*5/17/20 Workbook Updates – Clarifications and Applications Issued by the SBA on 5/15/20
Friday night, May 15, the SBA issued its Loan Forgiveness Application. The instructions to the application provide some clarity to questions we’ve been asking throughout this process. As expected, the instructions also created new questions but still left others unanswered. The chart below includes a review of the Application, how business owners should interpret the application, questions that remain unanswered, and for those of you using our workbook, a comparison of assumptions we made and any clarity regarding those assumptions.
Please note we are updating our PPP Loan Forgiveness Workbook frequently as new regulations are issued over the coming weeks. We recommend you bookmark the workbook page and re-download the workbook to ensure you are using the most current version. Specific updates are documented on our website. This tool is intended only for planning purposes.
|Loan Forgiveness Attribute||Discussion|
|Payroll Incurred and Paid||THE LAW: The law states payroll costs forgiven must have been incurred and paid during the 8-week covered period.
THE APPLICATION: In the instructions for the Application, the SBA and Treasury allow for those with weekly or bi-weekly payrolls to BEGIN their 8-week period with the first day of their payroll following loan funding. This will ensure their 8-week period aligns with their payroll and that they don’t have to run a “special” payroll at the end. This period is defined as the Alternate Payroll Covered period. This period together with the Covered Period are considered the Covered Periods.
THE WORKBOOK: We set the Workbook up to allocate the first and last pay periods so that it could accommodate either a cash basis calculation or accrual basis. We advised those using our workbook that they needed to be prepared to run a “special” payroll using the “Week 9” data. Now that we know how the SBA is treating payroll, we are working on an update to the calculations that will align with the Application approach.
|Rent Expense||THE LAW: The Law states rent payments paid during the 8-week covered period for leases in force prior to February 15, 2020 are eligible for forgiveness.
THE APPLICATION: The instructions to the Application clarify that business leases in force prior to February 15, 2020 for real or personal property during the 8-week covered period may be considered for loan forgiveness.
THE WORKBOOK: We generally advised that rent paid for real property during the 8-week covered period would be allowed in the forgiveness calculation. We weren’t clear whether or not rent would include lease payments on personal property, such as photocopiers, vehicles, postage machines, etc. would be an allowable expense for forgiveness. Therefore, our recommendation has been to accumulate this data in the event these lease payments were eligible. We have also recommended, and continue to recommend, that you ensure all lease agreements are up-to-date and that your amounts paid for any leases are consistent with your agreements.
|Full-Time Equivalent Employees (FTEs)||THE LAW: The Law does not define an FTE. Instead, it simply refers to FTEs in multiple sections related to eligibility for a loan and forgiveness of the loan.
THE APPLICATION: The Application indicates an FTE is calculated by dividing the average number of hours paid per week by 40, rounded to the nearest tenth of an hour. The maximum for each employee is capped at 1.0. A simplified method that assigns a 1.0 to those employees that work 40-hours or more per week and .5 for those that work fewer hours may also be used by the Borrower.
THE WORKBOOK: We based the design of the Workbook off of other laws, such as the Affordable Care Act, recently passed by Congress and used 30-hours for a FTE. We are updating the Workbook to include the 40-hour definition. We are also assuming many business owners will opt for the simplified calculation and opt to consider anyone working 40-hours or more as a 1.0 and anyone working less as a .5 FTE.
|FTE Reduction Exceptions||THE LAW: The Law is silent about this provision in the Application. The Law was later clarified in the SBA’s Frequently Asked Question (FAQ) #40 by indicating an eligible borrower’s forgivable amount would not be impacted by an employee that was previously furloughed or otherwise laid-off or terminated, that had been offered their position back in writing and who refused to return to work.
THE APPLICATION: The Application clarifies that a borrower’s loan forgiveness will not be impacted by (1) any position for which the Borrower made a good-faith, written offer to re-hire an employee during the Covered Period or the Alternative Payroll Covered Period that was rejected by the employee; and (2) any employees who during the Covered Period or the Alternative Payroll Covered Period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and were granted a reduction in their hours. Loan forgiveness won’t be impacted so long as the Borrower doesn’t fill this position with a new employee.
THE WORKBOOK: The workbook was designed to account for all employees who were paid any wages during the first quarter of 2020. Therefore, these employees had been included in the denominator and counted against you. In the next version of the workbook, these employees will be included in both the numerator and the denominator and will not have an adverse effect on the calculation.
|FTE Reductions Safe-Harbor (Re-Hire Provisions)||THE LAW: The Law states that a reduction in loan forgiveness related to reduced FTEs from the period February 15, 2020 through 30-days from enactment of the law, or April 26, 2020, would not be considered as long as the reduction is eliminated no later than June 30, 2020.
THE APPLICATION: The Application also includes a provision called the FTE Reduction Safe Harbor. Using this safe harbor, an eligible borrower that reduced its FTEs during the period February 15, 2020 through April 26, 2020 could eliminate its reduction in loan forgiveness by restoring its FTE employee levels no later than June 30, 2020 to its FTE employee levels in the Borrower’s pay period that included February 15, 2020.
THE WORKBOOK: We purposefully left the Re-Hire Provisions out of the Workbook because there were too many unknowns in and interpretations of these provisions at the time we developed the Workbook. We are incorporating calculations consistent with the FTE Reduction Safe Harbor in the next version of the Workbook.
|Salary/Hourly Wage Reduction Exceptions||THE LAW: The Law states loan forgiveness shall be reduced by the amount of any reduction in total salary and wages of any employee (except those earing greater than $100,000 annualized in 2019) during the Covered Period that is in excess of 25% of the total salary and wages of the employee during the most recent full quarter during which the employee was employed before the covered period.
THE APPLICATION: The Application reflects loan forgiveness reductions only for employees compensated in the Covered Period or Alternative Payroll Covered Period at a rate of pay that is not equal to or greater than 75% of their annual salary or hourly pay in the first quarter of 2020. There is no reduction for an employee paid in the first quarter of 2020 who was not compensated in the Covered Period or Alternative Payroll Covered Period.
THE WORKBOOK: The workbook reflected a reduction of loan forgiveness for employees paid in the first quarter of 2020 that were not rehired during the Covered Period. We are updating the workbook to be consistent with the interpretation of this provision in the Application.
|Salary/Hourly Wage Reductions Safe-Harbor (Re-Hire Provisions)||THE LAW: The Law states that a reduction in loan forgiveness will occur if the salaries or wages of a single employee during the period February 15, 2020 through April 26, 2020 is lower than their salary/hourly wage compared to February 15, 2020 unless the reduction is eliminated prior to June 30, 2020.
THE APPLICATION: There is a provision in the application that allows for a safe-harbor if by June 30, 2020 an eligible borrower has restored a reduction in the average annual salary or hourly wage of an employee during the period February 15, 2020 through April 26, 2020 compared to the annual salary or hourly wage of the employee as of February 15, 2020.
THE WORKBOOK: Similar to the FTE Reductions Safe-Harbor, we purposefully left this provision out of the Workbook. We are incorporating calculations consistent with the Salary/Hourly Wage Reductions Safe Harbor in the next version of the Workbook.
|75/25 Provision for Payroll Costs||THE LAW: This provision is not included in the Law. This provision was added by the Treasury Department after the Law was signed by indicating that due to the popularity of the PPP Loan Program a minimum of 75% of the forgiveness amount must come from payroll costs.
THE APPLICATION: The Application is consistent with the Treasury Department and includes a limitation for forgiveness that is equal to total payroll costs divided by .75.
THE WORKBOOK: The calculations in the Workbook are consistent with the Law and Application.
|Cash Compensation||THE LAW: The law does not define “cash compensation.” Instead, it defines what’s included in payroll costs, which include salaries and wages, vacation, sick pay and medical leave.
THE APPLICATION: The Application defines cash compensation as: gross salary, gross wages, gross tips, gross commissions, paid leave (vacation, family medical, family sick leave, not including leave covered by the Families First Coronavirus Response Act), and allowances for dismissal or separation paid or incurred during the Covered Periods. The Application indicates this compensation will be limited to $100,000 annualized or $15,385 during the Covered Periods.
THE WORKBOOK: We assumed in the Workbook that these forms of compensation would be considered cash compensation and would be limited to $100,000 annualized or $15,385 during the Covered Periods.
|Items on which we still need clarification||Floorplan interest – Will floorplan interest be included as a non-payroll cost for automobile dealerships?
Re-hire Provision – How long after June 30, 2020 are employers required to retain employees rehired for forgiveness purposes?
Health Insurance – Does it include employer contributions towards dental, HSAs, etc.?
Retirement Contributions – How much can be paid and forgiven in the Covered Periods?
Wage Reduction – How does this work for incentive based compensation agreements? For example, if an agreement indicates an employee makes 10% of net profit and net profit is $0, then can they earn $0?
Loan – What happens at the end of the Covered Periods when the loan is either forgiven or converted to term debt? Is any unused portion added to the unforgiven amount and termed out?