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Payroll Protection Program Loan Forgiveness Application

The SBA recently released the PPP Loan Forgiveness Application which needs to be completed by every business who intends to seek forgiveness for their PPP Loan. This is likely not the final copy of the forgiveness application, as there are still many questions left unanswered by this application. But at least businesses now have some idea of what forgiveness will look like.  A copy of the application can be found here: PPP Loan Forgiveness App

Covered Period 

Businesses must spend their PPP funds during the 8-week “covered period” to qualify for loan forgiveness. There are two definitions of covered period provided on the PPP application, the Alternative Covered Period and the Default Covered Period. The Alternative Covered Period applies only to payroll costs. All non-payroll costs must be paid during the Default Covered Period. 

Default Covered Period 

  • The covered period begins the day PPP funds are deposited into the business’ bank account and runs for 8 weeks (56 days).  
  • Example: If the funds were deposited on Friday, May 1, the covered period begins on Friday, May 1 and continues until Thursday, June 25. 

Alternative Covered Period (Available only for payroll costs)  

  • Available only to businesses with a biweekly or more frequent payroll 
  • The 8-week (56 day) period can begin on the first day of the first new pay period beginning after the day the PPP funds are deposited in the business’ bank account. 
  • Example: Assume the above deposit date of May 1st and the next biweekly payroll begins on Monday, May 4 – the start date for the covered period is Monday, May 4 and continues until Sunday, June 28, deferring the covered period by 3 days. 

In addition to providing some clarity to the timeframe over which the PPP loan proceeds must be spent to qualify for forgiveness, the forgiveness application offers some additional insights on which specific costs will qualify. We do expect further clarity on the specific definitions applied by the SBA to the costs described below. 

Payroll Costs 

At least 75% of the PPP Loan funds must be used for Payroll Costs. Until the PPP Application came out, we did not know what all was considered “payroll” under the SBA definition. According to the application, Payroll Costs include: 

  • Cash compensation paid and incurred under the loan’s 8-week covered period 
  • A business can use either the default covered period or the alternative covered period for calculating payroll costs 
  • Because of the $100,000 limit on compensation to any one individual under the PPP Loan, the maximum payroll allowable to any one individual employee over the 8-week period is $15,385. 
  • The application specifies that an owner of the business is limited to the lesser of a $100,000 annual compensation or the owner’s 2019 compensation. 
  • So, if an owner had $100,000 compensation in 2019, they can include $15,385 in the forgiveness calculation; if an owner had $50,000 compensation in 2019, they can only include $7,693 in the calculation.  
  • Expect further discussion and clarification from the SBA on this topic. 
  • Forgivable amount of Payroll Costs may be limited by reduction in Full Time Equivalent employees, or by more than 25% reduction in employee wages  
  • Health insurance costs incurred OR paid during the 8-week period 
  • Retirement costs incurred OR paid during the 8-week period 
  • Employer paid state taxes (does not specify the amount must have been incurred during the 8-week period)

Non-Payroll Costs 

A business can use up to 25% of PPP loan proceeds to pay for non-payroll costs. Those expenses qualifying as non-payroll costs include: 

  • Rent, whether for real or personal property, paid or incurred during the 8-week covered period, so long as the rental agreement was in place before 2/15/2020 
  • Mortgage interest paid or incurred during the 8-week covered period, so long as the mortgage was in place before 2/15/2020. Prepayments of interest are not included in this amount, nor are mortgage principal payments. The application specifies that the mortgage interest can arise from payments related to real or personal property.  
  • Utilities paid or incurred during the 8-week covered period, so long as the utility service began prior to 2/15/2020. Qualifying utilities include electricity, gas, water, telephone, internet, and transportation. “Transportation” is not defined on the loan forgiveness application and is an item we expect the SBA to release additional guidance on calculating. 

What Now? 

Now that we finally have a little more detail on what the PPP loan forgiveness application is going to look like, what should businesses be doing to position themselves to maximize their forgiveness? In many cases, achieving maximum loan forgiveness is not going to be as easy as covering your payroll for 8 weeks – there is some real planning involved. Come back tomorrow when we’ll talk about different strategies for your business! 

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