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First Look at Key Aspects of the PPP’s Loan Forgiveness Process

Joseph Most, J.D.

5.20.20 | Client Alert – COVID-19 Update

Last Friday, the Small Business Administration (SBA) released the Paycheck Protection Program (PPP) loan forgiveness application (the Application). The Application and instructions1 provide a first look into the PPP’s loan forgiveness process. Although the Application is to be submitted to the PPP lender, when the Application should or must be submitted has yet to be addressed.

The key aspects and important points are summarized below:

  • Alternative Covered Period: As a matter of administrative convenience, borrowers with a bi-weekly or more frequent payroll schedule may elect to measure eligible payroll costs for the 56-day period starting on the first date of the first pay period following its PPP loan disbursement, rather than the date the loan proceeds are first received.
  • Prepayment of Expenses: The Application instructions clearly state that eligible mortgage interest costs cannot include any prepayment of interest. However, this does leave open the possibility of prepaying rent or utilities during the covered period as an eligible PPP non-payroll cost. It also allows eligible non-payroll costs incurred during the 8-week period but paid after in the normal course of business as qualifying payments.
  • Full-Time Equivalent Employees (FTEE): The SBA has adopted a 40 hour per week standard in defining a full-time or full time equivalent employee. Borrowers calculate their average full-time equivalent employees by dividing each employee’s average number of hours worked per week divided by 40 (1.0 being the maximum quotient for any employee). Borrowers have the option to use a simplified method, where employees who work 40 hours or more count as 1 and part-time employees each count as 0.5.
  • Salary Reduction: For any employee who during the first quarter of 2020 was making under $100,000 annually, a borrower must determine if, on an annualized basis, their salary (or hourly wages for hourly workers) has fallen by more than 25% during the 56-day covered period as compared to the first quarter. Any reduction of more than 25% during the covered period reduces potential loan forgiveness dollar for dollar, unless the salary (or hourly wage) of that employee has been restored to its February 15, 2020 level by June 30, 2020, or unless one of the exceptions below applies.
  • Full-Time Equivalency Reduction: After accounting for salary reduction, a borrower further reduces its loan forgiveness amount if it reduces its number of FTEE during the 56 day covered period as compared to either the first 2 months of 2020 or February 15, 2019 to June 30, 2019.
  • FTEE Reduction Exceptions: The Application indicates that forgiveness amounts will not be reduced for (i) employees fired for cause, (ii) voluntary resignations, or (iii) for voluntary reduction in hours. This supplements the earlier guidance the SBA released which allows borrowers to prove that they made a good-faith written offer to rehire employees during the 56 day covered period and to not be penalized if the employee rejects that offer. SBA has also clarified that the FTEE reduction safe harbor is a comparison of a borrower’s FTEE level between its pay period that includes February 15, 2020 and June 30, 2020. If a borrower restores its FTEE level fully, then there will be no loan forgiveness reduction.

The Application indicates that the same employee can cause a reduction in loan forgiveness under both the Salary Reduction and Full-Time Equivalency Reduction tests.

It is expected that the SBA will shortly issue formal guidance on loan forgiveness in the form of an interim final rule. Stay tuned for further developments.

For more information on this topic or any other matter related to the COVID-19 pandemic, please contact your Berdon Advisor.

Berdon LLP New York Accountants

1 Loan forgiveness application and instructions.