Late last week the United States Small Business Administration (“SBA”) released its Paycheck Protection Program (“PPP”) forgiveness application. While the SBA has not issued its much anticipated further guidance regarding PPP loan forgiveness, the application, which can be found here, and its accompanying instructions provide answers to some questions that borrowers and their professionals have been asking.
- Timing of payroll cost payments. Since the PPP applies to payroll costs paid and payroll costs incurred during the eight (8) week loan period (“Covered Period”) the application reflects that, payroll costs are considered paid on the date that paychecks are distributed or the Borrower originates an ACH credit transaction. Payroll costs are incurred on the day that the employee’s pay is earned. As such, if your employees earn payroll during the Covered period that is not paid during the Covered period, those payroll costs incurred but not paid during the Covered Period are eligible for forgiveness if paid on or before the next regular payroll date.
- Non-payroll cost payments. The loan proceeds that may be used for non-payroll costs (mortgage interest, rent obligations and utility payments) that are eligible for forgiveness (up to 25% of the PPP loan proceeds) must be paid during the Covered Period or incurred during the Covered Period. As such eligible non-payroll costs that are incurred but not paid until the next regular billing date may be included in the loan forgiveness. The application clarifies that you cannot prepay these expenses.
- Full Time Equivalent Employees. The PPP forgiveness requirements also require a determination whether your average full time equivalent employee count varied from your initial reference period. If the full time employee count is reduced during the Covered Period below your initial reference period this will reduce the amount that will be forgiven. The application clarifies that an average full time equivalent employee for PPP purposes is based on a 40 hour work week. The application provides two (2) methods for determining full time equivalent employees, either enter the average number of hours paid per week for each employee and divide by 40 and round to the nearest tenth (with a maximum of 1.0 for each employee), or a simplified method that designates each employee that works 40 hours or more per week is assigned a Full Time Equivalent number of 1.0 and for those employees that work less than 40 hours per week are assigned .50.
- Excused Workforce Reductions. The application clarifies that your PPP loan forgiveness will not be negatively affected if an employee is terminated for cause, the employee voluntarily resigns, or an employee voluntarily requested and received a reduction in their work hours. The SBA previously addressed the question, what happens if an employer offers to rehire an employee that was laid off between February 15, 2020 and April 26, 2020, and the employee refuses to return to work? Provided that the employer made a good faith written offer to rehire the employee and the employer documents the employee’s rejection of the offer, this will not reduce the PPP forgiveness amount.
We anticipate that further forgiveness guidance will be issued by the SBA in the coming weeks, and we will keep you informed of this valuable information.