On Friday, May 15, the Small Business Administration issued its Loan Forgiveness Application providing instructions for borrowers seeking information on how to more definitively calculate PPP loan forgiveness. The application clarifies several areas that have remained unclear over the past weeks, but is not comprehensive in scope and leaves some questions unanswered.
As the RKL team continues to analyze the application, we’d like to share with you some highlights of what we know so far:
- Based on the application, payroll costs must comprise at least 75% of the forgiveness amount, not the loan amount.
- An alternative payroll covered period was introduced to allow borrowers with biweekly or more frequent pay periods to align the covered period with their payroll runs (e.g., Monday April 20 disbursement date and next pay period starts Sunday, April 26, then April 26 is the starting point for 56 days for payroll costs).
- It appears that an expense incurred during the eight-week covered period but paid in the regular course of business thereafter is permissible, rather than incurring costs but not paying them for some time.
- Companies can now avoid penalty under new special exceptions on the FTE reduction test for employees who were (a) fired for cause, (b) voluntarily resigned or (c) voluntarily requested and received a reduction of their hours.
- A series of tests appears to address the concerns that even an employee whose salary/wage rate didn’t change could have mathematically been shown as a decrease under the previous guidance.
- Cash compensation is defined as gross salary, gross wages, gross tips, gross commissions, paid leave (vacation, family, medical or sick leave, not including leave covered by the FFCRA), and allowances for dismissal or separation paid or incurred.
- Mortgage interest and rents apply to both real and personal property.
- The June 30 restoration test remains in place and there still is nothing expressly prohibiting a subsequent layoff/furlough.
The application did create some new questions, such as:
- The second certification – funds used for unauthorized purposes – does not reference forgiveness and therefore deals with the loan portion of this provision. What’s unclear is whether a borrower should sit on non-forgiven proceeds to complete this item and then only the use the remaining loan amount after the covered period?
- Just how far can owners take the incurred or paid concept? Will they be permitted to cover eligible amounts which were deferred as of the start of their covered period then paid within the covered period? Will they be able to accrue and pay a portion (or all) of typical annual expenses, such as bonuses and discretionary retirement and HSA contributions?
- How strict an interpretation of “mortgage” will be used for personal property? Will this be broadened to include interest incurred on all business debt secured by personal property, or must there be a mortgage agreement in place?
- With respect to the owner’s compensation being capped at 2019 levels, is there any prohibition on a pay increase to the owner’s actively employed spouse or other relatives?
RKL’s team of business advisors will continue to monitor and interpret the latest guidance from the SBA regarding PPP loan forgiveness. If you have questions specific to your situation, please contact your RKL advisor today.