Paycheck Protection Program: Loan forgiveness application

On Friday, May 15, the Small Business Administration (SBA) issued the Paycheck Protection Program (PPP) forgiveness application. The application document clarifies some issues regarding the forgiveness calculation, but not all. SBA/Treasury indicated they will continue to release guidance on the forgiveness calculation, and we’ll continue to report on future guidance as it becomes available.

The application document clarifies some issues regarding the forgiveness calculation, but not all. SBA/Treasury indicated they will continue to release guidance on the forgiveness calculation.

In the meantime, here’s a brief summary of what we learned from the application:

• Full-time equivalent (FTE) calculation: The application indicates that 40 hours per week will be considered full-time for purposes of calculating FTEs. For each employee, enter the average number of hours worked per week, divide by 40 and round the total to the nearest tenth. A simplified method is allowed where employers may count employees who work 40 hours or more per week as 1.0 FTE and employees who work less than 40 hours per week as 0.5 FTE. Borrowers should use the FTE calculation that’s most beneficial. Many commentators expected the SBA to use 30 hours per week as the standard, so this is a change from previous guidance.
• Order of operations for forgiveness reduction factors: The application indicates that the adjustments for salary/hourly wage reductions will be applied to forgivable costs first, and the FTE reduction percentage will be applied second. Many commentators expected this to be the other way around, so previous examples of the calculation were in the reverse order and may need to be revisited.
• Eight-week covered period: Previously, there was speculation that the SBA may allow PPP recipients to use an alternative covered period in situations where employers are still subject to government-ordered shutdown orders.  This was not included in the application issued on Friday evening. The eight-week covered period stands as originally defined (with the exception of the alternative covered payroll period described below). The clock is ticking on spending as soon as recipients receive the PPP funds.
• Alternative covered payroll period: The instructions provide a simplified approach for employers with a biweekly or more frequent payroll cycle. These employers may elect to begin their covered payroll period with the first day of the first pay period that starts after they received their PPP loan. Here’s an example that is included in the instructions:
  • An employer received its PPP loan on Monday, April 20.
  • The first day of its first pay period following the loan disbursement date is Sunday, April 26.
  • In this case, the alternative covered payroll period is Sunday, April 26 through Saturday, June 20.
  • This doesn’t change the covered period for other costs, which would still run from Monday, April 20 through Sunday, June 14.
• Rents and mortgage interest: Covered costs include rents and mortgage interest for both real and personal property.
• Incurred and paid clarification:
  • Covered payroll costs include costs that are incurred during the covered period (or alternative payroll covered period) and costs paid during that period. Payroll costs are considered incurred on the date that the employee provides the related service. Payroll costs are considered paid once the pay distribution has been made. Payroll costs incurred during the last pay period of the covered period may be included in covered costs as long as they are paid on or before the next regular payroll date.
  • Nonpayroll costs are covered if they are paid during the covered period or incurred during the covered period and paid before the next regular billing date, even if that payment occurs after the covered period.
• Salary/hourly wage reduction factor: This reduction factor will be based on reductions in individual employees’ average annual salary or hourly wage in excess of 25% during the covered period as compared to the average annual salary or hourly wage during the period Jan. 1, 2020 through March 31, 2020.

The guidance and clarification provided in the forgiveness application and instructions is a good start toward helping you understand the amount of your PPP loan that may be forgiven. For further guidance, please reach out to your Plante Moran advisor.