On May 15, 2020, the U.S. Treasury Department and Small Business Administration (SBA) released the application that the CARES Act’s Paycheck Protection Program (PPP) loan borrowers must use to determine the loan amount that may be “forgiven” by their lender. The four-part application includes many favorable rules for borrowers. Highlighted below are some new insights unveiled by the release of the application.

Payroll Costs

The application instructions revealed borrowers have two time period options for reporting payroll costs. Either the eight-week covered period beginning the day the loan proceeds were received or an alternative eight-week period aligned with the borrower’s pay schedule beginning on the first day of the pay period following the loan disbursement can be used. The latter option may be beneficial if employees are paid bi-weekly – resulting in nine weeks of pay calculated into the payroll costs. Review which option will be most beneficial to your business’s specific situation.

Payroll costs can be determined by using either costs incurred or paid. Paid costs would be based on the day the paycheck was distributed or originated as an ACH, while incurred costs would be based on the day the payroll is earned. If costs are incurred, but not paid during the borrower’s last pay period of the covered eight-week period, forgiveness will only be considered if it is paid on or before the next payroll date.

Payroll costs still include what was outlined by previously released interim rules, as follows:

  • Employer contributions for employee health insurance and retirement plans, this excludes pre-tax or after-tax employee contributions
  • Cash compensation/gross pay
  • Employer state and local taxes assessed on compensation
  • Guaranteed payments to owners of partnerships

Non-Payroll Costs

Non-payroll costs such as mortgage interest, rent and utilities under agreements in existence before Feb. 15, 2020, can also be accounted for using either costs paid or incurred, but it cannot exceed 25% of the total forgiveness amount. Furthermore, rental of real and personal property, or mortgage interest paid on loans of real or personal property can be included.

Wage Reductions

The application requires an employee-by-employee comparison as previously expected. However, it requires the base period for this calculation to be the first three months of 2020 starting Jan. 1, 2020 through Mar. 31, 2020. If a salaried employee’s pay was reduced by more than 25%, there is a direct reduction to your forgiveness amount to the extent it exceeds 25%. Hourly employees should be evaluated utilizing a similar calculation using average hours worked for the same period.

This wage reduction only applies to employees making less than or equal to $100,000 at an annualized rate for all pay periods in 2019 or that were not employed during 2019. Therefore, if paid weekly, the wage reduction rule does not apply to any employees who received more than $1,923 per pay period in 2019, or more than $3,846 per pay period in 2019 if paid on a bi-weekly basis.

The application also provides for a wage reduction safe harbor rule for those employees’ pay restored as of June 30, 2020, to the level it was at Feb. 15, 2020.

Headcount Reduction

Some may be surprised by the full-time equivalency (FTE) calculation used in the loan forgiveness calculation, as it is different than expected. Your headcount from your original loan application does not impact these calculations, rather it was used to support your ability to qualify for the PPP loan.

The application allows for two options when determining the average weekly number of FTEs, but has to be consistently used in the computations:

  1. Base method: Each employee’s average number of hours paid per week should be divided by 40 and rounded to the nearest tenth with the highest outcome being capped at one.
  2. Simplified method: Each employee who works 40 hours or more per week is considered one FTE, while other employees are designed a 0.5 FTE correlation.

Headcount reduction exceptions can apply. If you made a good-faith written offer to rehire an employee, but they declined to return, or in the instance the employee was fired for cause, voluntarily resigned or voluntarily requested and received a reduction of their hours, these FTE reductions will not reduce your forgiveness amount. However, if you have filled this position by a new employee, you cannot include the position in the headcount twice.

For example, if you had an average of 105 FTEs for the period Feb. 15, 2019 to June 30, 2019 and the average FTEs for Jan. 1, 2020 to Feb. 29, 2020 was 100, you should compare your employees for the eight-week covered period to the lower number (in this case 100). You would have no reduction as long as you had 100 FTEs during your eight-week loan allowance period. If you had 95, then only 95% of your calculated forgiveness amount would be eligible unless you meet the safe harbor. The safe harbor compares your effective FTEs for the pay period including Feb. 15, 2020 to your effective FTEs at June 30, 2020, as long as your FTEs for Feb. 15, 2020 are more than your average FTEs from Feb. 15, 2020 through Apr. 26, 2020.

Remember, this headcount reduction is applied last and reduces all costs eligible for forgiveness, so it is important to begin analyzing these counts sooner rather than later.

Certifications and Documentation

As a borrower, you will be required to certify you have verified the amount of payroll and non-payroll costs, as well as that all supporting documents are true in nature. The application outlines an extensive list of documentation required, which must be retained for six years after the date the loan is forgiven or repaid in full.

Stay Tuned

While the release of the application addressed some lingering questions, it left many still unanswered. The SBA is expected to issue regulations and guidance soon to further assist borrowers in completing their loan forgiveness applications. Applications can be complete once a borrower’s eight-week covered period is over and their lender begins accepting applications. Doeren Mayhew will continue to monitor how the loan forgiveness process will work and provide any insight on planning considerations that should be addressed in the weeks to come as you near the end of your eight-week period. In the meantime, if you have questions about calculating your loan forgiveness amounts, contact one of our business advisors today.