PPP Loan Forgiveness Applications

Late on Friday, May 15, the SBA released the application form that Paycheck Protection Program (“PPP”) loan recipients will use to request that their loans be forgiven. Together with its instructions, the PPP forgiveness application form consists of 11 pages, and may be found on the SBA’s and the Treasury’s websites. Completion of this application, and the resulting loan forgiveness for those who qualify, will bring full circle the flagship provision of the CARES Act.

Before we continue, readers should note that there is movement afoot in Washington to make some changes to the PPP. Those potential changes appear at this point to be favorable, and to have broad bipartisan support, consisting in part of allowing forgiveness for expenditures outside of the 8-week period and non-payroll costs that exceed 25% of loan proceeds, allowing payroll tax deferrals to be paired with PPP loans, and extending the rehiring deadline. These changes are significant, and BNN will cover them more fully if they materialize into law. The information below is based on the rules in place now, rather than proposals.

Context

This article assumes readers are generally familiar with PPP loans, but a good refresher can be found in a previous BNN article by Joe Jalbert. Let’s examine the significance of this application to borrowers in various categories.

Forgiveness applications will undergo two reviews: One by the lending institution (bank), and another by the SBA. Congress imposed a 60-day limit for banks to complete their reviews, while articulating no similar constraints on the SBA. To launch both, a borrower needs only to complete one application form, and provide it to its lender.

The purpose of the review is two-fold: Primarily it is used to determine whether the criteria for forgiveness is met. But secondarily it will be used by the SBA to determine whether it wants to further pursue whether the applicant can establish that the need for the loan truly existed as of the date of application. (Banks are not responsible to second-guess an applicant’s assertion of need; they can rely on the applicant’s assertion.) The outcome of these tests opens a number of possible paths:

  1. Some borrowers never made it to this step. They received PPP funds, but decided to return them after reviewing sources of varying authority discussing true needs for the money, such as SBA Q&A numbers 31, 37, 39 and 46; and Treasury Secretary Mnuchin’s tweets. Those who timely returned the funds by the May 18 deadline have no need for these loan forgiveness forms.
  2. If the SBA determines that need was established, applicants who also meet the forgiveness criteria (based primarily on spending, mostly related to payroll) will receive word that their loans do not need to be repaid.
  3. Some recipients may be able to evidence the need, but may not have spent the entirety of the funding on qualifying costs. Non-qualifying portions of their loans will remain as loans, subject to a variety of favorable repayment terms. Some of the loan parameters may be found in a March 30 BNN article.
  4. The SBA may determine that some recipients did not demonstrate the need, and it will ask those applicants to return the funding. SBA Q&A #46 discusses this, but it is frustratingly vague. For borrowers of less than $2 million, it is clear that the worst to befall them as a result of failing to establish need is that they have to repay the loan. For borrowers of $2 million or more, the SBA/Treasury has hinted at enforcement action related to the certification of need. The Q&A insinuates (but does not clearly state) that if notified by the SBA that the need was not established, the repayment must take place right away, rather than following the otherwise applicable loan repayment schedule. It also says that, “If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request”.

Content – What’s in the loan forgiveness application?

The application package consists of the following:

  • Pages 1-3 – General instructions and calculation of amount forgiven
  • Page 4 – Certifications
  • Pages 5-9 – Instructions and worksheets related to payroll costs
  • Page 10 – A list of documents that borrowers must submit with the application
  • Page 11 – Optional demographic information

Thoughts

The instructions are reasonably thorough, and will not be duplicated here, but a few observations are worth noting:

Payroll costs paid in the 8-week “covered period” qualify for forgiveness, and the start date of the covered period generally is the PPP loan disbursement date. However, to better align with payroll cycles, the applicant may elect to have the 8-week period begin with the first day of its normal pay period that begins after the date of the loan disbursement. The instructions on page 2 provide some leeway regarding payroll incurred but not yet paid, as long as the payment occurs in the following period. Logically, no double-counting is allowed, and no payroll cost is eligible to the extent it exceeds $100,000 of annualized pay for any one employee ($15,385 for the 8-week period). Regardless of whether the default or alternative period is chosen, and whether or not an adjustment is made for an amount earned in one period and paid in the next, it seems clear that the amount reported must capture exactly 56 days’ worth of pay.

Compensation paid to owners is subject to an additional restriction that apparently was put in place to prevent manipulating their own pay to game the system: Their includable amounts are capped at the $15,385 amount described above, or their actual pay for the comparable 8-week period in 2019, whichever is lower.

The amount of loan forgiveness may be reduced in two ways related to a borrower’s employees: One involves decreases in wages and the other results from drops in headcount. Both are discussed below.

Payroll expenditures otherwise eligible for forgiveness may be limited if, during the covered period, (1) overall compensation or (2) wages paid to any employee who normally receives less than $100,000 annually are decreased by more than 25%. However, exceptions exist for employees fired for cause or who voluntarily left or requested a reduction in hours.

Observation: The combined state and federal unemployment benefits, as created or enhanced by the CARES Act, interestingly allow many people to collect more funding through unemployment than through employment. This exception is needed to avoid punishing employers who tried to retain employees, consistent with the spirit of the program, but simply cannot compete with such an odd set of circumstances that financially de-incentivize employment.

The amount to be forgiven also can be reduced if the number of full-time equivalents (“FTE”) were reduced relative to pre-pandemic levels. The application’s use of FTEs involves two steps, each with two alternatives.

  1. Step one – computing the FTE: For purposes of this application, a FTE denominator is equal to 40 hours, and this appears to apply even in the case of employees who prior to the pandemic routinely worked fewer hours than this. The numerator is equal to the hours actually worked. The quotient is rounded to the nearest tenth and presented as a decimal, representing the FTE. However, at the election of the borrower, a simplified method may be used that assigns a value of 1.0 to employees who worked 40 or more hours, and a value of .5 to those who worked less (regardless of how much less).
  2. Step two – using the FTE: The borrower compares the FTE as of 2/15/20 with the average FTE for the 2/15/20 – 4/26/20 period. If the result is a decrease, the borrower should expect a decrease in forgiveness. However, the borrower instead may use a safe harbor method to determine whether there was a decrease for this purpose, which involves a simple comparison of the FTE as of 2/15/20 vs. 6/30/20.

 Observation: Some industries, such as retailers, restaurants, and hotels, may not be well-served by either of these methods, because state and local restrictions may prevent them from reopening at all by 6/30/20. In other cases, only partial operations will be allowed as part of a phased-in re-opening, and partial openings generally will require only partial staffing – a situation that will result in automatic dilution of loan forgiveness. 

Non-payroll costs are limited to 25% of the total amount to be forgiven, and like payroll, can be computed based on costs paid or accrued (assuming the accrued amounts are paid in the following billing period).

The entirety of page 4 of the application consists of certifications and some descriptions of some not-so-pleasant punishments that could await those who falsify the application.

Page 10 lists documents that borrowers must remit with their applications. But it also lists documents that borrowers should retain in their files, without submitting them. This includes brief mention of material supporting the “certifications as to the necessity of the loan request”. SBA/Treasury has warned repeatedly that borrowers should be prepared to provide evidence that they needed these loans, and that the SBA will audit all loans exceeding $2 million and other loans at their discretion. Although these forgiveness applications will be used as a springboard for those SBA “needs” audits, no further guidance was provided to help borrowers know what kind of support will be needed. A discussion of this issue, and some BNN recommendations, can be found in our April 30 article.

Borrowers are advised to retain all of their applicable records for a period of six years following the forgiveness or repayment of the loan.

BNN can help

Based on the instructions for the application, which include developing schedules to support various calculations for compensation, FTEs, salary/wage reductions, and allowed nonpayroll costs, we have determined that for many businesses, the application process will be highly complex. Through the application of agreed upon procedures, our professionals can assist your management team in its determination of compliance with the forgiveness provisions of the PPP in connection with the application submission. Please feel free to contact your BNN advisor for more information at 800.244.7444.

Conclusion

For most businesses, the Paycheck Protection Program quickly became the primary feature of the massive CARES Act, with its unprecedented opportunity for loans to be completely forgiven. For those businesses fortunate enough to receive loans, another step in the process is upon them with this need to complete the forgiveness applications following the end of their applicable 8-week periods. Borrowers of more than $2 million and others selected by the SBA will have more work to do later, providing yet-to-be explained evidence supporting their need for these loans. For many, though, this will be the last step, and hopefully the program served its purpose, and helped them and their employees weather an extraordinary storm.

For more information or a discussion on how this may impact you, please contact your BNN advisor at 800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.