PAYCHECK PROTECTION PROGRAM (“PPP”)
UNDERSTANDING THE FORGIVENESS APPLICATION
Updated July 6, 2020
While PPP recipients now have 24 weeks to spend the funds, we recommend that borrowers begin to understand the forgiveness process as early as possible. Understanding what’s required on the forgiveness application will allow borrowers to track expenditures, collect documentation - and, if appropriate, make adjustments to spending or headcount. Applicants are also encouraged to segregate PPP funds, to begin tracking spending and payroll and make key decisions early, such as the use of an alternative payroll covered period (APCP). This will make the forgiveness process easier and help ensure that opportunities to optimize forgiveness aren’t overlooked. See Tracking PPP Spending and Forgiveness for more information.
Understanding PPP Forgiveness
Recent Changes to PPP Program
The PPP forgiveness application has been revised to reflect the changes created by the Paycheck Protection Program Flexibility Act (“PPPFA”), including
- Extending the covered period to 24 weeks, from 8
- Requiring that at least 60% of forgiven funds be spent on payroll, down from 75%
- Expanding the headcount (Full Time Equivalent, or “FTE”) requirement to provide safe harbor to businesses forced to operate at reduced levels due to compliance with governmental directives
In addition, a new, simplified 3-page Form-EZ application has been created for businesses that meet any one of the following criteria:
- No employees (sole proprietorship, independent contractors, self-employed individuals)
- Have not reduced headcount and have not cut salaries or hourly wages by more than 25%
- Were unable to maintain FTE based on HHS, CDC or OSHA directives and have not cut salaries or hourly wages by more than 25%
These changes should make it easier for more applicants to have all, or a greater proportion of, their PPP forgiven. However, both long- and short-form applications require business owners to attest that they meet the criteria, so borrowers should be sure they understand the key elements.
PPP loan terms
The PPPFA made a number of changes to the loan terms on any PPP amounts not forgiven.
- Interest rate: all PPP loans carry a 1% interest rate
- Deferral period: the PPPFA extended the period in which no payments are due from the original 6 month term to the date at which the SBA approves the amount to be forgiven. This ensures that applicants will not owe interest on PPP amounts that are ultimately forgiven
- Maturity: all PPPs issued after June 5, 2020 have a 5-year maturity. Those issued earlier have the original, 2-year maturity. However, borrowers can negotiate directly with lenders for a longer maturity
Key elements of PPP Forgiveness
PPP loans will be forgiven, entirely or in part, based on three criteria
- Spending during the covered period (24 weeks, unless borrowers choose the original, 8-week period) on payroll, rent, mortgage interest and utilities. Of this, 60% of the forgiven amount must be spent on payroll
- Maintenance of salaries and hourly wages of at least 75% of pre-crisis levels
- Retention of headcount (FTE) consistent with pre-crisis levels
Each of these have elements, choices and exceptions explained in more detail below. Also, while forgiveness is attractive, borrowers should bear in mind that amounts not forgiven convert into a low-cost loan with no collateral or personal-guarantee requirements. For more information, see “PPP Loan Terms”, below.
The Forgiveness Application
Borrowers are urged to review the basic application criteria, as well as official instructions for completing the application or Form-EZ instructions. These are:
- Covered Period and Alternative Payroll Covered Period (“APCP”):
- The standard Covered Period represents the 24-week (168 day) period beginning the day PPP funds are received. For example, if the borrower received PPP loan proceeds on April 20, the Covered Period runs from April 20 through October 4. The Covered Period can not extend beyond December 31, 2020
- Borrowers who received PPP funds prior to June 5 may elect an 8-week (56 day) Covered Period
- For payroll only, borrowers may choose an Alternative Payroll Covered Period beginning on the first day of the first pay period following receipt of PPP funds. See “advanced topics”, below for more details
- Eligible payroll and non-payroll costs (lines 1-4):
- These can include amounts incurred but not paid during the covered period. See “Advanced topics” for explanation and details on eligible costs and “incurred but not paid”
- Borrowers do not need to list covered-period spending for which they are not seeking forgiveness. For example, total spending on rent during the covered period may be greater than the amount available after allocating at least 60% of forgiveness to payroll
- Salary / Hourly Wage Reduction (line 5): reduces the forgivable amount for salaries and hourly wages cut by more than 25% from pre-crisis levels which are not restored by December 31.
- FTE reduction quotient (line 7): further reduces the forgivable amount for any reduction in headcount (measured in Full Time Equivalency, or “FTE””) not restored by year end. See FTE discussion below.
- Payroll cost (line 10): provides a check that at least 60% of the amount to be forgiven has been spent on payroll
Application Form and Process (long-form application)
Detailed, step-by-step instructions for the PPP Loan Forgiveness Application are available on the US Treasury website.
- Page 1 summarizes the key information, spending and calculations, as outlined above.
- Payroll and headcount information are pulled from Schedule A and the supporting worksheets
- Key information derived on page 1 include the dates of the covered period and APCP (if used), payroll schedule, as well as a listing of non-payroll costs to be forgiven
- Page 2 requires representations and certifications by the borrower, including:
- Borrower understands the rules for eligible spending, has completed the application accordingly and verified and documented all spending
- Anyone claiming the FTE reduction Safe Harbor certifies that the business was unable to operate at the same level of business as before February 15, 2020 due to compliance with HHS, CDC or OSHA directives
- Borrower acknowledges that:
- The SBA may request additional documentation
- False statements may result in a fine or imprisonment
- Page 3 collects compensation, salary / wage and FTE data from the worksheet (page 4) and compiles for page 1 of the application
- Total compensation (line 10) is the total of
- Cash compensation for employees making $100K or less (line 1) plus those making more than $100K (line 4)
- Employer contributions for health insurance (line 6)
- Contributions to retirement plans (line 7)
- Employer portion of state & local payroll taxes (line 8)
- Amounts paid to owner-employees, self employed individuals and general partners (line 9). Compensation for these individuals is not to be included elsewhere. For more information, see Owner Compensation in Advanced Topics, below
- Salary /Hourly Wage Reduction calculation for employees making $100K or less, based on the total of individual calculations from the worksheet
- Basis for the FTE reduction calculation or Safe Harbor (more information on both in the FTE Calculation section, below)
- The application asks borrowers to attest to one of the three criteria for FTE Safe Harbor
- Only those who fail to meet the Safe Harbor criteria have to complete the FTE Reduction Quotient calculation
- Total compensation (line 10) is the total of
- Page 4 provides the underlying salary, wage and FTE data and calculation of FTE Safe Harbor 2
- Table 1 is for employees paid at an annualized rate of $100K or less
- Each employee is listed individually, along with the total cash compensation paid to the employee and that employee’s average FTE during the covered period or APCP. Employers can report FTE based on a 40-hour week or use the simplified method - see “Calculating Headcount (FTE)”, below
- If any employee’s salary or hourly wage has been reduced by more than 25% compared to January 1 - March 31, 2020, the borrower must calculate the reduction for that employee, or show that they meet the Salary / Wage Safe Harbor (see below for more information)
- Table 2 is for employees paid at an annualized rate above $100K and similarly totals cash compensation and FTE; a salary reduction calculation is not necessary for these employees
- The FTE Reduction Safe Harbor 2 calculation checks whether headcount has been restored by year end. This need only be completed by borrowers who have reduced headcount but can not certify that this was driven by compliance with governmental directives (see FTE calculation and Safe Harbor, below)
- Table 1 is for employees paid at an annualized rate of $100K or less
- Page 5 collects borrower information and demographics
Definitions, Calculations and Advanced Topics
Note: for simplicity, “covered period” in this section refers to APCP, if used
Full Time Equivalency (“FTE”) Calculation
The purpose of the FTE calculation is to ensure that headcount remains at or is restored to pre-crisis levels. This is done by comparing average weekly headcount, measured in Full Time Equivalency, or FTE, versus that of a reference period. The actual calculation is more complicated, involving choices of methodology and reference period
- FTE calculation and Safe Harbor: Borrowers do not have to complete the FTE reduction calculation if they meet any one of these criteria:
- No reduction in headcount between January 1, 2020 and the covered period
- Unable to operate between February 15 and the end of the covered period at the same level of activity as prior to February 15 due to compliance with HHS, CDC or OSHA directives or guidance
- FTE is restored to February 15 levels by December 31, 2020 (Safe Harbor 2)
- Reference period: The borrower can choose to compare covered-period headcount to:
- February 15 to June 30, 2019
- January 1 to February 29, 2020, or
- in the case of seasonal employers, either of the preceding periods or any consecutive 12-week period between May 1, 2019 and September 15, 2019
- Calculating headcount (FTE): Borrowers can choose to either:
- Calculate FTE on an hourly basis for all employees by dividing the hours worked each week by 40. (This number can not exceed 1.0)
- Designate employees who work 40 hours or more per week as full time (1.0 FTEs) and all those who work less than 40 hours as part-time (0.5)
Salary / Hourly Wage Reduction and Safe Harbor
Forgiveness levels will be reduced if the borrower has cut salary or hourly wage rates by more than 25% compared to January 1 - March 31, 2020. (This only applies to reductions in pay rates themselves; employee pay reductions due to fewer hours worked are captured by the FTE calculation). The process works as follows:
- Determine if salaries or wages have been reduced by more than 25%
- Each employee’s average salary or hourly wage for the covered period or APCP is listed, as well as the rate for January 1-March 31
- The covered period rate is divided by the Jan-March rate. If the result is 0.75 or higher, there is no reduction. If it’s lower, borrowers must complete Step 2
- Determine if Safe Harbor is met: this applies only to those individual employees whose salary or wages were reduced by more than 25%.
- First, the employee’s average salary or hourly wage as of February 15 is compared to the average for February 15 - April 26.
- If the February-April rate is lower than the February 15 level, the borrower then compares levels at year end. If the December 31 levels are equal to or higher than those at February 15, the Safe Harbor has been met
- Calculate the Salary / Hourly Wage reduction: this applies only to employees showing a reduction of more than 25% in Step 1 and who did not meet the Safe Harbor in Step 2
- The average salary during the covered period or APCP is subtracted from 75% of first quarter 2020 salaries.
- For hourly employees, this is then multiplied by the average hours worked per week from January 1 - March 31, 2020 to achieve a weekly total
- The resultant totals are then converted to 8- or 24-week totals based on the covered period. For salaried employees, the total is divided by 52 to achieve a weekly total
- The weekly total is multiplied by 8 or 24, as appropriate, to calculate the total covered-period reduction
Other Advanced topics
- Alternative Payroll Covered Period (“APCP”): Electing to use an APCP may make it easier for borrowers to use normal pay period data for the forgiveness application
- As explained, the standard covered period begins on the date funds are received
- The APCP allows borrowers to instead choose to begin payroll calculations beginning with the first day of the next payroll period.
- For example, if a borrower’s standard pay period runs from Sunday thru Saturday and PPP proceeds are received on Monday, April 20, the borrower could elect to use an APCP beginning Sunday, April 26
- The APCP is likely to be attractive to borrowers with weekly or bi-weekly pay periods, although it may be preferable for others as well
- Incurred but not paid: Borrowers are also allowed to include payroll and other eligible costs that are incurred but not yet paid during the covered period, as long as they are paid on or before the next regular due date.
- This allows for borrowers to include payroll, rent, mortgage or utilities that reflect operations during the covered period, but are actually paid soon thereafter
- For example, if rent is paid monthly on the first day of the following month, a borrower whose covered period ends September 15 could include half of September’s rent, even though the payment is made on October 1, after the end of the covered period
- Payroll costs: include gross salary, wages and tips, gross commissions, paid leave (vacation, family, medical or sick leave - excluding leave covered by the Families First Coronavirus Response Act), and allowances for dismissal or separation paid or incurred during the Covered Period or the APCP
- Owner compensation: the forgivable portion of amounts paid to owner-employees, self-employed individuals, independent contractors or general partners is capped at the lower of $20,833 (the 2.5-month equivalent of $100,000 per year) or the 2.5-month equivalent of their 2019 compensation
- Eligible rent and mortgage: must reflect obligations in place prior to February 15, 2020. Eligible mortgage payments include mortgage interest only; prepayments of principal are not eligible.
- Eligible utilities: include business payments for electricity, gas, water, telephone, transportation, or internet access on services begun before February 15, 2020