June 3 Update: Senate Approves Paycheck Protection Program Flexibility Act of 2020; President Trump Expected to Sign.
Late on May 15, the SBA released Form 3508, Paycheck Protection Program (PPP) Loan Forgiveness Application. Included in the 11-page document are the PPP Loan Forgiveness Calculation Form, PPP Schedule A and a related worksheet to compute payroll costs and Full-Time Equivalency (FTE) reduction, borrower certifications, and seven pages of instructions. In a press release that accompanied the application form, the SBA states that it will “soon issue regulations and guidance to further assist borrowers as they complete their applications…”
The instructions provide highly anticipated guidance on a number of topics, which we have summarized below.
Covered Period/Alternative Payroll Covered Period. (p. 1) The 56-day period within which costs must be paid or incurred** begins on the date the PPP loan proceeds were received from the Lender. The guidance allows for an Alternative Payroll Covered Period for payroll costs only, which begins on the first day of the first pay period following the PPP loan disbursement date and ends 56 days later.
Eligible Payroll Costs. (p. 2, 5, and 7) Included are payroll costs paid** and payroll costs incurred** during the eight-week period. The borrower must choose between the statutory covered period and the new alternative payroll covered period. Payroll costs include cash compensation (gross salary, wages, tips, commissions, paid leave, and severance), employer contributions for employee health insurance and retirement plans, and employer state unemployment insurance tax. Cash compensation exceeding $15,385 ($100,000 annual salary, pro-rated for eight weeks) for any individual employee cannot be counted. Owners whose cash compensation was less than $100,000 in 2019 are limited to eight weeks’ worth of the 2019 amount. We will watch for further guidance, but it initially appears that bonuses paid during the covered period can be included in cash compensation, and that retirement contributions previously accrued may be included if paid during the covered period.
Eligible Nonpayroll Costs. (p. 2) Included are interest payments on mortgages secured by real or personal property, rent/lease payments, and utility payments. These payments must be business expenses related to a mortgage, lease, or service that was in effect on February 15, 2020. Prepayments of mortgages are not eligible, nor are principal payments.
** Paid or Incurred. (p. 2) This may be addressed in future guidance, but it appears that for both eligible payroll and nonpayroll costs, payments made during the covered period for costs incurred prior to the covered period can be counted. In addition, payments made after the covered period for costs incurred during the covered period can be counted, provided that payment is made on or before the next regular payroll date/due date. Thus, it is possible that more than eight weeks’ worth of costs can be included in the forgiveness calculation. Costs that were both paid and incurred during the covered period may only be counted once. Also note that it is not necessary to pay bills or run payroll early so that the actual payment date falls within the covered period.
Forgiveness Reduction. (p. 7 and 8) The amount eligible for forgiveness is reduced if the borrower’s average FTE decreased from the chosen reference period (see the instructions for line 11 on p. 5), or if certain employees’ cash compensation decreased by more than 25% during the covered period as compared to the first quarter of 2020. The guidance clarifies that the FTE calculation is based on a 40-hour work week. For each employee, the average number of hours worked per week is divided by 40 and rounded to the nearest tenth, not to exceed 1.0. A simplified method may be elected, whereby employees who work at least 40 hours count as 1.0 FTE and all others count as 0.5. Exceptions are provided for FTE reduction in cases where employees rejected a written offer to be rehired, were fired for cause, voluntarily resigned, or voluntarily requested a reduction of hours. FTE and compensation safe harbors can apply if levels are restored by June 30, 2020. Detailed worksheets are provided in the instructions.
Documentation/Demographic Information. (p. 10 and 11) An extensive list of required documentation is provided, including documents that must be submitted with the application as well as other items to be retained by the borrower for a period of six years from when the loan is forgiven or repaid in full. An optional demographic form is also included.
As we have been doing with all SBA guidance during these past several weeks, we will be sure to update you with any additional insight as soon as possible. Continue to check back here for the most up to date tax information and changes in response to coronavirus. If you have questions about this or related topics contact an MCB Advisor at 703-218-3600 or click here.
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