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PPP – Forgiveness Application and FAQs

PPP Forgiveness Application

On Friday, May 15th, 2020 the Small Business Administration (SBA) published the Paycheck Protection Program (PPP) Loan Forgiveness Application for borrowers to calculate and report the amount of loan forgiveness requested from their lender. The SBA press release accompanying the application stated that additional regulations and instructions would be released at a later time.  Below we highlight many Frequently Asked Questions regarding the application, loan forgiveness, and comments on specific hypothetical situations.  A link to the application is also noted below.

Forgiveness Application HERE.

Non-payroll Costs

Q: What interest payments can be included in calculating my loan forgiveness?

A: Mortgage interest payments made during the covered period for any business mortgage on real or personal property, if the debt was in place prior to February 15, 2020, should be considered in calculating loan forgiveness. Any payments or prepayments of principal do not qualify for forgiveness.

 

Q: What rental payments can be included in calculating my loan forgiveness?

A: Business rent/lease payments made during the covered period for real or personal property, if the lease agreement was in place prior to February 15, 2020, should be considered in calculating loan forgiveness.

 

Q: What utility payments can be included in calculating my loan forgiveness?

A: Payments made during the covered period for electricity, gas, water, transportation, telephone, and/or internet can be considered in calculating loan forgiveness, as long as the service began before February 15, 2020.

 

Q: I incurred a non-payroll cost (rent, utilities, mortgage interest) during the covered period but did not pay it until after the covered period.  Can I still include this amount in my forgiveness calculations?

A: A non-payroll cost that is incurred but not paid during the covered period can be included in the forgiveness calculations if it is paid by the next regular billing date following the last day of the covered period.

 

Q: Are there any other limits on the non-payroll costs that I can use to determine forgiveness?

A: In total, non-payroll costs (mortgage interest, rent and utilities) cannot exceed 25% of the total forgiveness amount.  This limit is applied on Line 10 of the forgiveness application.

 

Q: I already have sufficient expenses to forgive all or most of my loan proceeds.  Am I required to report my interest, rent, and utility payments that were made during the covered period?

A: No.  The borrower is not required to report any payments that they do not want included in the forgiveness calculation.

 

Payroll Costs & Schedule A

Q: What is my covered period?

A: The covered period is the eight-week period of time beginning on the day you receive the PPP loan disbursement. For example if you received your proceeds on May 1, 2020 then your covered period begins May 1, 2020 and ends on June 26, 2020

 

Q: Can I change my covered period to match my pay periods?

A: Yes. The SBA will allow for a payroll covered period to begin on the first day of your next pay period. For example if you received your PPP loan on May 5 but your next, new pay period does not begin until May 11 then you may choose May 11 to July 6 as your eight-week payroll period. However for all nonpayroll costs your period begins on May 5 and ends June 30.

 

Q: Do I have to change my covered period to match my pay periods?

A: No. You may prorate your payroll to agree to your actual covered period or you may choose to match your covered period to your payroll cycle. Either are acceptable.

 

Q: What amounts should I include in “Cash Compensation” on the Schedule A Worksheet?

A: Include in this line the gross salary/wages, tips, commissions, paid leave (other than leave paid under the Families First Coronavirus Response Act), and separation payments paid or incurred during the covered period.  The cash compensation eligible for forgiveness for each employee cannot exceed an annualized salary of more than $100,000, so the applicable 8 week amount per employee cannot exceed $15,385 ($100,000/52 weeks x 8 weeks).

 

Q: Due to the timing of my payroll, during the covered period I paid my employee for wages earned prior to the date I received my loan proceeds.  Can this amount be forgiven as payroll costs?

A: Yes. Payroll costs paid or incurred during the covered period can be forgiven.  In this case, the payroll cost was incurred prior to the covered period, but because it was paid during the covered period it can be included in the forgiveness calculations.

 

Q: Due to the timing of my payroll, I didn’t pay my employee for wages earned during the covered period until after the covered period had ended.  Can this amount be forgiven as payroll costs?

A: Yes, however, amounts incurred but not paid during the covered period must be paid by the next regular payroll date following the covered period in order to be included for forgiveness.

 

Q: I haven’t made my 2019 profit-sharing contributions yet.  Can I make these payments during my covered period and receive forgiveness?

A: We need additional guidance to determine how far back the costs can have been incurred and still be eligible for forgiveness if paid during the covered period.

 

Q: Where should I include general partners and/or owner-employees on the Schedule A Worksheet?

A: General partners, owner-employees, and self-employed individuals are not included on the Schedule A Worksheet.  The compensation paid to these individuals should be reported directly on Line 9 of Schedule A.

 

Q: I paid an employee a bonus in 2019 and if I annualize their 2019 salary based on the pay period in which I paid them the bonus, their annualized salary exceeds $100,000.  Where should I report them on the Schedule A Worksheet?

A: This employee would be reported on Table 2.  Only employees whose annualized compensation does not exceed $100,000 for all pay periods in 2019 should be reported in Table 1.  Even if the employee’s base annual salary is less than $100,000, if any one pay period in 2019 resulted in an annualized salary in excess of $100,000 the employee will be reported in Table 2.

 

Q: I had to reduce an employee’s compensation due to a decline in business, resulting in a lower salary paid during the covered period versus the salary paid for the first quarter of 2020.  Does this reduce my forgiveness?

A: If the employee’s 2019 salary was less than $100,000 and the salary was reduced by more than 25%, then the salary reduction will decrease your forgiveness unless you meet a safe harbor test.  You meet the safe harbor if the average annual salary/hourly wage as of June 30, 2020 is equal to or greater than the annual salary/hourly wage as of February 15, 2020 (or the average between February 15, 2020 and April 26, 2020, if greater).

 

Q: I had to reduce an employee’s compensation due to a decline in business, and am not able to restore the salary by June 30, 2020.  How much will my forgiveness be reduced? (Assuming employee’s 2019 salary was less than $100,000)

A: Forgiveness will be reduced by the portion of salary reduction that exceeds 25% of the average salary from January 1, 2020 to March 31, 2020, prorated to 8 weeks.  For example, if an employee was paid $80,000 annualized for the first quarter of 2020, and the pay is decreased to $50,000 annualized during the covered period, the total decrease is $30,000.  Because this exceeds 25% of $80,000, the forgiveness will be reduced.  The forgiveness will be reduced by $1,538 (($30,000 salary decrease less $20,000 (or $80,000 x 25%)) x 8 weeks/52 weeks).

 

Q: I had an employee whose annual salary was in excess of $100,000 in 2019.  The employee received a pay cut during the covered period.  Will this cause a reduction in my forgiveness amount?

A: No. A reduction in pay will only cause a reduction in the forgiveness amount if the employee with the reduced salary had an annualized salary of less than $100,000 in 2019 (Table 1 employees).

 

Q: Do I include the full amounts paid for health insurance, retirement plans, and state/local taxes on employee compensation on lines 6 through 8 of Schedule A?

A: You should only include the portion paid by you, the borrower, not any portions paid by or withheld from the employee.

 

Full-time Equivalents

Q: How do I calculate my FTE number?

A: The FTE will be based upon a 40-hour workweek. In order to calculate your FTE during the covered period you will take the total hours worked by the employee and divide by the number of weeks worked (eight-weeks is the covered period) and divide that result by 40 and round to the nearest tenth. Your number cannot exceed 1.0. For example you have two employees. Employee A works 350 hours during the eight-week period and Employee B works 280 hours. In this example Employee A’s FTE is 1.0 (since it cannot exceed 1.0) and Employee B is 0.9 (280/8=35, 35/40=.875). Both employee’s combine to equal 1.9 FTEs

 

Q: What is the FTE alternative calculation?

A: The SBA provided for a simplified FTE calc. Any Employee that works 40-hours per week or more will be considered 1 FTE and any employee that works less than 40-hours per week will be considered 0.5 FTE. In the example above Employee A’s FTE would be 1.0 and Employee B’s FTE would be 0.5 resulting in a total FTE of 1.5

 

Q: Can my forgiveness amount be reduced if I don’t keep up my FTEs? How is this done?

A: The PPP program guidelines intend for an employer to maintain employees on payroll. The government is looking to an employer’s pre-COVID-19 employment FTEs as a baseline test. If you cannot maintain your FTEs then the government deems that the employer failed to maintain the FTE requirement and reduces the amount of tentative loan forgiveness. The government will look to the following periods (at the borrower’s election):

  • The period beginning on February 15, 2019 and ending on June 30, 2019; or
  • The period beginning on January 1, 2020 and ending on February 29, 2020, or
  • For a seasonal employer, as determined by the SBA, either the two previous periods or any 12-week period between May 1, 2019 and September 15, 2019.

Note that these periods are to determine your baseline of FTEs from before COVID-19 affected a borrower’s business. A borrower would calculate their FTE baseline during one of those applicable periods and compare it with the FTEs during the borrower’s PPP covered period. For example: Employer X received a $100,000 PPP loan and had 10 FTEs in the period February 2019, and ending on June 30, 2019. During the PPP loan period Employer X’s number was reduced to 6 FTEs. Therefore Employer X’s PPP loan forgiveness would be tentatively capped at $60,000 (6/10 x $100,000).

 

Q: What is the FTE safe harbor and how does it help?

A: A Borrower can ignore the reduction in forgiveness if they can satisfy the safe harbor requirement. The borrower must calculate its FTEs for the additional two periods below:

  • The period from February 15, 2020, through April 26, 2020, and
  • For the pay period that includes February 15, 2020.

If the Borrower can meet the two conditions of 1) having reduced its FTE levels during the period February 15, 2020 through April 26, 2020 and 2) the Borrower restored the FTE levels no later than June 30, 2002 to its FTE level in the payer period that includes February 15, 2020, then the FTE safe harbor can be used and the FTE reduction may be ignored.

For example: Adding to the previous example, if Employer X had 6 FTEs during the period February 15, 2020 through April 26 and 8 FTEs in the pay period including February 15, 2020 then by June 30, 2020 Employer X must have 8 FTEs in order to not receive any reduction in forgiveness. Note that Employer X did not need to restore to 10 FTEs based on the prior year FTE period rather it needed only to get back to the baseline of February 15, 2020.

 

Q: What if I can’t get all of my employee’s back to meet the safe harbor or due to circumstances where employee’s have reduced their hours? Am I stuck with an FTE reduction to my loan forgiveness amount?

A: The SBA has left a nice caveat to the FTE reduction issue. An employer may continue to count an employee’s FTE if an employer can indicate that:

  1. The employer made a good-faith, written offer to rehire an employee during the Covered or Alternative Payroll Covered Period and that offer was rejected by that employee; and
  2. Any employee during the Covered or Alternative Payroll Covered Period:
    1. Were fired for cause,
    2. Voluntarily resigned, or
    3. Voluntarily requested and received a reduction in hours.

If any of the above conditions are met then the employer’s PPP loan forgiveness eligibility will not be impacted by the reduction in FTEs. However, if an employer hires a new employee for the position in which an employee refused to come back, was fired for cause, resigned, or voluntarily reduced hours then the employer cannot use the old employee’s FTE. It must use the new employee’s FTE in the calculation.

 

Forgiveness Application Documentation Requirements

Q: What documentation do I need to provide with my forgiveness application

A: The following is a list of documentation you will need to provide with your application:

  • Payroll Documentation
    • Bank statements or third-party payroll service provider reports documenting the cash compensation paid
    • Payroll tax filings (i.e. Form 941 and applicable State form) for the periods that overlap the covered period
    • Payment receipts, cancelled checks, or statements documenting the amount of employer contributions to employee health insurance and retirement plans
  • FTE Documentation
    • Calculation of full-time equivalents for elected period used to determine FTE is the forgiveness calculation
    • Payroll tax filings
  • Nonpayroll Cost Documentation
    • Business Mortgage Interest – lender amortization schedule and receipts or cancelled checks verifying payment or account statements from February 2020 through one month after the end of the covered period
    • Business rent or lease payments – copy of current lease agreement and receipts or cancelled checks verifying payments during covered period or account statements from February 2020 through one month after the end of the covered period
    • Business utility payments – copies of invoices from February 2020 and those during the covered period and cancelled checks or account statements verifying the payments were made.

Note that an Employer should also maintain, but does not have to provide the following:

  • the documentation for how salary and hours reduction calculations were performed,
  • documentation of employee’s whose annual salary is over $100,000,
  • documentation of any refusal by employees to come back to work, resignations, and/or voluntary reductions in work schedules
  • Documentation supporting the “FTE Reduction Safe Harbor”

Forgiveness Application HERE.

Teal, Becker & Chiaramonte Certified Public Accountants