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PPP Loan Forgiveness Application and Guidance

(Published 5/18/20)

The Small Business Administration published the Loan Forgiveness Application and instructions for Payroll Protection Program (PPP) loans. Like the original PPP loan and program information, the guidance provided in the instructions is not fully defined or clear.

Here is some guidance collated from multiple sources including Forbes, AICPA, and several accounting firms.

Application

The application has four components:

  1. PPP Loan Forgiveness Calculation Form;
  2. PPP Schedule A;
  3. PPP Schedule A Worksheet;
  4. (Optional) PPP Borrower Demographic Information Form.

Borrowers are required to submit items (1) and (2) to their lender, a long with a list of supporting documents. You lender may require additional supporting documentation.

You must attest to certain certifications on the forgiveness application.  Note that while some are similar to the PPP loan applications, there are new, specific certifications. Read and understand these certifications before your Authorized Representative signs the application.

The application requires that borrowers who, along with its affiliates, received aggregate PPP funds over $2 million, check a box alerting the SBA to the size of the aggregate loan. If this may apply to you, seek legal guidance with respect to your loans and the affiliation rules.

Forgivable Costs

The Covered Period for forgiveness is the eight-week (56 day) period beginning with receipt of funds.

The SBA’s guidance provides for four broad categories of costs that are eligible for forgiveness, as covered below. With some exceptions, these costs are forgivable as incurred, or paid, during this period provided that at least 75% of incurred costs are attributable to payroll costs. Costs must incurred or paid during your Covered Period.

1. Payroll costs

The SBA guidance allows you to request forgiveness for payroll costs “incurred” or “paid” during your Covered Period, or an Alternate Payroll Covered Period aligned with the start of the first payroll period after receipt of PPP funds.  Incurred costs are recognized on the day they are earned; paid costs are recognized on the day paychecks are distributed or the ACH transaction is made. If your pay periods do not line up with your Covered Period, you may included incurred payroll costs not yet paid if they are paid on the next pay date.

Payroll costs include:

    • Cash Compensation, such as:
      • Gross salary / gross wages (Up to $15,385 — the equivalent of $100,000 per year — per employee)
      • Gross tips
      • Gross commissions
      • Paid leave (excepting leave covered by the FFCRA)
      • Allowances for dismissal or separation
    • Non Cash Compensation, per SBA guidance, includes the total amounts of:
      • Employer contributions for employee health insurance, excluding pre- or post tax employee contributions
      • Employer contributions to employee retirement plans, excluding pre- or post tax employee contributions
      • State and local taxes assessed on employee compensation, excluding taxes withheld from employee earnings

Payroll costs include compensation to owners at the lower of the $15,385 or the 8-week equivalent of owners’ compensation during 2019.

2. Business Mortgage Interest

The SBA guidance allows for forgiveness of business mortgage interest payments during the Covered Period for any mortgage obligation in place before February 15, 2020.

3. Business Rent or Lease

The SBA guidance allows for forgiveness of business rent or lease payments on real or personal property during the Covered Period for any lease agreements in place before February 15, 2020.

4. Business Utility Payments

SBA guidance allows forgiveness of business utility payments for services in place before February 15, 2020, including:

    • Electricity
    • Gas
    • Heating Oil
    • Water
    • Telephone
    • Internet Access
    • Transportation

Limitations

In addition to payroll limitations and the required payroll cost percentages, the CARES Act limits forgiveness if you reduce the average number of full-time equivalents (FTEs) during your Covered Period as compared with your past reference period (per your application).  The SBA guidance provides for an exception if a new FTE Reduction Safe Harbor applies.

Calculating FTEs

Per the SBA, you can calculate your FTEs in one of two ways:

    1. Enter the average number of hours paid per week for each employee during the Covered Period or the Alternative Payroll Covered Period, divide by 40, and round the total to the nearest tenth.  The maximum for each employee, however, is capped at 1.0.
    2. Assign a 1.0 for employees who work 40 hours or more per week; 0.5 for employees who work less than 40 hours.
FTE Reduction Exceptions

The SBA allows for exceptions and does not penalize your for FTE reductions due to one of the following conditions:

    1.  Reduction related to any positions for which you made a good-faith, written offer to rehire an employee during your Covered Period or Alternate Payroll Covered Period that was rejected by the employee.
    2. Reductions during your Covered Period or Alternate Payroll Covered Period for employees who (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction in hours.
FTE Reduction Safe Harbor

The SBA also recognizes a safe harbor that may keep you from losing loan forgiveness based on a reduction in your FTE level.  You are exempt under Safe Harbor if (1) you reduced your FTE levels in the period beginning February 15, 2020, and ending April 26, 2020; AND (2) no later than June 30, 2020, you restored your FTE level to that in place for the pay period including February 15, 2020.

Salary / Hourly Wage Reductions

The CARES Act reduces your loan forgiveness amount if you reduced certain employee salary and wages by more than 25% during your Covered Period or Alternate Payroll Covered Period when compares with the period from January 1, 2020 to March 31, 2020.

Additional Guidance

Prepayments

  • You may not include prepayment of costs not yet incurred in your forgiveness calculations.

EIDL Advances

  • Any Economic Injury Disaster Loan (EIDL) advances, typically $1,000 per employee up to a maximum of $10,000, will be a direct reduction from your final PPP loan forgiveness.

Loan Interest

  • While the CARES Act includes as an allowable use of the loan to be ““interest on any other debt obligations that were incurred before the covered period,” the SBA guidance does not include this on the forgiveness application.
  • While you may use PPP funds for this purpose, you should not include these costs on your forgiveness application without specific professional guidance.

Health Insurance

  • The definition of “health insurance” is not clear.
  • Obtain professional guidance with respect to including or excluding dental, vision, and other insurance expenses from the forgivable cost calculation.

As you plan your COVID-19 response and recovery, our Recovery Road Map Assessment can help you plan and execute your next steps. Contact us for more information.


 

SBA Clarifies “Good-Faith” Certification for PPP Loans

(Published 5/13/20)

The US Small Business Administration, today, published and update to the PPP Frequently Asked Questions (PDF) to clarify confusion regarding loan audits and the “Good Faith” certification of need signed as part of the loan application process and form. The SBA added Question 46 as, “How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?”

To summarize the impact

  • PPP loans under $2 million will not be audited.
  • Affiliated PPP loans will be consolidated for audit purposes.
  • The term “current economic uncertainty which makes the PPP loan request necessary to support the ongoing operations” was not clearly defined. Audits will most likely be based on individual facts and circumstances for each borrower.
  • Borrowers and affiliated borrowers with loans in excess of $2 million should be prepared to support their need of a PPP loan with documentation.

The full content of the question and answer is quoted as follows:

Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?

Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.

CARES ACT II – Emergency Funds for SMBs

(Updated 5/7/20)


5/7 Update: The EIDL program loans are now limited to $150,000 as the demand is dramatically outpacing funding.  The SBA is processing previously received applications in the order received. new applications are only accepted for certain US agricultural businesses, per the 5/5/20 update.  See news reports from CNBC.com and the Washington Post.

5/5 Update: The Small Business Administration has opened the Economic Injury Disaster Loan program, including emergency advances of up to $10,000 to U.S agricultural businesses.  For more information on eligibility and the application process, click here.


Late this week, Congress passed and the President signed a $480 billion package of additional COVID-19 relief funding.  Of this, $310 Billion is for Payroll Protection Program (PPP) loans and an additional $60 Billion is earmarked for the Economic Injury Disaster Loan (EIDL) program.

If want to apply for a PPP loan, the time to act is now.

The SBA Payroll Protection Program (PPP) re-opens with a new round of funding at 10:30 AM ET on Monday April 27th. The program provides an additional $310 Billion in funds, $60 Billion of which are earmarked through smaller credit unions and banks, and to minority, women, and veteran-owned businesses. If you do not have a SBA lender, now is the time to check with local banks and credit unions.

If you submitted a PPP loan package before and did not get a confirmation number, there is conflicting information about whether or not you have to re-apply. We strongly suggest that you contact your bank or lender to confirm that they plan to process your existing application. If you cannot confirm, you should prepare a new application package with the payroll and financial reports updated to the new “last 12 months.”

If you did not previously submit a PPP loan application, we suggest you prepare the application and materials now, so that you can provide them to your lending bank first thing Monday morning. While banks may differ in their specific requests, you package will most likely include the following:

  • SBA PPP Borrower Application Form
  • Payroll report for last 12 months, including:
    • All W-2 pay information, less required exclusions
    • State & Local Taxes Based on Compensation
    • Employer healthcare costs
    • Employer contributions to retirement plans
  • 2019 Form 940
  • Form 941 for last 12 months (last four reported quarters)
  • Certification of Beneficial Ownership
  • Ownership Report (names, titles, ownership percentages)
  • Copy of legal ID — Drivers License or Passport — for any owner over 20%
  • Retirement plan declaration (that you have/do not have a company retirement plan)

Most payroll companies have created reports specifically designed to provide the necessary information.

Am You Eligible?

You are eligible if you are:

  • A small business with fewer than 500 employees
  • A small business that otherwise meets the SSA’s size standard
  • A 501(c)(3) with fewer than 500 employees
  • An Individual who operates as a sole proprietor
  • An Individual who operates as an Independent contractor
  • An Individual who is self-employed who regularly carries on any trade or business
  • A Tribal business concern that meets the SBA size standard
  • A 501(c)(19) Veterans Organizati0n that meets the SBA size standard

In addition, some special rules may make you eligible:

  • If you are in the accommodation and food services sector (NAICS 72), the 500-employee rule is applied on a per physical location basis
  • If you are operating as a franchise or receive financial assistance from an approved Small Business Investment Company the normal affiliation rules do not apply

What Will Lenders Want to See?

In evaluating eligibility, lenders are directed to consider whether the borrower was in  operation before February 16. 2020 and had employees for whom they paid salaries and payroll taxes or paid independent contractors.

Lenders will ask you for a good faith certification that:

  1. The uncertainty of current economic conditions makes the loan request necessary to support ongoing operations
  2. The borrower will use the loan proceeds to retain workers and maintain payroll or make mortgage, lease, and utility payments
  3. Borrower does not have an application pending for a loan that duplicates the purpose and amounts applied for here
  4. From Feb. 15, 2020 to Dec. 31, 2020, the borrower has not received a loan that duplicates the purpose and amounts applied for here (Note: You may be able to fold emergency loans received since Jan. 31, 2020 into this loan)

If you are an independent contractor, sole proprietor, or self-employed individual, lenders will also be looking for certain documents, such as payroll tax filings, Forms 1099-MISC, and income and expenses from the sole proprietorship.

Please also note that lenders will NOT look for:

  • That you sought and were unable to obtain credit elsewhere
  • A personal guarantee (not required for the loan)
  • Collateral (not required for the loan)

How Much Can You Borrow?

Loans can be up to 2.5 times your average monthly payroll costs, not to exceed $10 million.  You Payroll Cost is the sum of included payroll costs less excluded payroll costs, as follows.

Included Payroll Costs for Employers: the sum of payments of any compensation with respect to employees that is a:

  • Salary, wage, commission, or similar compensation
  • Payment of a cash tip or equivalent
  • Payment for vacation, sick, or family medial leave
  • Allowance for dismissal or separation
  • Payment required for the provisions of group health care benefits, including insurance premiums
  • Payment of retirement benefits
  • Payment of state or local tax assess on the compensation of the employee

For Sole Proprietors, Independent Contractors, and Self-Employed Individuals: the sum of  payments of any compensation to, or income, that is a wage, commission, income, net earnings from self-employment, or similar compensation, and that is an amount that is not more than $100,000 in one year, as pro-rated for the covered period.

Excluded Payroll Costs:

  • Compensation of an individual employee in excess of an annual salary of $100,000, prorated for the period of Feb. 15 to June 30, 2020
  • Payroll taxes, railroad retirement taxes, and income taxes
  • Any compensation of an employee whose principal place of residence is outside the United States
  • Qualified sick leave wages for which a credit is allowed under Section 7001 of the Families First Coronavirus Response Act

Note that special rules apply for businesses not in operation for all of 2019 and for calculating average wages for seasonal employees.

Will This Loan be Forgiven?

Borrowers are eligible for loan forgiveness equal to the amount the borrower spent on the following items during the 8-week period beginning on the date of the origination of the loan.

  • Payroll costs (see above for criteria)
  • Interest on the mortgage obligation incurred in the ordinary course of business
  • Rent on a leasing agreement
  • Payments on utilities (electricity, gas, water, transportation, telephone, or internet)
  • Additional wages paid to tipped employees

The amount of the loan forgiveness will be reduces if there is a reduction in the number of employees or a reduction of greater than 25% in wages paid to employees. Staffing and wage reductions occurring in the period starting Feb. 15, 2020 and ending 30 days after the enactment of the CARES Act shall not reduce the amount of loan forgiveness IF the staffing or wage reductions are eliminated by June 30, 2020.

CARES ACT Emergency Funds for SMBs

(UPDATED 4/21/20)


4/21/20 Update – Senate Approves More PPP and EIDL Funding; Prepare Now.

Late this afternoon, the US Senate passed a $480 in COVID-19 relief funding.  Of this, $310 Billion is for PPP loans and an additional $60 Billion for the EIDL program. If want to apply for a PPP loan, the time to act is now.  While it will take time for the House of Representatives to vote, the President to sign, and the SBA to restart the process, you need to be ready.  Here is an action plan:

  • Contact a banker who will take your application and help you apply.
    • If you have an SBA lender, this is the best place to start.
    • If you do not have a SBA lender, contact your business banker.  If you bank is not participating in the program, ask them for a personal referral and introduction to a SBA lender in their network of contacts.  The personal introduction is key, as banks will want to serve existing customers first.
    • If you do not have a banking relationship, contact the manager of the branch you use.  Do not be embarrassed to introduce yourself and the number of years you have used their bank. Relationships matter, even you are creating a new one.
    • About $60 Billion of the PPP program is earmarked for small banks, rural banks, and credit unions.  The intent is to ensure more money makes it to small businesses that bank locally. Local relationships and introductions can help you connect with a lender that will do more than take your application and put it in a pile.
    • Fintech companies, including PayPal, Intuit and others, as well as American Express are participating in the program. If you have a business relationship, these may be another resource.
  • Ask your banker for a checklist of information you need to prepare. The rules are not expected to change, so they should have this on hand.
  • Ask your banker when they will start accepting applications.  Ask them to notify you once their portal is open or when they are accepting packets by email.  Many banks will take your packets and queue them up for entry as soon as the SBA program opens.
  • Gather and review the information now; have your packet ready.  Reach out to your payroll firm; many have created special reports with the information you need to include with your application.

With proper preparation, your application can closer to the front of the line.

4/16/20 Update – Applications for  PPP and EIDL Programs Have Been Halted

  • Funding for the Payroll Protection Program and the Economic Injury Disaster Loan program has been fully committed.  Per the SBA website:

SBA is unable to accept new applications at this time for the Economic Injury Disaster Loan (EIDL)-COVID-19 related assistance program (including EIDL Advances) based on available appropriations funding. Applicants who have already submitted their applications will continue to be processed on a first-come, first-served basis.

4/10/20 Updates – Important Changes to SBA Programs

  • Caveats on SBA ‘grants’ program: Inc. Magazine is reporting that the SBA clarified the SBA EIDL grant program, indicating the amount would be $1,000 per employee, up to $10,000, rather than a fixed $10,000 grant.  Note that the article’s link to the SBA Bulletin is no longer available online. ALSO, the SBA site now states that businesses will receive funds “in a few days”, a change from the prior 3 business day expectation.
  • Change in payments for EIDL loans: The New York Times is reporting that the SBA is limiting initial funding of EIDL program loans to $15,000 — far below the program expectations of loans up to $2 million.  The $15,000 would be in addition to the “up to $10,000” advance/grant.  There is no information whether the loans are capped at $15,000 or if they are controlling disbursements for the few months. This restriction could be due to limited funding.  As reported by CNBC, “… nearly 4 million businesses had applied for EIDL funding for a total of $383 billion, adding that Congress has allocated $17 billion for the program.”

4/06/20 Updates – Paycheck Protection Program and Debt Relief

From the SBA information site.

  • On Friday 4/2, the SBA changed and updated the Paycheck Program Protection loan application and required documentation.  In addition to annual payroll reports and copies of your 940 for 2019, you need to provide quarterly 941’s and payroll reports.  Check with your lender, as you may need to resubmit your application package.
  • On Friday 4/2, the SBA Debt Relief website was changed to state that the SBA will automatically make six (6) months of payments on existing SBA 7a and 504 program loans.  We recommend contacting your SBA lender to confirm.
  • If you apply for the EIDL, you are eligible for a $10,000 forgivable advance (even if you do not close on the EIDL). You may also qualify for a $25,000 bridge loan.  Applying for the EIDL now, however, may impede your ability to secure a Paycheck Protection Program forgivable loan. We recommend speaking with your lender BEFORE submitting your EIDL application.

4/01/20 Updates – Paycheck Protection Program

From the SBA information site.

  • You can apply through any existing SBA 7(a) lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should consult with your local lender as to whether it is participating in the program.
  • Lenders may begin processing loan applications as soon as April 3, 2020.
  • If you wish to begin preparing your application, you can download a sample form to see the information that will be requested from you.

The Coronavirus Aid Relief and Economic Security (CARES) Act allocated $350 billion to help small businesses keep workers employed amid the pandemic and economic downturn. Known as the Paycheck Protection Program, the initiative provides 100% federally guaranteed loans to small businesses who maintain their payroll during this emergency. These loans may be forgiven if borrowers maintain their payrolls during the crisis or restore their payrolls afterward.

Am You Eligible?

You are eligible if you are:

  • A small business with fewer than 500 employees
  • A small business that otherwise meets the SSA’s size standard
  • A 501(c)(3) with fewer than 500 employees
  • An Individual who operates as a sole proprietor
  • An Individual who operates as an Independent contractor
  • An Individual who is self-employed who regularly carries on any trade or business
  • A Tribal business concern that meets the SBA size standard
  • A 501(c)(19) Veterans Organizati0n that meets the SBA size standard

In addition, some special rules may make you eligible:

  • If you are in the accommodation and food services sector (NAICS 72), the 500-employee rule is applied on a per physical location basis
  • If you are operating as a franchise or receive financial assistance from an approved Small Business Investment Company the normal affiliation rules do not apply

What Will Lenders Want to See?

In evaluating eligibility, lenders are directed to consider whether the borrower was in  operation before February 16. 2020 and had employees for whom they paid salaries and payroll taxes or paid independent contractors.

Lenders will ask you for a good faith certification that:

  1. The uncertainty of current economic conditions makes the loan request necessary to support ongoing operations
  2. The borrower will use the loan proceeds to retain workers and maintain payroll or make mortgage, lease, and utility payments
  3. Borrower does not have an application pending for a loan that duplicates the purpose and amounts applied for here
  4. From Feb. 15, 2020 to Dec. 31, 2020, the borrower has not received a loan that duplicates the purpose and amounts applied for here (Note: You may be able to fold emergency loans received since Jan. 31, 2020 into this loan)

If you are an independent contractor, sole proprietor, or self-employed individual, lenders will also be looking for certain documents, such as payroll tax filings, Forms 1099-MISC, and income and expenses from the sole proprietorship.

Please also note that lenders will NOT look for:

  • That you sought and were unable to obtain credit elsewhere
  • A personal guarantee (not required for the loan)
  • Collateral (not required for the loan)

How Much Can You Borrow?

Loans can be up to 2.5 times your average monthly payroll costs, not to exceed $10 million.  You Payroll Cost is the sum of included payroll costs less excluded payroll costs, as follows.

Included Payroll Costs for Employers: the sum of payments of any compensation with respect to employees that is a:

  • Salary, wage, commission, or similar compensation
  • Payment of a cash tip or equivalent
  • Payment for vacation, sick, or family medial leave
  • Allowance for dismissal or separation
  • Payment required for the provisions of group health care benefits, including insurance premiums
  • Payment of retirement benefits
  • Payment of state or local tax assess on the compensation of the employee

For Sole Proprietors, Independent Contractors, and Self-Employed Individuals: the sum of  payments of any compensation to, or income, that is a wage, commission, income, net earnings from self-employment, or similar compensation, and that is an amount that is not more than $100,000 in one year, as pro-rated for the covered period.

Excluded Payroll Costs:

  • Compensation of an individual employee in excess of an annual salary of $100,000, prorated for the period of Feb. 15 to June 30, 2020
  • Payroll taxes, railroad retirement taxes, and income taxes
  • Any compensation of an employee whose principal place of residence is outside the United States
  • Qualified sick leave wages for which a credit is allowed under Section 7001 of the Families First Coronavirus Response Act

Note that special rules apply for businesses not in operation for all of 2019 and for calculating average wages for seasonal employees.

Will This Loan be Forgiven?

Borrowers are eligible for loan forgiveness equal to the amount the borrower spent on the following items during the 8-week period beginning on the date of the origination of the loan.

  • Payroll costs (see above for criteria)
  • Interest on the mortgage obligation incurred in the ordinary course of business
  • Rent on a leasing agreement
  • Payments on utilities (electricity, gas, water, transportation, telephone, or internet)
  • Additional wages paid to tipped employees

The amount of the loan forgiveness will be reduces if there is a reduction in the number of employees or a reduction of greater than 25% in wages paid to employees. Staffing and wage reductions occurring in the period starting Feb. 15, 2020 and ending 30 days after the enactment of the CARES Act shall not reduce the amount of loan forgiveness IF the staffing or wage reductions are eliminated by June 30, 2020.

What are The Next Steps?

The SBA needs to identify lenders that will facilitate the program. As such, this program is not yet on the SBA’s COVID-19 Resource Center.

You can download the US Chamber of Commerce’s guide here.

We do recommend that you contact your current SBA lender, if you have one, or your business banker. Get on their call list once the program is up and running.  Your accountant and bookkeeper will need to pull financial information, so give them a heads up as well.