Tax Monitor

PPP Forgiveness Application

May 16, 2020

By: Robert G. Tweel

The Forgiveness application produced by Treasury answers several questions about the forgiveness process:

PAYROLL COSTS

The application states that borrowers are eligible for forgiveness for payroll costs paid and payroll costs incurred. This indicates that both costs incurred and costs paid should be eligible for forgiveness. Payroll costs are considered paid on the day that paychecks are distributed. Payroll costs incurred on the date that the employee's pay is earned. There is relief for payroll costs incurred but not paid during the eight-week covered period. Payroll costs incurred but not paid during the eight-week covered period are eligible for forgiveness if paid on or before the next regular payroll date.

The application also appears to apply the total amount paid for employer contributions to employee health insurance and employee retirement plans. Because the application includes both payroll costs paid and payroll costs incurred, this appears to permit contributions to retirement plans paid during the covered period regardless of when incurred. Accordingly, payments for 2019 contributions paid during the covered period are likely eligible costs for forgiveness barring future guidance from the SBA.

NON-PAYROLL COSTS

The application lists costs for covered mortgage obligations, covered rent obligations, and covered utility payments. There is nothing new in this list with the exception of a list for utilities: electricity, gas, water, transportation, telephone, or internet access. Note, transportation costs include fuel which could be significant for certain businesses.

$2.0 MILLION

There is a checkbox for PPP Loans in excess of $2.0 million indicating a need for audit. There are approximately 4,000,000 PPP loans. Assuming 10% are in excess of $2.0 million, that is 400,000 loans that the SBA has stated it must audit in connection with forgiveness. While these are assumptions, the number of audited loans stands to be substantial, and borrowers in this category might expect delays in forgiveness in connection with the required audit, as the SBA has currently stated.

CALCULATION

The application applies the forgiveness reductions as was expected. First, there is a reduction for any 25% or more decrease in an employee’s average salary. Second, there is a decrease for any reduction in FTEs. Third, there is a reduction for any non-payroll costs in excess of 75% of payroll costs.

The application does apply the restoration safe-harbors for both 25% or more salary reduction and FTEs as absolute safe harbors against any reductions in forgiveness.

Importantly there are two big clarifications regarding these reductions:

FTE CALCULATION

FTEs are calculated using a 40 hour work week. The speculation was that this would be 30 hours, but the application clearly applies the FTE calculations using a 40 hour work week. There is also a simplified calculation using a 1 for anyone 40 hours or more and 0.5 for anyone under 40 hours.

25% OR MORE SALARY DECREASE

The application applies this decrease on an average salary calculation similar to a rate of pay. A rate of pay calculation makes restoration easier as you simply have to, prior to June 30, 2020, return the individual to the rate of pay in effect on February 15, 2020 in order to qualify for the safe harbor.

CERTIFICATIONS

Remember that the certifications on the application are subject to False Claims Act. However, the certifications are consistent with prior guidance on this issue.