To our Clients and Friends,
Last Friday (May 15, 2020), the Small Business Administration released its initial PPP Loan Forgiveness Application and related instructions. Frankly, this information falls short of answering the many questions our clients have around forgiveness and, in their own release, the SBA indicated that they will “soon issue regulations and guidelines to further assist borrowers” as they seek forgiveness. Furthermore, Congress continues to discuss changes to the PPP program in light of overall confusion, unintended consequences of competing CARES Act provisions and a desire to provide additional stimulus in light of the continued impact COVID-19 has on individuals, small businesses and the economy in general.

Additional updates are sure to come but here’s what we know at this point:

• Borrowers who received loans of less than $2.0 million will not need to provide additional documentation to justify the necessity of the loan – this provision provides a “safe harbor” to reduce the risk of SBA actions against them for borrowing PPP funds without using other capital resources or proving need.

• Expenses paid using PPP funds are not deductible – in spite of specific CARES Act language to the contrary, the IRS has determined that expenses paid with forgiven PPP funds will not be deductible (thus, making the PPP loan forgiveness taxable). Congress has held talks to address this conflict but legislative relief has not yet been provided here.

• Borrowers have only eight weeks to use PPP loan proceeds – we note that this may cause some problems in that the loans were provided based on 2.5 months of last year’s payroll. Given that eight weeks only contains 56 days whereas 2.5 months generally contains 76 days, it may be difficult for many borrowers to use all of their PPP loan proceeds even with consideration of 25% of non-payroll related costs.

• Maximum cash compensation eligible for PPP forgiveness is $1, 923 per week – in applying for forgiveness, cash compensation is limited to $100,000 annually which equates to $1,923 per week ($100,000/52 weeks) or $15,385 over the maximum eight-week period.

• “Alternative payroll covered periods” may be used if PPP funds were received in the middle of a payroll period – this method allows an employer with “ a biweekly or more frequent payroll” to use PPP funds beginning with the next payroll period following receipt of the funds rather than to perform special calculations to determine eligible payroll within a partial pay period (starting with receipt of PPP funds).

• Borrowers are required to track payroll and other expenses over eight weeks following receipt of funds –employers who pay employees on a semi-monthly or monthly basis will need to convert employee compensation to a weekly amount for forgiveness calculations.

Definition of “payroll costs incurred and paid – payroll costs are eligible for forgiveness as long as they are incurred or paid during the eight-week covered period or alternative covered period if elected. Payroll costs are considered incurred on the day the employee’s pay is earned. Payroll costs incurred but not paid during the last payroll of the covered period are eligible for forgiveness if paid on or before the next regular payroll date. This eliminates the need to complete a special payroll to distribute cash to employees within the eight-week period.

• Non-payroll related costs – must a) have been incurred during the eight-week period under b) agreements in force prior to February 15, 2020 and c) paid during the eight-week period or before the next regular billing date.

• FTE calculations – full time equivalents are defined as employees who work 40 or more hours. Employers may assign .5 of an FTE to any employee working less than 40 hours. This may benefit the FTE calculations of employers with numerous part-time employees.

 

• FTE exceptions for forgiveness calculations – employers are not penalized in loan forgiveness calculations for employees who were either a) offered employment but elected not to return or b) were not paid during the eight week period due to termination by cause, voluntary resignation or voluntary reduction in hours (i.e. employee requested unpaid leave).

 

• Required documentation – the forgiveness application requires borrowers to submit extensive data to lenders in order to obtain forgiveness. Details of the requirements are included in the Loan Forgiveness Application and include: payroll reports and related tax filings, loan amortization schedules, lease agreements, utility bills and related copies of payments and banking activities showing such payments.

As noted above, additional guidance is to be provided which we hope will cover open questions from comments above as well as the mechanics of rehiring employees by June 30, 2020 in order to cure any shortcomings in FTE calculations and applicability of loan interest unrelated to “mortgage obligations on real and personal property” among other open matters.

Here is a link to the PPP Loan Forgiveness Application and instructions from the SBA: SBA Loan Forgiveness Application . It appears that the PPP Loan Forgiveness Application may be even more complicated than the original Loan Application and will likely require significant attention and effort to prepare properly.

Of course, we are here to help and will continue to provide updates as soon as they become available. Please contact any of us at Kimble if you would like to discuss further.

Thank you for your continued confidence in us during these uncertain times. Be safe and stay well.