The Coronavirus Aid, Relief and Economic Security Act (CARES Act), which created the Paycheck Protection Program (PPP), was signed into law by President Trump on March 27, 2020. The PPP provides government-backed loans to qualifying businesses, which may ultimately be forgiven if certain conditions are met. As nearly eight weeks have passed since the first PPP loans were disbursed, the focus has largely shifted from the loan application process to the issue of forgiveness.

On May 15, 2020, the Small Business Association (SBA), in consultation with U.S. Department of the Treasury (Treasury), released the PPP loan forgiveness application with instructions. This blog provides a “crash course” in the basic requirements for completing the application. All borrowers should consult their attorneys or accountants for specific advice regarding their particular circumstances.

Application Forms

The application consists of four main parts, each of which has its own set of instructions. These include the: (1) Forgiveness Calculation Form; (2) Schedule A; (3) Schedule A Worksheet; and (4) optional Demographic Information Form. In sum, the first three of these various forms provide for a cascade of calculations. The most granular calculations are performed on the Schedule A Worksheet, which is then used to complete the calculations on Schedule A, which is then used to complete the calculations on the Forgiveness Calculation Form.

In the end, only the Forgiveness Calculation Form and Schedule A are required to be submitted to the borrower’s lender, along with a plethora of supporting documentation described in more detail in the forms. The required documents may be submitted to the lender in hard copy or electronically.

The borrower must also maintain the Schedule A worksheet (or an equivalent calculation sheet) and its supporting documentation for a period of six years after the date the loan is fully forgiven or repaid.

Relevant Time Periods

Previously, it was understood that a PPP loan would be forgiven if the proceeds were spent on certain expenses during the eight weeks after the loan’s origination date. However, the forgiveness application states for the first time that an alternative time period may be utilized for the purpose of calculating loan forgiveness.

Specifically, the application provides that forgiveness can be based on payroll costs incurred during either: (1) the “covered period,” which consists of the 56-day period beginning on the date the borrower’s PPP loan funds were disbursed; or (2) the “alternative payroll covered period,” which is the 56-day period beginning on the first day of the borrower’s next payroll period following the disbursement of loan proceeds. The alternative payroll covered period may be utilized by borrowers whose payroll is on a biweekly or more frequent schedule.

Borrowers must note that using the alternative payroll covered period adds an extra layer of complication. Those borrowers must use the alternative covered period for calculations required by the application that refer to the “the covered period or the alternative payroll covered period.” However, borrowers must make calculations based on the “covered period” (not the alternative period) wherever there is a reference in the application to “the covered period” only. In our observation, it appears that the application refers to the alternative period when dealing with calculations relating to payroll, and only the covered period when addressing non-payroll expenses.

Borrowers should also bear in mind that the government appears to be mulling over the idea of making further changes to the eligible forgiveness window. On May 18, 2020, lobbyists for certain industries met with President Trump to advocate that the covered period be extended from 8 weeks to 24 weeks. The President seemed to be open to the idea, stating, “That should be easy. That’s like one of the easiest requests I’ve ever heard.”

Forgiveness Formula Generally

The main takeaway from the Forgiveness Calculation Form is that the borrower’s maximum forgiveness amount is the smallest of the following three figures:

  1. PPP loan amount (line 9 of the PPP Forgiveness Calculation Form)
  2. Payroll Costs divided by 0.75 (i.e., the requirement that at least 75% of the PPP loan be used for payroll) (line 10 of the PPP Calculation Form)
  3. ((Payroll Costs + Eligible Non-Payroll Costs) – (Dollar Value of Pay Reductions in Excess of 25%)) x FTE Reduction Quotient (line 8 of the PPP Forgiveness Calculation Form)

Figuring our your PPP loan amount is simple, but the other calculations might make your head spin. Not to worry, as we will breakdown what borrowers need to do to perform the other calculations.

Payroll Costs 

Payroll costs essentially consist of two broad components: cash compensation and non-cash benefits, each of which will be determined separately if the borrower follows the steps on Schedule A and the Schedule A worksheet. Below we’ve summarized those calculations in an order that we think is more easily digested (relatively speaking).

Borrowers should start with a list of each individual employed during the covered period or the alternative covered period. For each employee, the borrower should determine his or her cash compensation, which consists of: gross salary, gross wages, gross tips, gross commissions, paid leave (excluding leave under the Families First Coronavirus Response Act), and severance pay. To the extent any employee’s compensation during the relevant time period exceeds $100,000 annualized, the employer should list that employee’s cash compensation as the maximum amount of $15,385. By adding together the result for each employee, the borrower will know the total cash compensation amount.

What about non-cash benefits? These include the amounts paid by the borrower for employer contributions to employee health insurance and employee retirement plans, and employer state and local taxes assessed on employee compensation (e.g., unemployment insurance taxes, but not amounts withheld form employee pay for state and local income tax). The borrower should total the amount paid for each expense for each employee during the covered period or alternative covered period. When these sums are added together, the borrower will know the total amount of non-cash benefits.

Schedule A requires that compensation paid to employee-owners, self-employed individuals and general partners be listed separately. Sums paid to such an individual may be forgiven in an amount that is equivalent to his or her annual draw for 2019, divided by 52, and then multiplied by 8 (i.e., 8 weeks of the individual’s average weekly draw for 2019). However, as in the case of ordinary employees, the amount forgiven is capped at $15,385.

The borrower’s payroll costs are the sum of all cash compensation and non-cash benefits described above. This sum will be filled in on line 1 of the PPP Forgiveness Calculation Form. The sum will also be divided by 0.75 to complete line 10 of the form, which sets forth one of the borrower’s potential forgiveness amounts.

Non-Payroll Costs

The borrower’s non-payroll costs are the total of its eligible business mortgage interest payments, business rent or lease payments, and business utility payments. For these expenses to be eligible, the following conditions must be met:

  1. The obligation to pay the expense must have been incurred before February 15, 2020. This means that, in the case of a mortgage or lease, the borrower must have signed the documents establishing the obligation prior to February 15th. In the case of utilities, service must have begun prior to that date.
  2. The expense must have been paid during the covered period, or incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period. Expenses that were both paid and incurred during the covered period should only be counted once.
  3. Non-payroll costs cannot exceed 25% of the total forgiveness amount (at least this is true at present, although proposals to eliminate this requirement are percolating).

The eligible amounts of these expenses will be filled in on lines 2, 3 and 4 of the PPP Forgiveness Calculation Form.

Calculating the Amount of Qualifying Compensation Decreases

A borrower’s baseline forgiveness amount might be thought of as the total of its payroll costs and non-payroll costs. However, that amount will be reduced to the extent the borrower decreased the average rate of pay of any employee during the covered period or the alternative covered period by more than 25% as compared to that employee’s average pay rate between January 1, 2020 and March 31, 2020.

For each employee, the borrower determines the amount of its loan forgiveness reduction as follows:

  1. Determine the average salary or hourly rate of pay during the covered period or the alternative covered period.
  2. Determine the average salary or hourly rate of pay during the period from January 1, 2020 through March 31, 2020.
  3. Divide the figure resulting from #1 by the figure resulting from #2. If the result is 0.75 or more, no deduction needs to be made from the borrower’s forgiveness amount for that employee.
  4. If the figure resulting from the calculation described in #3 is less than .075, the borrower should determine whether the the employer met the safe harbor requirements by restoring the employee’s salary to pre-pandemic levels (the instructions to the Schedule A worksheet explain how this determination should be made) before June 30, 2020. If the employer meets the safe harbor requirements, then its forgiveness amount will not be reduced.
  5. If the safe harbor has not been met, the borrower must determine the dollar amount by which its forgiveness amount must be reduced. This is done by:

a. Multiplying the employee’s average salary or hourly rate of pay during the period from January 1, 2020 through March 31, 2020 by .75.

b. From the resulting figure, subtract the employee’s average salary or hourly rate of pay during the covered period or the alternative covered period.

c. If the employee is paid on an hourly basis, compute the dollar amount of the reduction in pay that exceeds 25% by determining the average number of hours worked from January 1, 2020 through March 31, 2020, and multiply that figure by the result of item (b) above. Then, multiply that number by 8. The result is the amount by which the borrower’s loan forgiveness must be reduced in respect of this employee.

d. If the employee is salaried, multiply the result of item (b) above by 8. Divide the result by 52. This figure is the amount by which the borrower’s loan forgiveness must be reduced in respect of this employee.

The borrower must make this calculation for each employee (unless, of course, the borrower already knows that it did not reduce salaries at all or below acceptable levels). The total reduction amount is then filled in on line 5 of the PPP Forgiveness Application Form. Line 6 of the form is the result of (Payroll Costs + Non-Payroll Costs) – Compensation Reduction or, put another way, the result of (Lines 1+2+3+4) – Line 5.

FTE Quotient Reduction

There is yet another possible reduction in forgiveness that borrowers need to consider. In general, it has been understood that the amount of forgiveness a PPP borrower is entitled to will be decreased if it had fewer full-time employees after the loan’s origination date than in the past. The forgiveness application provides the clearest explanation so far about how this determination will be made.

The question is whether the borrower’s average weekly number of “full-time equivalent” (FTE) employees during the covered period or the alternative covered period was less than during the “reference period.” The borrower gets to choose which of the following reference periods to use: (1) February 15, 2019 to June 30, 2019; (2) January 1, 2020 to February 29, 2020; or (3) for seasonal employers, either the period in (1), (2) or any consecutive twelve-week period between May 1, 2019 and September 15, 2019. Logic dictates that borrower will want to choose the reference period with the smallest number of employees.

How does the borrower determine the average number of FTE employees during the covered period, the alternative covered period and the reference period? There are two possible methods. In either method, each employee will be assigned a number that is 1.0 or less (1.0 represents one full-time employee). By way of the simplified method, the borrower can simply assign 1.0 for each employee who works 40 hours or more per week, and 0.5 for each employee who works fewer than 40 hours per week. Alternatively, the borrower can determine a more specific number for each employee by calculating the average number of hours paid per week, dividing that figure by 40 and rounding the result to the nearest tenth (the result is still capped at 1.0). The more complex method will likely be preferred by employers that have many employees who work more than 20 but less than 40 hours per week.

To determine the average weekly number of FTE employees during the reference period, the borrower must assign each person who worked for the borrower at any time during that period a number of 1.0 or less using either of the methods described above, and then calculate the sum of all assigned numbers. The same should be done to determine the average weekly number of FTE employees during the covered period or alternative covered period. However, for the covered period or alternative covered period, the borrower should also assign a number to and count the following employees in its total (unless such an employee was replaced by someone else):

  1. Any positions for which the borrower made a good-faith, written offer to rehire an employee which was rejected by the employee.
  2. Any employees who were fired for cause, voluntarily resigned or voluntarily requested and received a reduction in their hours.

If the average weekly number of FTE employees during the covered period or the alternative covered period is greater than or equal to the average weekly number of FTE employees during the reference period, then no reduction of the borrower’s forgiveness is required. In that case, the borrower fills in the number 1.0 on line 7 of the PPP Forgiveness Calculation Form.

If the average weekly number of FTE employees during the covered period or the alternative covered period is less than the number of FTE employees during the reference period, the borrower must determine whether it qualifies for the safe harbor. Under the safe harbor, a borrower is exempt from a reduction in the amount of forgiveness if: (1) the borrower reduced the number of FTE employees in the period beginning February 15, 2020, and ending April 26, 2020; and (2) the borrower then restored its FTE employee levels, on or before June 30, 2020, to its FTE employee levels in the borrower’s pay period that included February 15, 2020. If the borrower qualifies for the safe harbor, then no reduction of the borrower’s forgiveness is required and the borrower fills in the number 1.0 on line 7 of the PPP Forgiveness Calculation Form.

If the borrower does not qualify for the safe harbor, it must determine by what percentage its loan forgiveness must be reduced. To do this, the borrower must divide its average weekly number of FTE employees during the covered period or the alternative covered period by the average weekly number of FTE employees during the reference period. The resulting figure is referred to as the “FTE Reduction Quotient” and must be filled in on line 7 of the PPP Forgiveness Calculation Form. The borrower will then multiply the FTE Reduction Quotient by the number on line 6 of the form (i.e., the result of (Payroll Costs + Non-Payroll Costs) – Compensation Reduction). The resulting figure is the third possible forgiveness amount that was referred to above, and it is filled in on line 8 of the PPP Forgiveness Calculation.

Audits

In prior guidance, SBA and Treasury announced that borrowers that acquired PPP loans in the principal amount of $2 million or more will have their forgiveness applications audited. Those borrowers will need to demonstrate that their PPP loans were necessary to support their continued business operations. The PPP Forgiveness Calculation Form requires borrowers to indicate whether they, together with their affiliates, acquired PPP loans exceeding the $2 million threshold. Borrowers will need to take care to determine whether other entities are properly considered “affiliates” for purposes of aggregating PPP loan amounts, and must refer to the Interim Final Rule on this subject to make that determination.

Conclusion

While the calculations that need to be made to complete the forgiveness application may seem daunting, borrowers should remember that they pulled some of the underlying data when applying for a PPP loan in the first instance. Looking back to the initial application will provide some of the information necessary to complete the salary reduction and FTE calculations. Additionally, those borrowers who use a payroll provider will likely be able to obtain streamlined reports that summarize all the required data.

It is important to note that SBA and Treasury have not updated their Frequently Asked Questions document since the forgiveness application was published. As borrowers begin to complete and submit these applications, it is extremely likely that questions will arise and be addressed there or in other regulations. It is also possible that some of the parameters of the current forgiveness application may change in the future. For example, the definitions of covered period and alternative covered period may be expanded since various industries are advocating for extensions of the current eight-week window.

Borrowers who will soon be eligible to seek forgiveness may want to wait a short while before applying to see whether changes or clarifications are in the offing. Those who do not wish to wait should still be sure to review all guidelines and regulations when completing the application and again on the date the application is submitted. The contours of the PPP change so rapidly that repeated follow-up is absolutely necessary.

If you have any questions about the PPP or forgiveness applications, please contact Jessica Baquet at (516) 393-8292 or jbaquet@jaspanllp.com.