On Friday, May 15, the SBA released its Loan Forgiveness Application (attached here), which provides much needed guidance that borrowers and lenders have been seeking. Below are some of the highlights:
The application includes step-by-step instructions on how to perform the calculations required by the CARES Act to confirm eligibility for loan forgiveness.
Flexibility Regarding 8-Week Covered Period
Borrowers have the option of starting the 8-week period either:
- at the point the loan funds are disbursed, or
- the date of the borrower’s first payroll following the disbursement of the loan funds.
Example: if the borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, then the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20.
There had been concerns that only expenses that were paid during the covered period would be allowed to count toward forgiveness. This option ensures that borrowers will be able to count a full 8 weeks of payroll toward forgiveness.
Flexibility Regarding Expenses Incurred and Expenses Paid
The SBA has clarified its position, so that expenses eligible for forgiveness include both expenses incurred AND expenses paid during the 8-week period. Therefore, those expenses paid during the 8-week covered period include those:
- that were paid early in the covered period, but were likely incurred prior to the covered period, and
- that were incurred during the end of the covered period, but are likely paid after the 8-week period so long as they are paid on or before their regularly scheduled pay date.
Maximum Cash Compensation
The application clarifies the total amount of cash compensation eligible for forgiveness may not exceed $15,385 (annual maximum of $100,000, as prorated for the 8-week period). Similar to guidance provided for the PPP application, employer-paid expenses for health insurance, retirement benefits, and state and local taxes are treated as “payroll” expenses, but not included in the $100,000 proration maximum.
Covered Utility Payments
The application clarifies what is considered utilities. Utilities include payments for electricity, gas, water, transportation, telephone and internet services.
Rent and Lease Payments
The SBA has confirmed our previously communicated position that lease payments on tangible personal property (i.e. copiers, equipment, etc.) are eligible to be included in the forgiveness calculation, subject to the non-payroll expense limitation of 25%. Such lease obligations must have existed prior to February 15, 2020 to be considered eligible.
Full-time Equivalency Defined
Borrowers have the option to calculate their FTEs under two options:
- Average number of hours paid per week, divided by 40. This calculation is rounded to the nearest tenth (0.1), and each employee is capped at 1.0. The summation of this calculation across all employees provides the average FTE.
- A simplified method whereby all employees who work 40 or more hours per week are designated 1.0; all employees who work fewer than 40 hours per week are designated 0.5. The summation of this determination across all employees provides the average FTE.
Exemptions to Reduction in Forgiveness
The application also includes guidance on how to calculate a reduction in the forgiveness amount for borrowers that spent less on payroll during their covered periods than they did during the first quarter. The reduction would be deducted from the forgiven amount, though there is an exemption if a borrower can show that employees rejected a good faith offer to rejoin their company.
Additionally, borrowers can obtain safe harbor from forgiveness reduction if they can show that by June 30, they restored their workforce to the level in place on February 15.
Documents That Must be Submitted With Application
The application includes a list of documents that must be submitted together with the application. This includes, but is not limited to, bank accounts’ statements, payroll records, canceled checks, utility invoices, lease agreements and mortgage statements. In addition, the application includes a list of documentation that borrowers are required to maintain, but not submit with the application. Borrowers must retain all documentation for a minimum of six years from the later of date of forgiveness or date of loan repayment.
Loans in Excess of $2 Million
The borrowers must indicate on their applications, whether the borrower, together with its affiliates (to the extent the affiliation rules apply and are not waived), received PPP loans in excess of $2 million. As communicated previously, the SBA indicated that all loans in excess of $2 million would be subject to SBA review.
Please contact us if you have any questions.