The SBA released the application and instructions for Paycheck Protection Program (PPP) loan forgiveness. Although the application is generally consistent with previous guidance from the SBA, in this alert we highlight a few provisions of which borrowers should take particular note.
1. Forgivable payroll costs include costs incurred or paid during the loan period.
A borrower can include in its forgiveness calculation eligible costs (i) paid during the eight week loan period regardless of when they were incurred and (ii) eligible costs incurred during the eight week loan period so long as the costs are paid by the next standard payment date. For example, payroll expenses incurred during the loan period count for forgiveness if the expenses are paid on or before the next regular payroll date. This provision eliminates the need to schedule a special payroll to be paid on the last day of the eight week period. Of course, if a cost is both incurred, and paid, during the period, it can only be counted once towards forgiveness.
2. Safe Harbor Rule to avoid a reduction in loan forgiveness.
The safe harbor rule, if satisfied, allows the borrower to avoid the detailed calculations regarding FTEs during the eight week loan period and may be a simpler and better way to secure more loan forgiveness. The safe harbor rule applies as follows:
- If a borrower reduced the number of FTEs in the pay periods that commenced after February 15, 2020 but concluded on or before April 26, 2020; and
- the borrower restored by June 30, 2020 the number of FTEs to the level of FTEs that existed in the borrower’s pay period that included February 15, 2020; then
- the borrower satisfies the safe harbor and there is no reduction in the loan forgiveness amount related to number of FTEs during the eight week loan period.
For example, if a borrower had 100 FTEs in the last payroll period that included February 15, 2020 but had reduced FTEs to 90 during the period February 15 to April 26, 2020 but then restores the additional 10 FTEs by June 30, 2020 (even though this period differs from all other periods on the worksheet tied to the actual eight week loan period), the borrower will not suffer a reduction in loan forgiveness that may have otherwise been applicable based on a headcount reduction. The safe harbor rule, however, is an “all or nothing” rule — if the borrower falls short of fully restoring the FTE number to the February 15, 2020 level, even if by 0.1 FTE, then the safe harbor rule is not available.
3. Exclusions from counting FTEs to avoid loan forgiveness reduction.
There are other exceptions to the FTE calculations in the loan forgiveness application.The borrower may exclude from the FTE calculations: (1) any position for which the borrower made a good faith, written offer to rehire an employee during the applicable eight-week period if the employee rejected the offer, and (2) any employee who was fired for cause, voluntarily resigned, or voluntarily requested and received a reduction of hours during the applicable eight-week period. However, to the extent the borrower hires new employees to fill these same roles, the borrower may not “double count” the employees. For example, if the borrower furloughed 20 people on March 1, 2020, and offered to bring back all 20 employees on April 15, 2020 but only 10 furloughed employees accepted the offer, and the borrower hires 10 new employees to fill the vacant roles – the borrower may add the full 20 back to its FTE count (but not 30!). Neither the application nor its instructions define “for cause”. The borrower relying on these exclusions should retain appropriate documentation related thereto (although it need not be submitted with the application for forgiveness).
Note that the safe harbor rule and the permitted exclusions to the FTE count may allow borrowers to avoid a “haircut” with regard to loan forgiveness related to an employee headcount reduction, but the borrower will still have to demonstrate that 75% of the loan amount was spent on qualified payroll expenses. Accordingly, borrowers may still suffer a haircut on forgiveness based on how the loan is spent, especially if its FTE count is less than the reference period used to apply for the original PPP loan. Forgiveness of the loan will be reduced on a proportional basis if the borrower fails to meet either the FTE headcount or the 75% payroll-expenditure requirement for the loan proceeds.
4. Exclusion of owners from the FTE calculation and other owner-related matters.
Less borrower-favorable rules relate to owners of borrowers. With respect to the rules regarding FTE calculations (but not payroll calculations), owners are expressly excluded from the FTE calculation for the eight week loan period. However, there is no explicit guidance to exclude owners from the FTE calculation for the base period (either February 15 to June 30, 2019 or January 1 to February 29, 2020). Note, however, K-1 partners apparently are excluded under one interpretation of prior guidance; hence, it may be clear where the entity is an LLC but murky where the entity is an S corporation.
Additionally, to the extent that owner W-2 compensation during the loan period is greater than 2019 compensation for any eight week period, such increased 2020 owner compensation is excluded from loan forgiveness. The certification included with the loan forgiveness application requires the borrower to certify: “The dollar amount for which forgiveness is requested: . . . does not exceed eight weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385 per individual.” Accordingly, an owner of a business whose spouse also owns the business but worked little for the business in 2019 but has worked many more hours during the pandemic and paid for those increased hours is capped at the spouse’s 2019’s highest eight weeks in 2019. Owners may want to adjust their compensation for the eight week period accordingly.
Further, an owner who pays self-employment tax and files a 2019 Form 1040, Schedule C, cannot include owner health insurance and retirement plan contributions in the amount to be forgiven. The instructions have caused confusion with respect to owners of LLCs that are taxed as partnerships who pay self-employment tax but who do not file Forms 1040, Schedule C, as to the forgiveness of their payroll costs attributable to health insurance and retirement plan contributions. Owners of S corporations clearly can seek forgiveness of such amounts.
We expect the SBA will issue additional guidance on the loan forgiveness application and instructions. As further guidance is forthcoming, Hirschler will continue to keep you abreast of these developments.
Luis F. Ruiz