Borrowers, lenders get first look at PPP forgiveness process

More than 40 days after the launch of the Paycheck Protection Program (PPP), lenders and borrowers finally got their first look at the steps needed to gain forgiveness for some or all of the loans issued by the Small Business Administration (SBA).

SBA and the Treasury Department issued the loan forgiveness application form, used to calculate and determine the amount of forgiveness from each loan. The form must be filled out by borrowers and sent to lenders, and because it’s a borrower application, there are no directions within the form on lenders’ responsibility for verifying information submitted.

However, the first step in issuing the form was met with relief by the industry.

“A standardized forgiveness application alongside with a step-by-step worksheet for borrowers (which we requested) will help small businesses calculate the amount of forgiveness and also lists clearly what documentation will need to be submitted to lenders and what documentation borrowers will need to keep for their records,” the Consumer Bankers Associations said in a statement.

Although there is not direct guidance accompanying the form, there are some directions within the application which bring new details to the forgiveness process.

First, the standard covered period for the loan is a 56-day period beginning on the loan disbursement date. However, the application also allows an alternative covered period for payroll.

“For administrative convenience, borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP loan disbursement date,” the application stated. “For example, if the borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the alternative payroll covered period is April 26 and the last day of the alternative payroll covered period is Saturday, June 20.

“Borrowers who elect to use the alternative payroll covered period must apply the alternative payroll covered period wherever there is a reference in this application to ‘the covered period or the alternative payroll covered period.” However, borrowers must apply the covered period (not the alternative payroll covered period) wherever there is a reference in this application to ‘the Covered Period’ only.”

The form lists eligible payroll costs as those incurred during the covered or alternative covered periods, and are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction. Payroll costs are incurred on the day an employee’s pay is earned. Payroll costs that are incurred – but not paid – during the borrower’s last pay period are eligible for forgiveness if paid on or before the next regular payroll date.

The application stated that payroll costs consist of:

• Compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation;
• Cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips);
• Payment for vacation, parental, family, medical, or sick leave;
• Allowance for separation or dismissal;
• Payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement;
• Payment of state and local taxes assessed on compensation of employees;
• For an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation.

The form also includes non-cash payroll expenses during the covered or alternative covered period which may be counted as payroll. Those include:

• The total amount paid by the borrower for employer contributions for employee health insurance, including employer contributions to a self-insured, employer-sponsored group health plan, but excluding any pre-tax or after tax contributions by employees.
• The total amount paid by the borrower for employer contributions to employee retirement plans, excluding any pre-tax or after-tax contributions by employees.
• The total amount paid by the borrower for employer state and local taxes assessed on employee compensation (e.g., state unemployment insurance tax); do not list any taxes withheld from employee earnings.
• Any amounts paid to owners (owner-employees, a self-employed individual, or general partners). This amount is capped at $15,385 (the eight-week equivalent of $100,000 per year) for each individual or the eight-week equivalent of their applicable compensation in 2019, whichever is lower.

On the subject of nonpayroll costs, the application states that nonpayroll costs eligible for forgiveness consist of:

• Covered mortgage obligations: Payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before Feb. 15, 2020;
• Covered rent obligations: Business rent or lease payments pursuant to lease agreements for real or personal property in force before Feb. 15, 2020; and
• Covered utility payments: Business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before Feb. 15, 2020.

“An eligible nonpayroll cost must be paid during the covered period or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period,” the application stated. “Eligible nonpayroll costs cannot exceed 25 percent of the total forgiveness amount. Count nonpayroll costs that were both paid and incurred only once.”

For businesses which had changes in staffing from Feb. 15 through April 26, the application offered an exception to full-time equivalent (FTE) status for borrowers who laid off employees and offered them jobs, only to have the employee turn it down.

“Indicate the FTE of

1. Any positions for which the borrower made a good-faith, written offer to rehire an employee during the covered period or the alternative payroll covered period which was rejected by the employee; and
2. Any employees who during the covered period or the alternative payroll covered period
   1. Were fired for cause,
   2. Voluntarily resigned, or
   3. Voluntarily requested and received a reduction of their hours.

In all of these cases, include these FTEs on this line only if the position was not filled by a new employee. Any FTE reductions in these cases do not reduce the borrower’s loan forgiveness,” the application stated.

The application also reiterated the safe harbor that protects borrowers from reduction of loan forgiveness based on FTE levels.

The application stated: “Specifically, the borrower is exempt from the reduction in loan forgiveness based on FTE employees described above if both of the following conditions are met:

1. The borrower reduced its FTE employee levels in the period beginning Feb. 15, 2020, and ending April 26, 2020; and
2. The borrower then restored its FTE employee levels by not later than June 30, 2020, to its FTE employee levels in the borrower’s pay period that included Feb. 15, 2020.”