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SBA Releases Loan Forgiveness Application
By Mariel J. Giletto on May 19, 2020
SBA Releases Loan Forgiveness Application

On May 15, 2020, the Small Business Administration (“SBA”) released the loan forgiveness application for small businesses that received loans under the Paycheck Protection Program (“PPP”) as created by the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. 

The loan forgiveness application follows previous SBA guidance and provides for four categories of forgivable expenditures: (1) eligible payroll costs; (2) covered mortgage obligations; (3) covered rent obligations; and (4) covered utility payments. As the SBA has previously stated, covered mortgage, rent, and utility costs may not exceed 25% of the total loan forgiveness amount. Borrowers must also report the amount of Economic Injury Disaster Loan (“EIDL”) advance funds it received and must provide its EIDL application number if such an application was made.  Borrowers must submit the applications to their lenders, or the lenders servicing their loans, after the company’s eight-week covered period has expired. The SBA is expected to release further guidance to assist borrowers in completing their loan forgiveness applications.

Alternative Covered Period

The loan forgiveness application makes provisions for an Alternative Covered Period in order to better coincide with an employer’s payroll schedule. Generally, the eight-week Covered Period of the loan would begin on the date loan disbursements were made. However, the Alternative Covered Period provides for employers that have a biweekly or more frequent pay period to elect to calculate eligible payroll costs based on the eight-week period beginning on the first day of the first pay period immediately following the date of PPP loan disbursement.

Full-Time Equivalent Employees

The loan forgiveness application also details the permissible methods to calculate full-time equivalent (“FTE”) employees, which can affect the amount of loan forgiveness for which an employer is eligible. Businesses must reduce the forgivable loan amount if they have not rehired the same number of employees they had prior to the COVID-19 emergency. The number of FTE employees is determined by entering the average number of hours paid per week during the Covered or Alternative Coverage Period, dividing by 40, and rounded to the nearest tenth, capped at 1.0. The borrower may also elect to assign a 1.0 to employees who work 40 hours or more per week, and 0.5 for employees who work fewer than 40 hours.

That said, the loan application provides a FTE Safe Harbor, which exempts borrowers from loan forgiveness reduction if: (1) the borrower reduced its FTE employee levels in the period beginning February 15, 2020 and ending April 26, 2020; and (2) the borrower then restores its FTE employee levels to levels in the borrower’s pay period that included February 15, 2020, by no later than June 30, 2020. The application also provides for FTE reduction exemptions if borrowers made a good-faith written offer to rehire the employee during the Covered or Alternative Covered Period which was rejected by the employee, or if employees were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in hours during the Covered or Alternative Covered Period.

Cash vs. Non-Cash Compensation

The loan forgiveness application also distinguishes between “Cash Compensation” and “Non-Cash Compensation” payroll costs. Cash Compensation costs are those including gross salary, wages, commission, paid leave (including family and medical leave not covered by the Families First Coronavirus Response Act) and are subject to the previously-described $100,000 salary cap. Non-Cash Compensation payroll costs include amounts paid for employee health insurance, retirement plans, and employer state and local taxes assessed on employee compensation, and are not subject to the $100,000 salary cap. Documentation verifying these amounts may consist of bank account statements, third-party payroll service provider reports, tax forms (federal and state) and payment receipts, cancelled checks, or account statements documenting employer contributions to employee health insurance and retirement plans.  

Loans Over $2 Million

A Borrower must also self-report if it, together with its affiliates “to the extent required under SBA’s Interim Rule on affiliates issued April 15, 2020,” received PPP loans with an original principal amount in excess of $2 million. The SBA has expressed that it may audit loans in excess of $2 million.

If you have any questions regarding the PPP loan forgiveness application, Parker McCay’s Corporate and Labor & Employment Departments are available to assist you.

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