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US Treasury Issues PPP Loan Forgiveness Application

May 19, 2020


On Friday, May 15, the US Treasury issued the Paycheck Protection Program (PPP) loan forgiveness application (see it here). This highly anticipated release provides some, but not all, answers to open questions that borrowers have had related to PPP loan forgiveness.

Payroll Period Updates

The application introduces a new term, “Alternative Payroll Covered Period,” that appears to provide some flexibility to borrowers to elect a different start date of the Covered Period to align with the first day of a pay period following disbursement of a PPP loan. The Alternative Payroll Covered Period would provide administrative relief to borrowers that received a loan in the middle of a pay period by aligning the start of the pay period with the start of the loan.

Example provided in the application: If the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20.

However, other references to the Covered Period that do not reference Alternative Payroll Covered Period would still apply the original dates.

Eligible Payroll Costs

Borrowers are generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the 8-week (56-day) Covered Period (or Alternative Payroll Covered Period). Payroll costs are considered paid on the day that paychecks are distributed or the day the borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period). For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the Covered Period ($15,385 total per employee). Count payroll costs that were both paid and incurred only once.

Other Eligible Costs

The application for forgiveness provides additional clarity regarding qualifying other costs, specifically noting that rents during the Covered Period for personal property, and mortgage interest on loans for personal property, are both qualifying expenditures eligible for forgiveness.

Loan Forgiveness Amount

The amount of loan forgiveness will equal the lesser of the following amounts:

  1. PPP loan amount
  2. Payroll costs equal to 75% of the loan forgiveness amount
  3. Actual eligible costs less the Salary/Wage Reduction Test and FTE Reduction Test

The loan forgiveness reduction tests (Salary/Wage and FTE) only apply to the third amount, if applicable. Borrowers will first calculate all eligible costs, then reduce eligible costs by the Salary/Wage Reduction Test and then reduce by the FTE Reduction Test.

FTE Reduction Test and the FTE Reduction Safe Harbor (“FTE Safe Harbor”)

The application delineates the interaction between the various FTE testing periods and the FTE Safe Harbor. Additionally, the application provided makes clear that the determination of average FTEs should be calculated at the individual employee level for all testing periods (i.e., John Doe is 0.5 FTE + Jane Doe is 0.5 FTE = 1 total FTE).

The application also states that “full time” equates to a 40-hour work week; there had been questions about whether the Affordable Care Act definition of full time would be used—i.e., a 30-hour work week. The application provides the borrower with the ability to use a simplified method for calculating an employee’s specific FTE quotient. This simplified method provides that all employees who work less than 40 hours a week would be considered 0.5 FTE, while those who work 40 hours or more a week would count as 1 FTE. Companies should think about the calculation and testing of average FTEs in this order:

  1. Calculation of total FTEs (calculated on employee-by-employee basis) as of February 15, 2020
  2. Calculation of average FTEs for the period from February 15, 2020, to April 26, 2020 (“Period 1”)

If the average FTEs for Period 1 are less than FTEs as of February 15, 2020, the company could be eligible to apply the FTE Safe Harbor. If Period 1 average FTEs are equal to or greater than the amount on February 15, 2020, the company is not eligible to apply the FTE Safe Harbor.

  1. Calculation of FTEs at/or before June 30, 2020 (only if the company could be eligible for FTE Safe Harbor)
  2. Calculation of average FTEs during the Covered Period (“Current Period”)
  3. Calculation of average FTEs at the available prior measurement periods (“Period 2”)

If the total FTEs by June 30, 2020, are equal to or greater than the total FTEs at February 15, 2020, and their Period 1 average FTEs were less than total FTEs at February 15, 2020, the company can apply the FTE Safe Harbor and eliminate any reduction in loan forgiveness for FTEs and not calculate average FTEs for Period 2. If the company is not eligible to apply the FTE Safe Harbor, they must calculate the average FTEs for the Current Period and Period 2 to determine whether any decrease in loan forgiveness results from the reduction of FTEs.

Salary/Wage Reduction Test and Salary/Wage Safe Harbor (“S/W Safe Harbor”)

The application provides additional detail and clarification around which employees are included in the Salary/Wage Reduction Test. Similar to the FTE Reduction Test, the application delineates the interaction between the testing periods and the S/W Safe Harbor. Additionally, it clarifies that current employees who have compensation in any pay period in 2019 that annualizes to greater than $100,000 are not included in the Salary Reduction Test analysis. The 25% reduction is based on a comparison of annual salary or hourly wage and not total compensation. This also addresses the ongoing question about the comparison periods being different between the Covered Period (8 weeks) and Q1 of 2020 (13 weeks). Similar to the FTE Reduction Test, the S/W Safe Harbor allows that a restoration of reduced annual salary or hourly wage from the February 15-April 26, 2020 period by June 30, 2020 allows a company to eliminate all reductions for that employee in loan forgiveness.

Open Items

  • Retirement plan contributions appear to fully qualify under the current guidance for any amount “paid” or “incurred” during the Covered Period. This may provide a significant planning opportunity for employers that have not funded 2019 or 2020 defined benefit plan/matching contributions. We expect further guidance on this subject.
  • Qualifying payroll costs for independent contractors/sole proprietors/partners vs. S-Corp/C-Corp employees continues to vary. Independent contractors, sole proprietors and partners are not eligible to include health insurance or retirement plan contributions, whereas expenditures made to “employees” under S-Corp/C-Corp status are included under qualifying payroll costs not subject to the $100,000 annualized limitation. This disparity will create potential significant planning opportunities for S-Corp/C-Corp entities in maximizing loan forgiveness, and limit the potential for independent contractors, sole proprietors and partners. We would expect further guidance on this issue.
  • Prepayment of rents on real/personal property continues to be unclear under the application for forgiveness. The application explicitly disallows prepayments for mortgage interest, but is silent on prepayments of rents.
  • Definition of utilities continues to be unclear related to “transportation” expenditures. However, it has been made clear that “internet access” is a qualifying expenditure.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.


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