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On May 15th, the Small Business Administration (SBA) released the application borrowers of a Paycheck Protection Program (PPP) loan must use to determine the amount of the loan that may be “forgiven”.
The SBA’s guidance provides four categories of costs that are eligible for forgiveness: (1) payroll costs; (2) business mortgage interest payments; (3) business rent/lease payments; and (4) business utility payments. Subject to some exceptions, forgiveness is generally available for costs incurred with respect to these items during the borrower’s “Covered Period,” which is the eight-week period that begins on the date the PPP loan was disbursed. The SBA requires that at least 75% of the forgiven amount be spent on payroll costs.
Payroll Costs. The SBA’s guidance allows a PPP borrower to deduct payroll costs “paid” or “incurred” during the borrower’s eight-week Covered Period (or an Alternative Payroll Covered Period). Under the guidance, payroll costs are considered paid on the day that paychecks are distributed or that the borrower originates an ACH credit transaction. Payroll costs are considered accrued on the day that the employee earned the pay.
Payroll costs incurred but not paid during the borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if the borrower pays them by its next regular payroll date. Otherwise, the SBA’s guidance requires that payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period) to qualify.
The SBA provides for an Alternative Payroll Covered Period that caters to borrowers with a biweekly (or more frequent) payroll schedule, allowing them to elect to calculate eligible payroll costs using the eight-week period that begins on the first day of their first pay period following the disbursement of PPP proceeds. Borrowers who opt for the Alternative Payroll Covered Period are still required to use the standard Covered Period for other costs.
Cash Compensation. The total cash compensation eligible for PPP forgiveness for each individual employee cannot exceed an annual salary of $100,000, or $15,385 for the 8-week period. Cash compensation includes the sum of gross salary, gross wages, gross tips, gross commissions, paid leave (vacation, family, medical or sick leave, not including leave covered by the Families First Coronavirus Response Act), and allowances for dismissal or separation paid or incurred during the Covered Period or the Alternative Payroll Covered Period.
Non-Cash Compensation Payroll Costs. Non-cash compensation payroll costs include the following items:
· 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 state and local taxes assessed on employee compensation (e.g., state unemployment insurance tax), but not including any taxes withheld from employee earnings
· The total amount paid by the borrower for employer contributions to employee retirement plans excluding any pre-tax or after-tax contributions by employees.
Compensation to Owners. According to the SBA, the forgiveness paid to owners (e.g., owner-employees, a self-employed individual, or general partner). eligible for forgiveness is capped at the lower of (1) $15,385 (the eight-week equivalent of $100,000 per year) for each individual or (2) the eight-week equivalent of the owner’s applicable compensation in 2019, whichever is lower.
Eligible Nonpayroll Costs. Nonpayroll costs eligible for forgiveness consist of the following categories:
Mortgage Obligations. The amount of business mortgage interest payments during the Covered Period for any business mortgage obligation on real or personal property incurred before February 15, 2020. The guidance defines “business mortgage interest payments” as payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property that was incurred before February 15, 2020.
Rent Obligations. The amount of business rent or lease payments for real or personal property during the Covered Period pursuant to lease agreements that were in force before February 15, 2020.
Utility Payments. The amount of business utility payments during the Covered Period for business utilities for which service began before February 15, 2020. The guidance defines “business utility payments” as business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
Payroll Costs. According to the SBA, t an eligible nonpayroll cost must either be (1) “paid” or (2) “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 SBA clarified that eligible nonpayroll costs cannot exceed the 25% of the total forgiveness amount.
Reductions in Average Full-Time Equivalency (FTE). The CARES Act states that a borrower’s forgiveness relief is limited where there is a reduction in the average number of full-time equivalent employees during the Covered Period as compared to a past reference period. The new guidance, however, provides that a borrower is exempt from this reduction if a new FTE Reduction Safe Harbor applies.
The SBA provides rules for calculating the FTE. The borrower enters the average number of hours paid per week for each employee during the Covered Period or the Alternative Payroll Covered Period, divides by 40, and rounds the total to the nearest tenth. The maximum for each employee, however, is capped at 1.0. The guidance also provides that a simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the borrower’s election.
FTE Reduction Exceptions. The SBA’s guidance provides several exceptions to the forgiveness-limitation rules. One exception provides that a borrower is not penalized for FTE reductions that result from the following circumstances: (1) reductions related to 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 that was rejected by the employee; and (2) reductions related to any employees who during the Covered Period or the Alternative Payroll Covered Period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours.
FTE Reduction Safe Harbor. The SBA’s guidance also recognizes a safe harbor that exempts some borrowers from losing loan forgiveness based on reduced FTE employee levels. A borrower is exempt from the reduction in loan forgiveness based on FTE employees if both of the following conditions are met: (1) the borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and (2) the borrower, by no later than June 30, 2020, restored its FTE employee level to the FTE employee level that existed during the borrower’s pay period that included February 15, 2020.
Salary/Hourly Wage Reduction Safe Harbor. The PPP reduces a borrower’s loan forgiveness amount if the employer reduces employee salary and wages beyond 25% during the Covered Period or the Alternative Payroll Covered Period as compared to the period of January 1, 2020 through March 31, 2020.
Small businesses can read the comprehensive PPP and CARES Act guidance here.