On May 16, 2020, the U.S. Small Business Administration (SBA) issued the Paycheck Protection Program Loan Forgiveness Application (PPP Forgiveness Application) to be used by borrowers to apply for forgiveness of their Paycheck Protection Program (PPP) loans.  

A copy of the new PPP Forgiveness Application can be obtained by clicking here.

The PPP Forgiveness Application provides detailed instructions and worksheets for borrowers to calculate PPP loan forgiveness and reductions, if any, in the amount of forgiveness.  The following are a few takeaways of interest from the new application:
 
Alternative Payroll Covered Period. For administrative convenience, rather than using the eight-week (56-day) period beginning on the date of disbursement of the loan (covered period), borrowers with a biweekly or more frequent payroll schedule may elect to calculate eligible payroll costs during the eight-week (56-day) period that begins on the first day of their first pay period following the date of the disbursement of the loan (alternative payroll covered period). This period will also be used to determine full-time equivalent employees, average salary/wages, and employees employed for purposes of calculating forgiveness and reduction in forgiveness.

Eligible Costs Paid and Eligible Costs Incurred.  The CARES Act provides that PPP loans will be eligible for forgiveness with respect to eligible “costs incurred and payments made” during the covered period. This had been interpreted to mean the costs must be both incurred and paid during such period. The PPP Forgiveness Application provides a more flexible interpretation. While, generally, to be eligible for forgiveness, eligible payroll costs must be paid during the covered period or alternative payroll covered period, payroll costs incurred but not paid during the borrower’s last pay period of the covered period or the alternative payroll covered period are eligible for forgiveness if paid on or before the next regular payroll date.  The PPP Forgiveness Application further clarifies that, to be eligible for forgiveness, eligible non-payroll costs must be paid during the covered period or incurred during the covered period and paid on or before the next regular billing date (even if after the covered period). 
 
Average FTE calculation. The CARES Act provides that the amount of forgiveness may be reduced by a reduction in the average number of “full-time equivalent employees” of the borrower, but does not define or set forth how to calculate a “full-time equivalent employee”.  The PPP Forgiveness Application clarifies that average full-time equivalency (FTE) is determined with respect to each employee of borrower during the relevant periods, with the sum of the FTEs for all employees in the relevant period to be used for purposes of determining the reduction in forgiveness (or applicability of the safe harbor).  Each borrower, at its election, can calculate average FTE for each employee using either of two methods. Under the first method, for each employee, the FTE is the average number of hours paid per week during such period, divided by 40, with the total rounded to the nearest tenth. The maximum for each employee is capped at 1.0. Alternatively, borrower can use a simplified method that assigns a 1.0 FTE for employees who work 40 hours or more per week and a 0.5 FTE for employees who work fewer hours. 
 
Exclusions from reductions in forgiveness based on FTE. Recent SBA guidance provided that a borrower’s forgiveness amount will be not be reduced if the borrower laid off an employee, made a written offer in good faith to re-hire the same employee but the employee declined the offer.  SBA guidance had not previously addressed the impact on forgiveness in the case of employees terminated for cause or who voluntarily terminate.  The PPP Forgiveness Application sets forth that, for purposes of calculating the total average FTE of the borrower during the covered period or alternative payroll covered period, the average FTE of each of the following will be included in the total sum: (1) any positions for which the borrower made a good-faith, written offer to rehire an employee during the covered period or the alternative payroll covered period which was rejected by the employee; and (2) any employees who during the covered period or the alternative payroll covered period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours. In all of these cases, the FTE is included only if the position was not filled by a new employee. The intent is that FTE reductions in these cases should not reduce the borrower’s loan forgiveness.
 
FTE reduction safe harbor.
The CARES Act provides a safe harbor with respect to the reduction in forgiveness based on a reduction in the number of borrower’s employees. Under the safe harbor, reductions from February 15, 2020 levels in the number of employees of borrower that occurred between February 15, 2020 and April 26, 2020 will be disregarded and not affect forgiveness, so long as “not later than June 30, 2020” borrower eliminates the reduction. It was unclear from the language of the statute whether the rehired employees needed to be employed during the covered period or had to be employed on June 30, 2020. The PPP Forgiveness Application clarifies that the determination as to whether the reduction has been eliminated is as of June 30, 2020. For this safe harbor to apply, therefore, the borrower must have a total FTE as of June 30, 2020 that is no less than its total FTE in the February 15, 2020 pay period.
 
Reduction in forgiveness based on salary/wages.  The language in the CARES Act with respect to a reduction in forgiveness based on salary/wages is unclear as to how to determine whether a more than 25% reduction in salary/wages of an employee had occurred in the covered period as compared to the first quarter of 2020. It is also unclear from a reading of the statute whether employees who were laid off and not rehired would affect the reduction in forgiveness calculation based on salary/wages. The PPP Forgiveness Application clarifies that, (1) with respect to each salaried employee of borrower, the average annual salary of each such employee during the covered period or alternative payroll covered period is compared to the average annual salary of such employee during the first quarter and (2) with respect to each hourly employee of borrower, the average hourly wage of each such employee during the covered period or alternative payroll covered period is compared to the average hourly wage of such employee during the first quarter. Additionally, it does not appear from the calculation methodology set forth in the PPP Forgiveness Application that employees of borrower who were laid off before the PPP loan was distributed and not rehired will affect the determination of the reduction in forgiveness based on salary/wages (or the application of the safe harbor), as only employees of borrower who were employed at some point during the covered period or alternative payroll covered period are included.
 
Salary/Hourly Wage Reduction Safe Harbor.  The CARES Act provides a safe harbor with respect to the reduction in forgiveness based on a reduction in the salary/wages of employees of borrower.  Under the safe harbor, reductions from February 15, 2020 levels of salary/wages of employees of borrower that occurred between February 15, 2020 and April 26, 2020 will be disregarded and not affect forgiveness, so long as “not later than June 30, 2020” borrower eliminates the reduction for each employee. For purposes of this safe harbor, it was unclear from the language of the statute whether the February 15, 2020 pay levels had to be in effect only during the covered period or on June 30, 2020.  The PPP Forgiveness Application clarifies that the determination as to whether the reduction has been eliminated is as of June 30, 2020. For this safe harbor to apply, therefore, the respective employee must be employed, and no less than the February 15, 2020 salary/wage level for such employee must be in effect, as of June 30, 2020.

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