The Paycheck Protection Program continues to be the proverbial “airplane being built in mid-air” as pieces of guidance continue to trickle out from Treasury and the SBA. Last week, the SBA released the interim guidance providing more detail regarding the PPP Loan Forgiveness application released a few weeks ago. We’ve been covering PPP loan guidance since March and the steps you should take to properly account for how you spend PPP funds. That continues as we analyze clarifications made to the forgiveness process.
It should be noted that a number of bills have been floated in both the House and the Senate that could bring additional changes to the PPP Program. It seems that there’s bipartisan support for 1) extending the eight-week window to 24 weeks, 2) repayment of the loans over five years instead of two, 3) extending the deadline to apply for the loan past June 30th, and 4) scrapping the rule that only 25% of funds can be used for non-payroll expenses. These would be major and welcome changes as they address some of the key issues that Compass East has addressed with clients. For now, this is all TBD but could happen very quickly as these changes are not part of a larger Coronavirus bill.
For today, we’ll focus on what we know. Last Friday, the SBA and Treasury released “interim final guidance” regarding existing questions on the Forgiveness Application and some interesting details on long-term oversight authority for reviewing applications and lender responsibilities.
As always, here’s what you need to know:
Specifically, on borrower forgiveness, there have been a few clarifications on how you calculate your forgiveness amounts and what is included.
Alternative Payroll Method – Initially, there were questions surrounding “incurred” payroll costs and “paid” payroll costs and which count toward forgiveness. This interim ruling now includes an “alternative payroll method”. This allows borrowers to include payroll costs as forgivable outside the covered period window, as long as they are paid on the first payroll run after the covered period ends.
For example, if you received funds June 1st, but the first payroll cycle within the covered period starts June 7th, the alternative payroll window is pushed back six days over the eight weeks. So, payroll incurred during the six-day discrepancy and ultimately paid six days after the covered window still counts towards the forgiveness calculation. The SBA is providing some additional flexibility here, which is a good thing.
Furloughed Employees’ Salary, Bonuses, Hazard Pay Inclusion – The interim guidance stated that all of these items are eligible for payroll costs. Also, if an employee’s total compensation does not exceed $100,000 on an annualized basis, the employee’s hazard pay and bonuses are eligible for loan forgiveness.
“Owner Employees” and Self-employed Individuals Caps – Owner employees and self-employed individuals forgiveness on their own payroll compensation can be no more than the lesser of 8/52 (or 15.38%) of 2019 compensation or $15,385 ($100k annualized) per individual in total across all businesses. Schedule C filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit. General partners are capped by the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235. No additional forgiveness is provided for health insurance contributions for those that are self-employed.
Non-Payroll Costs Forgiveness Timing – Similar to the alternative payroll method, the interim ruling allows for non-payroll costs incurred in the period to count toward forgiveness. So if you paid 2 utility bills within the covered period and incurred a partial month within the period, the partial month will still count even if it’s paid outside the covered period window. However, advance payments on mortgage interest are not eligible for forgiveness.
Employee Reduction Penalty Waived for Rehire Offer – This has been an ongoing issue for those unable to rehire employees furloughed or laid off prior to the June 30th cutoff date. Businesses are not penalized if an offer was made to rehire an employee during the covered period or alternative payroll period. But the ruling also clarified that the owner has to show the written offer was:
- the same wages/hours,
- rejected by the employee,
- both offer and rejection documented, and
- the borrower informed the local unemployment insurance office of the offer within 30 days.
A borrower is not penalized for employees fired for cause, voluntarily resigning, or requests for a scheduled reduction.
FTE Reduction Amounts – Simply confirms what we knew about FTE reductions and how it relates to forgiveness reduction. Essentially, forgiveness reduction will be proportional to an FTE reduction during the covered period.
Defines FTE – Full-time equivalent employee will mean an employee who works 40 hours or more, on average, each week. The SBA determined that full-time equivalent is best understood to mean 40 hours or more of work each week.
How to Calculate an FTE for Hourly Employees – Calculate the number of hours per week and divide by 40. Even if you worked 48, it’s capped at 40 and will only count as 1 FTE.
For less than 40 hours, you can calculate proportionally:
- 30 hours / 40 hours = .75
- 10 hours / 40 hours = .25
- or you can just ALL part-time employees as .5 regardless of the number of hours worked
Wage reduction penalty – Confirms that a wage reduction greater than 25% may penalize you. If you reduce an employee’s wage by 30%, the additional 5% delta would be reduced from your forgiveness amount. Borrowers can reverse reductions to salaries and wages for FTE employees by June 30 to avoid wage reduction penalties.
No Double Wage/FTE Penalties – SBA determined that the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction. So for example, if an employee’s hours were cut in half, but their hourly rate stayed the same, even though their wages dropped by 50%, the borrower would only be penalized for the FTE reduction from 1 to 0.5 and not also penalized for the wage reduction of greater than 25%.
SBA Authority and Documentation Requirements
The second piece of guidance focused on SBA oversight and the lender process. After determining a few weeks ago that a $2m loan amount would be the threshold for SBA review (see audit), this guidance solidifies broad oversight authority for the SBA. Documenting EVERYTHING and storing supporting documents will be critical as the SBA now has six years to potentially review the PPP loan application and its eligibility.
This guidance gives the SBA authority to review individual PPP loans “deemed appropriate” related to Borrower Eligibility, Loan Amounts and Use of Proceeds, and Loan Forgiveness Amounts, aka everything. The SBA can review any loan at their discretion and borrowers must be able to provide documentation for six years after the loan is forgiven or repaid. A borrower has an opportunity to respond to their inquiry and appeal but the SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.
Even though the SBA has stated in their FAQs they will only review $2m+ loans and those below that threshold are deemed to be made in good faith, this broad authority covers all loans and could open up reviews for smaller borrowers as well.
There is a lot to unpack and understand here, and we know that it’s extremely complicated. Please reach out with any questions or needs that you may have. Compass East is here to help.
Questions? Finance and Accounting needs? Schedule a Free Consultation today!
John Lanahan
Director Of Financial Strategy
john.lanahan@compasseast.com