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SBA Releases PPP Forgiveness Application; Sheds Dim Light on Looming Questions

May 18, 2020


The lack of guidance related to Paycheck Protection Program (PPP) loan forgiveness has been the genesis of exacerbated frustration in the tax and business communities over the last several weeks. While the Small Business Administration (SBA) has still not released authoritative guidance clarifying critical definitions and providing much-needed direction, it did release the PPP loan forgiveness application Friday, May 15. This 11-page application sheds some light – although dim – on several outstanding items. Outlined below are a few key developments:

  • Payroll Costs: Borrowers can elect an Alternative Payroll Covered Period “alternative period” for payroll costs (for borrowers with at least as frequent as bi-weekly payroll). With this election, borrowers may treat the first day of the eight-week period as beginning on the first day of the pay period following the PPP loan disbursement. (Note: This alternative period only applies to payroll costs). For this purpose, payroll costs are considered paid on the day the paycheck is distributed or the origination date of the ACH credit transaction.

Additionally, payroll costs incurred but not paid during the borrower’s last pay period – either under the normal eight-week period or the alternative period – are eligible if paid on or before the next regular payroll date.

  • Other Eligible Expenses: Other eligible expenses include covered mortgage obligation interest, covered rent obligations, and covered utility payments. The application states that those expenses paid during the covered period (eight weeks from loan origination) are qualifying expenses. Additionally, qualifying expense includes amounts incurred during the eight-week covered period but paid after the eight-week covered period, provided the payment is made by the next regular due date. The alternative period described above does not apply to these other eligible expenses even where a borrower elects to apply the alternative period to payroll costs.
  • Average FTE: Confirmation that 40 hours per week is the standard basis. Clarity that employees who work in excess of 40 hours per week are considered “1” full time equivalent (FTE). A simplifying convention, borrowers may treat all employees who work less than 40 hours per week as “.5” FTE.
  • Owner Compensation: A surprise certification: Compensation for any owner-employee or self-employed individual/general partner does not exceed eight weeks of 2019 compensation.
  • Payroll Costs – 75% Cliff: There was concern that if payroll costs did not constitute 75% of the loan amount, none of the loan would be forgivable. The application appears to alleviate this concern, instead solely applying the 75% rule to the calculation of the maximum loan forgiveness amount.
  • Interest: In contrast to the Interim Final Rule, the application does not extend the forgiveness provision to cover interest on the PPP loan.
  • Ordering Rules for Forgiveness Reductions: We have known there are several factors that reduce the amount of PPP loan forgiveness, the sequence of which would have a significant impact on the amount of forgiveness. The application provides a borrower favorable ordering as follows:
  • Salary/wage reduction
  • FTE quotient reduction
  • 75% payroll requirement stands alone
  • Affiliates Representation: Borrowers with PPP loans in excess of $2 million are required to check a box indicating that combined loans (borrower and affiliates) exceeds $2 million. Borrowers may want to revisit the affiliation rules to confirm that, on a combined basis, the loan amount does not exceed $2 million.

KSM Can Help

The nuances in the PPP loan forgiveness application are vast, which will ultimately affect the amount of loan forgiven. At 11 pages, many borrowers may feel overwhelmed with the process. KSM is here to answer your questions and can help you prepare the necessary documentation to support your application. Please reach out to your KSM advisor for help or complete this form.

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