PPP Loan Forgiveness Application Clarification

 In Articles, COVID-19
May 21, 2020 at 3:00 pm |

The following information is intended to give guidance that will be the most relevant and of greatest value to our clients in regard to the loan forgiveness application. Each borrower will have slightly different scenarios and circumstances. As you encounter these items, please make use of your Simon Lever representative. We look forward to walking you through this process.

It is important to keep in mind that this information is what we know as of today. There will certainly be more FAQs released, and we believe there is a possibility that Congress will act to enforce or correct any number of SBA interpretations. The guidance we have been given certainly provides more clarity, but this application will not be the final word on all fronts. Congress has ultimate authority to pass law mandating interpretations.

New/Clarified Guidance
  1. Payroll costs paid AND payroll costs incurred are eligible for forgiveness. This means that payroll paid at the beginning of the 8 weeks that may have been for time worked before the 8 weeks is eligible for forgiveness (it was paid within the 8 weeks), and time worked during the 8 weeks but not paid until after the 8-week period is up is also eligible for forgiveness (if paid on or before the next regular payroll date).
  2. Owner’s pay is limited to 8/52nds of 2019 levels: Owners that were making less than $100,000 will be limited to their 2019 earnings.
  3. Additional guidance issued on calculation of FTE’s (most relevant points are below):
    • A FTE (full-time equivalent) is measured at 40 hours per week, not 30 as was the original expectation.
    • A simplified version of the FTE calculation was introduced — an employee who works 40 is 1.0, and anyone who works less than 40 is 0.5.
    • Applicants may include as a FTE persons who were made an offer (which must be in writing) to be rehired but declined, persons who voluntarily resigned, were fired for “cause,” or voluntarily requested a reduction of hours IF the position was not filled.
  1. Safe harbor: If the safe harbor provision is satisfied, there is no reduction in loan forgiveness from FTE equivalent or wage reduction calculations. The safe harbors are:
    • If wages/salary were reduced more than 25% or FTE were reduced from 2/15 through 4/26, and then restored to 2/15 levels by June 30th, it does not make a difference what occurred from 4/26 through June 30th, you will not have any reduction in loan forgiveness for FTE or wage reduction.
    • If the applicant did not reduce the number of employees or the average paid hours of their employees in effect at January 1, 2020 compared to the end of the Covered Period, you will not have any reduction in loan forgiveness for FTE.
Planning Opportunities
  1. There is still some uncertainty regarding items such as prepaying health insurance and retirement plan contributions. Our guidance is that these payments appear to be eligible for loan forgiveness if appropriate documentation is included. For non-payroll costs, the application does clearly state that prepayment is NOT allowed for mortgage interest, but stays silent on prepayment for utilities, rent, and other eligible costs. However, to document rent (for example), it asks for a copy of the lease agreement, or a lessor account statements from February through one month after the covered period. From this documentation, it would be fairly simple to tell if large prepayments were made. Prepayments are clearly a planning opportunity. However:
    • There is certainly risk that either prepayments will be expressly prohibited or that the loan forgiveness application will not be approved by the lender if prepayments are included. Prepayments do not need to be made until near the end of the 8-week covered period. Additional guidance regarding prepayment of expenses may be issued before this decision needs to be made.
    • We do encourage clients to implement other strategies to qualify for loan forgiveness before the prepayment option is utilized.
  1. We do not have further guidance on the definition of “transportation” (transportation is mentioned as a utility and eligible for forgiveness as a non-payroll cost). We believe fuel at a minimum is a forgivable expense based on SBA guidance issued to self-employed individuals. Transportation is a very wide category. Vehicle repairs and maintenance, mileage reimbursement, etc. would all seem to be transportation costs. Our best counsel in this area is similar to the prepayment issue. We encourage other avenues to qualify for loan forgiveness before expanding the definition of “transportation” costs.
  2. We encourage making a strong attempt to meet one of the safe harbors outlined above — it will result in maximizing loan forgiveness and will be both the easiest and least time consuming to document and calculate.
  3. Payment of bonuses (to non-owners), merit pay, etc. is a valid concept to both boost payroll costs and to reward employees, if additional costs are needed to either meet the test that requires 75% of loan forgiveness to be payroll costs or if not enough costs in total are eligible for 100% loan forgiveness. Please keep in mind that wages to any one person in excess of $15,385 will not be permitted as an eligible payroll cost.
  4. Make full use of the persons who can count as a FTE that were not necessarily on payroll IF the position was not filled (you can’t count the same position twice). This includes the following classes of employees:
    • Persons who were made an offer to be rehired but declined (offer must be in writing)
    • Persons who voluntarily resigned
    • Persons who were fired for “cause”
    • Persons who voluntarily requested a reduction of hours
Open Questions
  1. Prepayment of costs — will this be permitted or expressly prohibited?
  2. June 30th restoration date — will there be some guidelines that prohibit a subsequent layoff/furlough after June 30th, or will companies be permitted to restore as of June 30th and then be given free rein to handle employment as they best see fit after they meet June 30th safe harbor staffing requirements?
  3. How will banks monitor and oversee the loan forgiveness? Will each bank require their own documentation and use their own calculations (similar to the application process)?
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