The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided that the Small Business Administration (SBA) had until April 26, 2020 to issue guidance on the Paycheck Protection Program (PPP) loan forgiveness rules. Unfortunately, the SBA did not issue the required guidance, which left many businesses that were already weeks into their 8-week covered period of spending searching for answers on the loan forgiveness calculations. That is until now.
Treasury and the SBA have finally issued some guidance through the release of a Paycheck Protection Program Loan Forgiveness Application. Some of the items that were clarified through the application and the related instructions:
- The allowance of an Alternative Payroll Covered Period – the SBA had previously indicated that the covered period during which the expenses incurred or paid, would begin on the date of the loan disbursement and the following 8-weeks. At the election of the borrower, the application provides for another option strictly related to payroll. There is an Alternative Payroll Covered Period which will begin with the first day of the first pay period following the PPP loan disbursement date and continue for the following 8-weeks.
- As we have previously reported, the SBA will be reviewing loans in excess of $2 million for the “loan necessity” certification. The application includes a check box if the borrower, along with affiliates of the borrower, have a PPP loan with the original principal amount in excess of $2 million.
- The application clarifies which expenses qualify under the CARES Act “incurred and payments made” language. Qualifying expenses can either be paid during the covered period (or for payroll during the alternative payroll covered period) or incurred during the covered period (or for payroll during the alternative payroll covered period) and paid within their normal billing cycle after the covered period ended.
- Confirms that a covered rent obligation includes both real and personal property.
- There is a reduction in the amount of loan forgiveness based on not maintaining full time equivalents (“FTEs”) or if there is a reduction in the salary and wages paid during the covered period. The instructions clarify the following:
o When calculating the amount of loan forgiveness, the reduction in salary and wages calculation is applied before the reduction in the FTE.
o Confirms the reduction in salary and wages for the employee is computed based on a weekly average of salary and hourly wage during the covered period as compared to a weekly average of the previous quarter.
o FTE is calculated on a 40-hour work week. An FTE will be computed by dividing the number of hours for the week divided by 40, not to exceed 1. A simplified method is available assigning an employee that works 40 hours or more as 1 FTE, with other employees that work less than 40 hours will be assigned as .5 FTE for the week.
o Allows for an exemption to the FTE reduction for 1) re-hire of employees that are rejected by the employee, 2) employees that during the covered period are fired for cause, voluntarily resigned or voluntarily requested and received a reduction in their hours.
- Exceptions to the loan reduction amounts -
o Confirms that for businesses which had a reduction in FTE between February 15, 2020 and April 26, 2020 and then fully restores the FTE to the February 15, 2020 level by June 30, 2020 there will be no reduction to the loan forgiveness calculation for the FTE reduction during the covered period.
o Confirms that if there is a reduction in the employee’s average salary or hourly wage during the covered period and if the employee’s average salary or hourly wages is restored as of June 30, 2020 to the level of salary or wage as of February 15, 2020, then there will be no reduction in the loan forgiveness calculation for that employee.
The above items are good news for many borrowers, however there are still a number of unanswered questions regarding the loan forgiveness calculations. When the forgiveness application was issued, Treasury and the SBA indicated there will be regulations and additional guidance issued soon related to the forgiveness calculations which will hopefully answer the remaining unanswered questions.