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Additional SBA Guidance Released Regarding PPP Debt Forgiveness

June 26th, 2020

The Small Business Administration (SBA) released further PPP guidance on Monday, June 22nd that solidifies the new debt forgiveness application process that was provided on June 16th and clarifies limitations if a loan application is submitted before the 24-week covered period is complete.

The most recent guidance confirms many of the changes that were signed into law under the Paycheck Protection Program Flexibility Act of 2020 which was signed by the President on June 5, 2020.

Expansion of the Debt Forgiveness Covered Period and Lower Percentage Payroll Utilization

Under the original CARES Act and SBA guidance, in order for borrowers to maximize debt forgiveness, they were required to utilize 75% of their PPP funding towards payroll within 8-weeks from the loan origination date. While the SBA expanded guidance regarding an alternative 8-week payroll period to align with employee service dates was helpful, still many businesses were struggling to utilize 75% of their funding during the 8 weeks.

To assist PPP borrowers and encourage borrowers who might not have applied or returned their PPP funding due to fear of not being able to utilize the funding appropriately within an 8-week period, the time period was expanded to 24-weeks and the amount of PPP funding that must be utilized on the payroll in order to optimize debt forgiveness was decreased to 60%. Therefore, up to 40% of PPP funding can be utilized on non-payroll costs such as covered rent, interest, or utilities. The decrease to 60% utilization towards payroll and the increase of 40% usage towards non-payroll is applicable whether or not an 8 or 24 -week period is selected.

The SBA guidance reaffirmed that even though the covered period was expanded from 8 weeks to 24 weeks, borrowers that received PPP loans before June 5, 2020, can elect to utilize the original 8-week period. The SBA also reiterated that payroll costs included when determining whether the 60% was met include payroll costs paid or incurred during the covered period. Whether or not an 8-week or 24-week period is chosen, the period for tracking payroll can either start at the date of disbursement of the PPP loan proceeds from the Lender or from the first day of the first payroll cycle in the covered period. Payroll costs incurred during the borrower’s last pay period of the selected time period are eligible for forgiveness if paid on or before the next regular payroll date; otherwise, payroll costs must be paid during the selected time period to be eligible for forgiveness.

Adjustment of Salary Caps for Borrowers who Select a 24-week Period

The SBA adjusted loan application continues to only allow a maximum gross payroll amount of $15,385 per employee during an 8-week period, but if the covered period is 24 weeks the maximum amount of payroll allowable has been increased to $46,154. However, the salary cap for owner-employees or self-employed individuals is limited.

Owner employees and self-employed individuals are capped at $15,385 per individual or 8 weeks’ worth of their 2019 compensation, whichever is less. If the borrower is utilizing a 24-week period, the owner-employees or self-employed individuals are capped at 2.5 months of their 2019 compensation or $20,833, whichever is less.

When Can a Borrower Apply for Loan Forgiveness?

The Flexibility Act allows a borrower 10 months after the last day of the covered period to submit their debt forgiveness application, still allowing deferment of principal and interest during those 10 months. Even so, businesses that are exploring the 24-week covered period for the utilization of their PPP funding were looking for clarification as to whether they could submit their debt forgiveness application before the 24-week period if all PPP funding was utilized accordingly. For example, if a business’s 24-week period ends on October 15th but the utilization of their PPP funding ended in July, could they submit for forgiveness in August?

The SBA guidance does allow a borrower to submit a loan forgiveness application before the end of the covered period if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness. However, for borrowers who are facing a reduction in their debt forgiveness due to a reduction of employee salaries, it appears they will forfeit a safe-harbor allowing them to restore salaries or wages by December 31st. Instead, if the borrower applies for forgiveness before the end of the covered period and has reduced any employees’ salaries or wages in excess of 25 percent, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period.

Example: A borrower is using a 24-week covered period. This borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period, with an FTE of 1.0. In this case, the first $250 (25 percent of $1,000) is exempted from the loan forgiveness reduction. The borrower seeking forgiveness would list $1,200 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by 24 weeks). If the borrower applies for forgiveness before the end of the covered period, it must account for the salary reduction for the full 24-week covered period (totaling $1,200).

Full-Time Equivalent Exceptions and Safe Harbors

In addition to debt forgiveness being reduced due to a reduction in salaries during the covered period, the debt forgiveness amount can also be reduced if the borrower has a reduction in FTEs during the covered period. Even if the funding is used appropriately during the 8 or 24-week covered period, the amount of debt forgiveness will be lowered if the borrower reduces the FTE employees during the covered period as compared to the base period selected by the borrower. When calculating the FTE for the covered period, a borrower may exclude a reduction in FTE headcount that is attributable to:

  • Any positions for which the borrower made a good-faith, written offer to rehire an individual who was an employee on February 15, 2020, and the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020.
  • Any positions for which the borrower made a good-faith, written offer to restore any reduction in hours, at the same salary or wages, during the Covered Period or the Alternative Covered Period and the employee rejected the offer.
  • Any employees who during the covered period were fired for cause voluntarily resigned or voluntarily requested and received a reduction of their hours.

The most recent SBA guidance provides additional documentation guidance that is required in order to exclude a reduction in FTE headcount for the above items.

In addition, a borrower’s reduction in FTE headcount during the covered period can be ignored if it meets one of two safe harbors:

  • If both of the following conditions are met: (a) the borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and (b) the borrower then restored its FTE employee levels by not later than December 31, 2020, to its FTE employee levels in the borrower’s pay period that included February 15, 2020.
  • Borrower is able to document in good faith an inability to return to the same level of business activity as the borrower was operating at before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020, and December 31, 2020, by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19 (COVID Requirements or Guidance). Specifically, borrowers that can certify that they have documented in good faith that their reduction in business activity during the covered period stems directly or indirectly from compliance with such COVID Requirements or Guidance are exempt from any reduction in their forgiveness amount stemming from a reduction in FTE employees during the covered period. Such documentation must include copies of applicable COVID Requirements or Guidance for each business location and relevant borrower financial records.

The most recent SBA guidance interpretation of the second exemption includes both direct and indirect compliance with COVID requirements or Guidance because a significant amount of the reduction in business activity stemming from COVID Requirements or Guidance is the result of state and local government shutdown orders that are based in part on guidance from the three federal agencies.

Example: A PPP borrower is in the business of selling beauty products both online and at its physical store. During the covered period, the local government where the borrower’s store is located orders all non-essential businesses, including the borrower’s business, to shut down their stores, based in part on COVID-19 guidance issued by the CDC in March 2020. Because the borrower’s business activity during the covered period was reduced compared to its activity before February 15, 2020, due to compliance with COVID Requirements or Guidance, the borrower satisfies the Flexibility Act’s exemption and will not have its forgiveness amount reduced because of a reduction in FTEs during the covered 24 period, if the borrower in good faith maintains records regarding the reduction in business activity and the local government’s shutdown orders that reference a COVID Requirement or Guidance as described above.

Confirmation That You Must Have Been Eligible for the PPP Loan to Receive Forgiveness

Lastly, if the SBA determines in the course of its review that the borrower was ineligible for the PPP loan based on the provisions of the CARES Act, SBA rules or guidance available at the time of the borrower’s loan application, or the terms of the borrower’s PPP loan application (for example, because the borrower lacked an adequate basis for the certifications that it made in its PPP loan application), the loan will not be eligible for loan forgiveness. If only a portion of the loan is forgiven, or if the forgiveness request is denied, any remaining balance due on the loan must be repaid by the borrower on or before the maturity date of the loan.

Your Bonadio Team is Here to Help.

While the additional guidance is employer-friendly, the application for debt forgiveness is becoming more complicated and administratively burdensome for many employers. Please do not hesitate to reach out to The Bonadio CARES & More Consulting Team for additional support.

The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We, therefore, make no warranties, expressed or implied, on the services provided hereunder.

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