SBA releases PPP loan forgiveness application

Authored by Paul Dillon, Michelle Hobbs, Mike Schiavo, Pat Balthazor and Michael Wronsky

On May 15, 2020, the Small Business Administration (SBA) released the Paycheck Protection Program (PPP) loan forgiveness application form and instructions for small businesses. Under this initial guidance, borrowers will have two options to calculate payroll costs, including use of a loan support period that matches with the applicant’s payroll schedule. The SBA is expected to issue further regulations and other guidance relating to debt forgiveness in the coming weeks.

Key takeaways

Covered period

The covered period is defined as the eight-week period beginning on the PPP loan disbursement date. The instructions also allow borrowers with a biweekly (or more frequent) payroll schedule to elect to use an alternative covered period with respect to its payroll costs only, which is the eight-week period beginning on the first day of their first pay period following the loan disbursement date.

1. Payroll costs that are paid or incurred during the covered period, or the alternative covered period, generally are eligible for forgiveness.
2. Other costs – i.e., mortgage interest, rental/lease payments and utilities – generally are eligible for forgiveness if they are paid or incurred during the covered period only.

75% cliff effect

As discussed in previous alerts, the SBA’s interim rules on loan forgiveness raised the possibility of a cliff effect – that is, if less than 75% of the loan proceeds were used for payroll costs, it was unclear if any of the loan would have been forgivable. Fortunately, the application does not include a cliff effect. The forgiveness amount is the lesser of:

1. Payroll costs divided by 75%,
2. The total loan amount, or
3. “Modified” total cost (adjusted for salary reduction/headcount reduction).

Salary/hourly wage reduction

The loan forgiveness amount may be reduced if the employer cuts the salary/wages of certain employees by more than 25% during the covered period (or the alternative covered period) compared to the first calendar quarter of 2020. However, there is a safe harbor. If, by June 30, 2020, the employer restores employees’ average annual salaries/hourly wages to their Feb. 15, 2020, levels, the loan forgiveness amount is not reduced.

Full-time equivalency (FTE) reduction

The loan forgiveness amount may be reduced if the employer decreases its headcount. Certain FTE reductions will not affect the loan forgiveness amount, including employees that:

1. reject a written offer to be re-hired
2. were fired for cause
3. voluntarily resigned or voluntarily requested a reduction in hours

Similar to the salary/wage reduction safe harbor, if the employer restores headcount to the Feb. 15, 2020, level by June 30, 2020, then the loan forgiveness amount is not affected.

Application components

The loan forgiveness application consists of three components:

1. Schedule A Worksheet. Much of the analysis is completed on this worksheet, including computing eligible compensation for each employee, determining the number of FTEs, and calculating salary/wage and FTE reduction amounts. Independent contractors, owner-employees, self-employed individuals and partners are not included in the computation.
2. Schedule A. Schedule A pulls information from the Worksheet and adds amounts for group healthcare benefits, retirement benefits and state/local tax withholding; these amounts are in addition to the maximum compensation per employee. Schedule A also includes amounts paid to owner-employees and partners.
3.  Loan Forgiveness Calculation Form. The calculation form reports mortgage interest paid or incurred during the covered period, business rent or lease payments, and business utility payments. The last section of the form computes the loan forgiveness amount).

Open issues

• Whether March wages incurred, but not paid until the employer received its PPP loan proceeds in April will qualify for forgiveness.
• Similarly, whether prepayments of payroll or rent expenses for periods after the applicable covered period will qualify for forgiveness.
• Confirmation is needed that guaranteed payments to partners are included in compensation paid to owners in line 9 of Schedule A.
• If a borrower’s covered or alternative period extends past June 30, 2020 (the date through which PPP loans are available and can be used to fund eligible expenses), whether eligible expenses incurred and paid after June 30 will be eligible for forgiveness.

Please reach out to your Baker Tilly tax advisor to discuss how these changes may affect your tax situation.

Paycheck Protection Program solutions

Baker Tilly has a comprehensive set of solutions readily available to assist qualifying businesses that have received, or will receive, loan proceeds that may be eligible for forgiveness under the PPP. No matter where you are in the process, through a self-service model or managed-service process, our specialists can help you through:

• Applying for a PPP loan
• Monitoring utilization of loan proceeds
• Complying with forgiveness submissions requirements

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.