SBA Releases PPP Loan Forgiveness Application

On May 15, 2020, the Small Business Administration (SBA) released the Paycheck Protection Program (PPP) Loan Forgiveness Application. The application package contains eleven pages of detailed instructions, worksheets required to complete the application, and a listing of substantiating documents required to be submitted along with the application. While there are numerous remaining open questions regarding the forgiveness process, this release does prove valuable and provides clarity on several issues. Notable guidance from the release includes:

Prior guidance indicated that the eight-week Covered Period for purposes of loan forgiveness commenced on the date the loan was funded. The instructions confirm that the first day of the Covered Period is the same as the loan disbursement date. However, it provides that borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll using the eight-week period that begins on the first day of their first pay period following the PPP Loan Disbursement Date. The alternative period for payroll costs may provide for more efficient administration and accounting. If elected, the alternative period must be used where available for measuring all compensation related costs. The alternative period is not available for other covered costs (e.g. mortgage interest, rents, utilities), which would still be measured under the normal Covered Period.

The Cares Act stated that forgiveness eligibility included qualifying “costs incurred and payments made during the covered period.” Conservative interpretations of that language assumed that an eligible cost had to be both incurred and paid to qualify. The instructions indicate that costs meeting either of those two prongs can qualify a cost for forgiveness. The term incurred can generally be equated with earned by an employee, in the context of payroll costs. The instructions provide that costs included on the basis that they were incurred but not paid, will need to be paid in the normal course of business after the Covered Period ends.

In prior guidance, the SBA indicated that for forgiveness purposes at least 75% of the PPP loan must have been used for payroll costs. Some lenders and commentators interpreted this rule as a ‘cliff’, such that if only 74% of loan expenditures were for payroll, then no forgiveness would be allowed. The instructions indicate that that is not the case. Rather, otherwise eligible non-payroll costs will be limited 33.3% of eligible payroll costs, which results in a maximum 25% of the total forgiveness amount constituting non-payroll costs.

The SBA had previously stated that proceeds from an SBA EIDL Grant (up to $10,000) would be deducted from the loan forgiveness amount on the PPP Loan. It was unclear how that reduction would be implemented computationally, leading to uncertainty as to whether a business could increase their payroll by the amount of their EIDL Grant to avoid unnecessary repayment. The instructions clarify that the reduction for the EIDL Grant will be made after the PPP Loan Forgiveness is calculated without consideration for the grant. Therefore, there is no benefit to an increase in payroll to offset the grant.

The application certifications indicate that owner-employee’s (including self-employed and general partners) cash compensation is limited to eight weeks’ worth of their 2019 weekly compensation, capped at $15,385 per owner-employee. The cap corresponds to eight weeks’ worth of a $100,000 annual salary. It is unclear whether ownership attribution rules would cause a spouse, children, or other relatives to be treated as an owner-employee, and therefore subject to the same 2019 based limitation for purposes of loan forgiveness. This rule indicates that an owner-employee cannot take a raise or bonus in excess of their 2019 compensation levels. There does not appear to be a prohibition on raises or bonuses for non-owner employees in comparison to their 2019 compensation levels, however non-owner employees are subject to the same $15,385 cash compensation cap.

At Brown CPA Group, we are closely monitoring this developing situation. We will provide general guidance, as more certainty develops. Please reach out to your Brown CPA Group professional team to discuss how we can assist with your business needs.