New PPP Loan Forgiveness Application Provides Much-Needed Clarity
Published on by Matt Rosen in COVID-19
The Small Business Administration (SBA) has released revised applications for PPP loan forgiveness, incorporating changes required by the PPP Flexibility Act. Among the most important revisions is the extension of the original 8-week covered period to a 24-week covered period for expenses eligible for forgiveness.
In addition to the revised application, the SBA issued a secondary ‘EZ’ application for use if the applicant meets certain criteria. The applications and instructions can be found here.
Overall, our observation is that the revised applications kept most of the interpretations and structure of the calculation from the initial application. Unchanged areas include:
- allowing an alternative covered period for payroll costs depending on paycycles
- the inclusion of payroll costs paid and payroll costs incurred during the period
- the method of calculating Full-time equivalents (FTEs)
- the expansion of lease expenses for personal property
This is aligned with what we were expecting, as we outlined in this earlier post.
Important Clarifications and Caveats
While areas of uncertainty regarding the qualified expenses and forgiveness application process remain, the applications provide much-needed clarification on the impact of the 24-week covered period. We’re outlining key clarifications here – and adding caveats to keep in mind.
Although not in the text of the PPP Flexibility Act, the SBA had indicated they would be permitting companies to continue to use an 8-week covered period, which provides significant flexibility to those borrowers who have fully utilized the funding and wish to proceed with the forgiveness application as well as possibly make staffing reductions without concern for the impact to the amount eligible for forgiveness.
The application does provide two key items that those who are interested in the 8-week option should keep in mind:
- The 8-week option is limited to those loans which were received prior to June 5, 2020 (the date of the PPP Flexibility Act). Any loans received after that date are required to use the 24-week covered period.
- The original application allowed a ‘safe harbor’ as it related to FTE levels, where the borrower could be exempt from the reduction in loan forgiveness based on FTE employees if they restored their FTE employee levels by June 30, 2020. Under the revised application, this safe harbor has been changed to being ‘not later than December 31, 2020’. The application will assess the safe harbor based on the FTE number as of the ‘earlier of December 31, 2020 and the date this application is submitted.’ This may provide some borrowers with added flexibility; those who had an FTE reduction now have additional time to return to their pre-COVID employment levels. This also may create a need to be strategic on the timing of submitting your forgiveness application. (If you need help determining the best time to submit your application, contact Barnes Dennig to speak with one of our COVID-19 Advisory Team experts).
The PPP Flexibility Act’s biggest change was the addition of the 24-week option. As noted above, this did not result in an overall change to the method of the calculation other than the utilization of a longer period for expenses and a longer period to calculate the average FTEs for the purposes of assessing if a reduction to forgiveness is needed.
However, there are a few specific items to note:
- The prior application instructed that owner compensation eligible for forgiveness was limited to the lesser of the amount paid during the covered period, the 8-week equivalent of their compensation in 2019, or $15,385 (8 weeks of pay not to exceed the $100,000 annualized maximum). With the extension of the covered period to 24 weeks, these amounts were revised, but limited to 2.5 months of compensation. Thus, the amounts for owners now eligible for forgiveness is the lesser of the amount paid during the covered period, the 2.5 months equivalent of their compensation in 2019, or $20,833 (2.5 months of pay not to exceed the $100,000 annual maximum).
We do note that the 2.5 months limitation only applies to owners. All other employees are limited to $46,154, based on the 24-week covered period not to exceed the annual maximum.
- The application does not provide flexibility for utilizing a covered period other than 24 weeks, so borrowers are unable to select a shorter period based on when they fully utilize the funds (with the exception of the 8-week alternative as noted above).
- The application does not provide a maximum for the amount of costs that are eligible and to which the forgiveness reductions are applied to. As the covered period is extending significantly beyond the 2.5 months used to calculate the loan amount, it is possible that the calculated eligible expenses would exceed the loan value, possibly even after applying a reduction for reducing wages of FTEs. The final forgiveness amount, per the application, is determined based on the lesser of:
- The PPP loan amount, which is not adjusted for any forgiveness reductions
- The total of eligible payroll and nonpayroll expenses, net of reductions for FTE or wage reductions
- The amount of qualified payroll costs divided by 0.60, which is based on the requirement that at least 60% of any forgiveness be for payroll costs.
The SBA provided a simplified application, which is 2-pages plus an optional demographic information form. The basis of the calculation is unchanged, however, this form can be used by borrowers who are self-employed, independent contractors, or sole proprietors who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the loan application form. It is also available for borrowers who do not have a reduction to their forgiveness related to reductions in FTE or for reductions in wages. Borrowers will still need to assess their employee levels and wage levels to validate the reduction is not necessary, however, this provides a simplified application in which completing the very detailed supporting schedules is not necessary – significantly reducing the burden for borrowers who meet the necessary criteria.
Still Unanswered Questions
There are still so many unanswered questions. We’ll keep sharing our insights, ideas, and perspectives as new guidance emerge, so be sure to subscribe for e-mail updates.
Visit Barnes Dennig’s COVID-19 Resource Center for a comprehensive list of resources. Please contact our COVID-19 Advisory Team or any of our leadership team at Barnes Dennig to discuss.
Barnes Dennig COVID-19 Advisory Team
- Cheryl Ganim
- Andy Bertke
- Matt Rosen
- Ryan Lauer
- Nick Pennekamp