On Friday, May 15th the SBA released the PPP loan forgiveness application and instructions. These instructions do provide insight into the direction that SBA is moving with this process; however, this is not the long-awaited forgiveness regulation. Regulations will soon be issued by the U.S. Treasury and/or the U.S. Small Business Administration (SBA) that will provide further guidance and clarification as to which costs can be forgiven and over what period of time.

There has also been significant speculation as to additional changes coming to this program, whether by legislation or by additional changes in direction by the SBA. There have been bills introduced in both the House of Representatives and the Senate that could make changes to this program. We are not going to speculate as to what specifically might change and when; however, we will continue to watch developments closely and will let you know as to the impacts of such changes. Treasury Secretary Mnuchin has indicated to the media that some changes would be coming, so this is more than just speculation.

Below we are highlighting some of the proposed changes so that you can have the opportunity to contact your Congressperson or Senator and ask them to consider changes that are in your and/or societal best interests.

The following are some of the proposals that have been put out.

  • Provide more flexibility as to how the funds get spent. The SBA imposed a 75% minimum to payroll-related costs, while The CARES Act had no such minimum.
  • Extensions to the eight-week period. Many small businesses cannot open their doors while under the shelter in place order; therefore, they cannot hire their people back and are not able to benefit from loan forgiveness in a meaningful amount.
  • Taxability of forgiveness. The CARES Act specified that the forgiveness income would be tax-exempt, but then IRS ruled that the associated expenses are non-deductible thus rendering the forgiveness taxable.
  • Extension of the repayment period beyond two years. The CARES Act provided for a ten-year period, while the SBA issued a shorter period when they issued their interim final regulations.

The following are observations from Friday’s release of the SBA’s application form and instructions.

  • Eight-week forgiveness period generally begins on the date that you borrow the funds, not the date you sign your loan documents; however, they provide for some flexibility by allowing you to align your eight-week period to the beginning of a payroll period (referred to in the application as the “Alternative Payroll Covered Period”. They also provide for expenses to be measured either on a basis of expenses paid or expenses incurred, so if payroll periods do not align with your forgiveness period you may be able to report such amounts so long as they are paid on or before the next regular pay date. The same concept applies to nonpayroll costs such as rent, utilities, etc.
    • Interestingly, some of the language in the application instructions is a bit ambiguous and might imply that perhaps more than eight-weeks’ worth of costs could be included in the application, and in fact, we’ve seen interpretations from other parties supporting this. We anticipate that some of these instructions might be clarified when the regulations are issued, but we will be watching this closely.
    • There might also be opportunities provided for partnerships or seasonal employers to amend their loan applications to include partner compensation or seasonal employer compensation if they had not previously included such amounts in their applications. This was addressed in some of the Q&As previously issued by the SBA.
  • There are tables and worksheets provided in the application on which companies will need to specifically list all employees and their cash compensation during the forgiveness period.
    • Note: there are specific provisions requiring separate reporting of owners’ compensation, and there are interpretations that we’ve seen that indicate it may be problematic to include higher levels of compensation than in 2019. We expect further clarification of this when SBA issues its regulations.
  • The materials provide some clarification as to how to measure headcounts and how to handle specific reasons for reductions in headcounts (such as voluntary dismissals, involuntary terminations for cause, layoffs/furloughs, etc. Each employee paid during the forgiveness period will need to be listed along with their full-time equivalency (FTE) during the period and their compensation (capped at $15,385, which is 8/52 of the $100,000 cap limit provided by the law).
  • The FTE measurements will be based on the number of hours an employee works per week divided by 40 (capped at 1.0). The form also provides an alternative of assigning 1.0 to each employee working at least 40 hours per week and 0.5 for employees who work fewer hours. Additionally, there is a provision that certain terminations can be excluded from the FTE measurements, such as if an employee was terminated for cause, voluntarily terminated, voluntarily took a reduction of hours, or was extended an offer to return and declined to do so. They have also retained the safe harbor to avoid a proportionate reduction in the forgiveness if there was a reduction between February 15 and April 26, and the FTE count that existed on February 15 is restored by June 30.
  • Specific documentation will be required to be included in the application for forgiveness that supports the calculations of FTE during the selected measurement period. The options for measuring periods are:
    1. 2/15/19 to 6/30/19,
    2. 1/1/20-2/29/20, or
    3. any consecutive 12-week period between 5/1/19 and 9/15/19 (seasonal employers only).
  • Specific documentation will need to be attached to the application to provide evidence that such amounts are appropriate. Examples:
    • Payroll reports documenting the cash paid to employees during the period, along with payroll tax forms (or for third-party payroll providers, equivalent reports from their systems), including reports to both federal and state quarterly reporting and unemployment insurance filings with the states.
    • Payment receipts, canceled checks or bank statements demonstrating payments for contributions to health insurance and retirement plans.
    • Amortization schedules and canceled checks or bank statements from February 2020, the eight-week covered period, and the month after the eight-week period for mortgage interest payments.
    • A copy of the lease and canceled checks verifying payments from the eight-week period or lessor account statements from February 2020, the eight-week covered period, and the month after the eight-week period for rent or lease payments.
      • Note: the language in the application instructions refers to “rents and leases” which would appear to clarify that both facility rents and equipment leases can be includable in the calculations.
    • A copy of invoices from February 2020, the invoices for amounts paid during the eight-week period, along with canceled checks or account statements for the payments.

We know this hasn’t been easy for businesses. We’re here to help. We’re working with clients to help with their loan application, maximizing their cash resources and implementing best practices and innovative solutions for success. Contact your BMF Advisor to discuss the best option for your business.

Check out our Q&A sheet on loan forgiveness to help answer any immediate questions you may have. Visit our COVID-19 Resource Center for additional information and resources for you and your business.

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