The Small Business Administration issued a Loan Forgiveness Application on May 15, intended to help borrowers more definitively calculate how much of their Paycheck Protection Program (PPP) loan will be forgiven. The application offers clarity in a several areas, but it is not comprehensive in scope and some key questions remain unanswered. The team of business advisors and financial analysts at professional services firm RKL LLP have been tracking developments and assisting clients throughout the PPP process, from application to proper fund usage and now forgiveness maximization. Below are highlights from the RKL team’s initial analysis of the forgiveness application, as well as new questions that have come to light.
Highlights of what’s now clear:
- Based on the application, payroll costs must comprise at least 75 percent 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 rate 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.
New questions created by the application:
- The second certification – funds used for unauthorized purposes – does not reference forgiveness and therefore deals with the loan portion of this provision. Should a borrower sit on non-forgiven proceeds to complete this item and then only 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?
- 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 continues to monitor and interpret the latest guidance from the SBA and will provide an in-depth update on the application in its weekly coronavirus webinar this Friday, May 22. Register for the webinar here and visit the firm’s Coronavirus Resource Center for more insights.