On Friday, May 15th, the SBA issued the Loan Forgiveness Application that PPP borrowers must use to calculate and report how much of their PPP loan will be forgiven. The Application and accompanying instructions address several areas of borrower uncertainty for which the SBA had previously failed to offer specific guidance, including the following:
Aligning your payroll periods with the 8-week loan forgiveness period
In most cases, a borrower’s payroll period will not exactly align with the 8-week forgiveness period that begins on the day the first loan funds are distributed. The CARES Act stated that only “costs incurred and payments made” within the 8-week period would be forgiven, leading borrowers and commentators to worry that payroll costs would need to be both “paid and incurred” – meaning that the employee would actually have to work and be paid for such work – within that time. For most borrowers, this would mean excluding all or a portion of one or more payrolls – an accounting nightmare.
However, the application allows the borrower to choose to use the 8-week forgiveness period, which is referred to as the Covered Period, or to select an Alternative Payroll Covered Period, to line up with the payroll schedule of the borrower, as long as the borrower pays on a bi-weekly basis, or more frequently. The Alternative Payroll Covered Period, if elected, begins on the first day of the borrower’s first pay period following the date of loan disbursement, and ends on the 56th day thereafter. As such, borrowers who pay their employees in full on the last day of each pay period will receive full forgiveness for the entire 8 weeks of payroll.
Borrowers who pay their employees on a delay (days after the last day of the pay period) will need to adjust their payday for their last payroll within the 8 week period, if possible, to coincide with the last day (the 56th day) of the Alternative Payroll Covered Period to avoid losing full forgiveness of that payroll. Employers who pay monthly should adjust their payroll procedures to pay every two weeks so that they can qualify to use the Alternative Payroll Covered Period.
If a borrower elects to use the Alternative Payroll Covered Period, it must also track payments for employee health insurance, retirement plan contributions, and state and local taxes assessed on employee compensation for the same period of time, as those are considered to be “payroll costs,” but should still track rent, interest and utility payments in alignment with the Covered Period (the 8-week period starting with the date of loan disbursement).
Rent, utilities and interest paid on delay are still forgivable
Rent, utilities and interest incurred during the Covered Period will also qualify to be forgiven as long as they are paid during the Covered Period or by the next regular billing date, even if the billing date is after the Covered Period.
The 75% rule is not an “all or nothing” requirement
The SBA has previously indicated that loan forgiveness will be limited if 75% of the loan amount is not spent on payroll, health insurance and pension expenses. The application confirms that eligible nonpayroll costs cannot exceed 25% of the total forgiveness amount. However, this does NOT mean that if a borrower’s non-payroll expenses exceed 25% of the loan amount, there is no forgiveness whatsoever. Rather, there would be instead a proportional reduction in the total loan forgiveness.
To make this calculation, a borrower must first determine its payroll expenses (employee payroll plus payroll-related costs, such as employee health insurance, retirement plan contributions, and state and local taxes associated with payroll), and then the sum of its other forgivable expenses (rent, utilities, and interest). The sum of a borrower’s “other forgivable expenses” cannot exceed 33 1/3% of its “payroll expenses.”
For example, if the loan is $100,000, and only $70,000 is spent on payroll expenses, then 33 1/3rd% of $70,000 is $23,333, and the maximum allowable amount of other forgivable expenses will be $23,333, so that the total loan forgiveness would be $93,333.
The SBA, IRS, and Treasury will most likely continue to issue guidance on PPP loan forgiveness, and we strive to keep you up to date on these important changes. Please reach out to us to discuss how we may help you.