A Matter of Forgiveness – of a PPP Loan That Is (Round Two)
In the last "Profit From It" article, I took an initial dive into the issue of Paycheck Protection Program (PPP) Loan forgiveness under the CARES Act; see "A Matter of Forgiveness - of a PPP Loan That Is" on May 27.
As stated at the time, there were still many unanswered questions upon which we were awaiting guidance. Sure enough, just about the time that article was submitted, the Small Business Administration (SBA) issued a loan forgiveness application. It followed that up about a week later with another 26-page loan forgiveness guidance document for lenders. These documents answer some of, but certainly not all, our unanswered questions.
So today, consider this round two in our discussion of PPP loan forgiveness, as we lay out some of what we additionally now know.
First, is the application for forgiveness, and let me just say, if you thought the loan application process was complicated, well, hold on tight. The SBA has issued Form 3508, an 11-page forgiveness application and set of instructions. As government forms go, I’ve seen worse, but this is no walk in the park either. The application includes two important supporting schedules, namely Schedule A and the worksheet to Schedule A.
The process will go something like this. First, you will prepare and submit the form (or an equivalent from your lender) to the lender. Next, the lender will review Form 3508 to make a decision regarding the loan forgiveness amount, if any. The lender has 60 days from receipt of the application to make that decision and communicate the loan forgiveness amount to SBA. Finally, once it’s in SBA’s court, they have 90 days to potentially review the forgiveness application and make payment to the lender of the forgiveness amount.
Will SBA review all applications? Likely not with its limited resources, but they are authorized to do so as deemed necessary.
What are some other things we can glean from the recent SBA issuances? Here are a few items for which badly needed guidance was given:
- The forgiveness amount for owner/employees, the self-employed and general partners is capped at no more than 8/52 of 2019 compensation or $15,385 per individual over all businesses.
- Employee FTEs (full-time equivalents) are calculated using a 40-hour week as the standard work week. Some had thought, based on other SBA/IRS rules, it might be a 30-hour week. Recall FTEs have to be calculated because loan forgiveness can be lowered if FTEs for your business are reduced. There is also a simplified FTE method where every part-time employee (i.e., under 40 hours per week) is simply treated as .5 FTE as opposed to having to calculate the actual number.
- Exceptions were provided for the FTE forgiveness reduction. An employee can be removed from the FTE position count if they were fired for cause or voluntarily resigned. They can also be excluded if the employer makes a good faith, written offer to rehire the employee and the offer is rejected. However, you must inform the state unemployment office of this rejection, among other requirements, to use this exception.
- An "alternative payroll covered period" was provided. Rather than starting the 8-week covered period (see previous article for more on this) in which you have to spend the PPP funds to get forgiveness on the date the loan is disbursed as was originally required, for payroll cost determination, you can elect to start the covered period (the eight weeks) on the day of your first pay period following the loan disbursement date. In some cases, this could result in a higher forgivable payroll cost amount.
- Making advance payments of interest on mortgage obligations won’t fly, only interest actually due.
- For other non-payroll costs such as mortgage interest, rent and utilities, to qualify for forgiveness, these expenses must either be: a) paid during the 8-week covered period, or b) incurred during the 8-week period and paid by its next regular due date, even if that due date is outside the 8-week period. Based on the above, it appears that amounts paid for the above during the covered period are eligible for forgiveness even if related to periods before the covered period.
- The guidance also details the documentation that will be required to be submitted backing up the application information. The scope of it all is beyond the space limitations I have here; suffice it to say, some trees are going to die in the process!
Bear in mind that, as stated above, there are still many things for which we still need answers from the SBA. Plus, Congress is starting to weigh in on various issues they want changed or to clarify areas in which the SBA interpretation of the CARES Act may not square with congressional intent. So stayed tuned, the saga is still unfolding.