New PPP Loan Forgiveness Application Provides Flexibility in Calculating Loan Forgiveness | Bennett Thrasher Skip to main content

On May 15, 2020 the Small Business Administration (SBA) posted the long-awaited Paycheck Protection Program Loan Forgiveness Application, with step-by-step instructions on how to perform the calculations required by the CARES Act to determine the eligible amount of loan forgiveness. According to a Treasury statement, the application and instructions provide guidance that is meant to reduce compliance burdens and facilitate the process for borrowers. They answer several questions that were troubling borrowers and their advisors and are mostly favorable to businesses.

Specifically, borrowers who have a bi-weekly or more frequent payroll schedule now have the option to calculate payroll costs using a period that aligns with their regular payroll cycles. Further, all employers now have the flexibility to include payroll and nonpayroll expenses paid or incurred during the eight-week period after the loan disbursement date. These provisions potentially increase a borrower’s eligible payroll and nonpayroll costs, thereby increasing the portion of the PPP loan that can be forgiven.

Flexibility for Calculating Payroll Costs

For administrative convenience borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week period that begins on the first day of their first pay period following their PPP loan disbursement date – the “Alternative Payroll Covered Period.” For example, if the borrower received its PPP loan proceeds on Monday, April 20 and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day is Saturday, June 20.

Note that even if a borrower elects to use the Alternative Payroll Covered Period for purposes of calculating eligible payroll costs, eligible nonpayroll costs are still calculated based on the “Covered Period” beginning on the loan disbursement date.

Favorable Interpretation of “Incurred and Paid”

The Cares Act provides that a borrower will be eligible for loan forgiveness for “costs incurred and payments made during the covered period,” which created uncertainty as to whether eligible costs had to be both paid and incurred. With the Loan Forgiveness Application, it is now clear that the SBA has taken the favorable position on the issue and interpreted the “and” in the statutory language as disjunctive, with the result that borrowers will potentially be eligible for greater loan forgiveness amounts.

Eligible payroll costs include payroll costs paid during the eight-week Covered Period or Alternative Payroll Covered Period. Payroll costs eligible for forgiveness also include payroll costs incurred but not paid during the borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) if they are paid on or before the next regular payroll date.

Nonpayroll costs eligible for loan forgiveness must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if that billing date is after the Covered Period.

What does the SBA’s favorable interpretation of “costs incurred and payments made” mean for borrowers? First, the added flexibility in calculating eligible payroll costs will likely mean that borrowers will not have to resort to special or manual payroll runs. More significantly, borrowers will have the opportunity to report increased amounts of payroll and nonpayroll costs for the eight-week period. For example, the borrower’s first payroll run of the eight-week period may include eligible wages earned prior to the loan disbursement date. Absent additional formal guidance to the contrary, according to the instructions the wages paid during eight-week period will not need to be reduced by amounts earned prior to the beginning of the Covered Period (or Alternative Payroll Covered Period).

Similarly, the instructions do not indicate that eligible nonpayroll costs paid during the eight-week period will need to be reduced by amounts accrued prior to the beginning of the Covered Period. While the CARES Act specifically prohibits forgiveness for prepayments of mortgage interest, it now appears that employers can obtain forgiveness of late payments and prepayments of rent and utilities made during the Covered Period. However, it is important to note that nonpayroll costs are still limited to 25 percent of the loan forgiveness amount pursuant to the application and instructions.

Calculation of Average FTE

The portion of the loan that will be forgiven will still be reduced if there is reduction either in the employer’s FTE headcount or the amount of employee wages during the eight-week period following loan disbursement. The instructions explain two methods for calculating average full-time equivalency (FTE), thereby answering questions regarding whether that means 30 or 40 hours per week:

  • For each employee, the borrower enters the average number of hours paid per week, divides by 40 and rounds the total to the nearest tenth. The maximum for each employee is capped at 1.0.
  • Borrowers may alternatively use a simplified method that assigns 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.

FTE Reduction Exceptions

The Loan Forgiveness Application includes a new exemption from the loan forgiveness reduction for borrowers who make good-faith, written offers to rehire employees during the Covered Period (or Alternative Payroll Covered Period) that are declined by the employee. Also, a borrower’s loan forgiveness will not be reduced by FTE reductions attributable to any employees who were fired for cause, voluntarily resigned or voluntarily requested and received a reduction of their hours during the Covered Period (or Alternative Payroll Covered Period).

Finally, the instructions make clear that reductions in FTEs and/or wages will be disregarded for purposes of the loan forgiveness calculation if they are fully restored by June 30, 2020. While it appears that a business can avoid the statutory reductions in loan forgiveness by restoring the reductions in headcount or wages in a single day, it is important to keep in mind that the result of dividing payroll costs by 75 percent still establishes a limit to the amount of loan forgiveness.

More Changes to Come?

The AICPA responded to the Loan Forgiveness Application with a news release stating that the application and instructions helped address some administrative questions but left some significant issues unresolved. Specifically, the AICPA said that small businesses still need additional flexibility on when the eight-week Covered Period should start or else need to have the period extended to more than eight weeks. Businesses severely impacted by the coronavirus pandemic are lobbying for additional flexibility to rehire workers later in the year rather than rush to bring them back by June.

In the Senate, Small Business Committee Chairman Marco Rubio is finalizing legislation that would give businesses up to 16 weeks to use their PPP loans. Legislation was introduced in the House that would extend the loan forgiveness deadline from eight to 24 weeks and eliminate the requirement that at least 75 percent of the loan forgiveness amount be attributable to payroll costs. There appears to be bipartisan support for extending the eight-week deadline, but it remains to been seen whether a political compromise can be achieved to modify the rules.

We’re Here to Help

We will continue to keep you informed of any new developments regarding the Paycheck Protection Program or significant new guidance issued by the SBA. If you have questions regarding how the new Loan Forgiveness Application and instructions impact your own situation, please contact your Bennett Thrasher advisor by calling 770.396.2200.