The U.S. Small Business Administration and the Department of Treasury have released new Paycheck Protection Program loan guidelines, including the forgiveness application.
While the guidance clarifies some matters for borrowers and lenders, it fails to address other key issues, including whether bonuses count as cash compensation.
The agencies said the SBA will issue additional regulations and guidance, but did not provide a timeline for that release.
The 11-page application and instructions address many, but not all issues that borrowers, lenders, and other stakeholders have with the loan forgiveness provisions, including:
- Options for borrowers to calculate payroll costs using an "alternative payroll covered period" that aligns with an employer's regular payroll cycles
- Flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving a PPP loan
- Step-by-step instructions for performing the calculations required by the CARES Act to confirm eligibility for loan forgiveness
- Borrower-friendly implementation of statutory exemptions from loan forgiveness reduction based on rehiring by June 30
- Addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that was declined
Calculating Loan Forgiveness
The newly released document includes a three-part calculation to determine a borrower's eligible forgiveness amount:
- Enter payroll and qualifying non-payroll costs that the business spent over the eight-week period since receiving PPP funds.
- Reduce the forgiveness amount if employee pay was reduced by more than 25% and/or full-time equivalent employee levels were not restored to previous levels. The application provides a waiver if the business failed to restore FTE employee levels during its eight-week post-loan period but reached that mark by June 30, 2020.
- Calculate the allowable forgiveness amount, as at least 75% of loan funds must go to payroll costs, with no more than 25% spent on rent, mortgage interest debt, and utilities.
To determine full-time equivalent employees, the SBA allows two calculation methods:
- Take the average number of hours paid each week for each employee, divide by 40, and round the total to the nearest 10th. The maximum number of hours per employee is 40 or one FTE.
- A simpler method assigns 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer than 40 hours.
The SBA requires that payroll costs be documented as follows:
- Bank accounts or third-party payroll service reports documenting cash compensation paid to employees
- Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the covered period or alternative payroll covered period.
- Payment receipts, cancelled checks, or account statements documenting employer contributions to employee health insurance and retirement plans.
The forgiveness application clarifies that rent includes "business rent or lease payments pursuant to lease agreements for real or personal property in force between February 15, 2020."
The mortgage interest payment definition includes loans for real property and personal property, with interest paid on loans for equipment, vehicles, and other items eligible for forgiveness.
Personal property items such as copiers, servers, vehicles, and other leased items can be included with forgivable non-payroll costs.
Utility expenses are also allowed, and include "electricity, gas, water, transportation, telephone, or internet access, for which service began before February 15, 2020."
The SBA requires that borrowers document rent, mortgage interest, and utility costs, to prove the existence of an obligation or service prior to February 15, 2020 and evidence of payments during the eight-week post-loan period.
Lender amortization schedule, payment receipts, and statements from February 2020 and during the eight-week covered period are acceptable for documenting mortgage interest payments.
For rent or lease payments, the SBA requires a copy of the lease agreement and copies of account statements or cancelled checks.
Utility payments must be documented with invoices or account statements from February 2020.
Borrowers are required to submit PPP forgiveness applications to their lender, with the lender then required to act on the application within 60 days.
The SBA continues to accept PPP loan applications through approved lenders.
A total of $4.15 billion in loans were approved for 18,435 Connecticut small businesses in the first round of PPP lending before $349 billion in funding was exhausted April 16.
Through May 16, loans totaling $6.67 billion were made to 54,559 Connecticut companies in the second round of funding, which opened April 27 after Congress approved an additional $320 billion.
A Bloomberg analysis found that 77% of Connecticut small businesses were approved for loans through both rounds of PPP funding.
For more information, contact CBIA's Brian Corvo (860.244.1169).