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AAFCPAs Guidance on SBA Loan Forgiveness Application

On Friday, May 15, 2020, the Small Business Administration (SBA) released its long-awaited Paycheck Protection Program (PPP) Loan Forgiveness Application & Instructions.

When the PPP loan program was announced back in March, it left business owners and their advisors with more questions than answers. The application and instructions are not without issues, but they do resolve several calculation and substantive questions that we have been seeking.

AAFCPAs has summarized the most notable PPP Loan issues and answers below:

Forgiveness Calculation Steps

The PPP loan forgiveness calculation consists of multiple steps:

  1. Determine Total PPP Eligible Forgiveness: The sum of total allowable costs incurred and paid during the defined 8-week period (covered period).
  2. Apply Forgiveness Reduction Calculations:
    1. Less Wage Reduction: Reduce eligible forgiveness by reductions in employee salary and wages of more than 25% as defined by the SBA.
    2. Apply Full Time Equivalent (FTE) Quotient: Multiply the remaining Eligible Forgiveness (Step 1 less Step 2) by the FTE Quotient. FTE Quotient is calculated by comparing historical FTE to the covered period FTE as defined by the SBA.
    3. Calculate 75% Payroll Rule – Divide total amounts spent on salary and wages as determined in step 1 by 75%.
  3. Determine Loan Forgiveness – Take the lesser of Step 2b, Step 2c or the total PPP loan proceeds.

Forgiveness Calculation Clarifications and Changes

  • The Covered Period of 8 weeks is defined as a 56-day period from the date PPP loan proceeds were received.
  • To avoid payroll date discrepancies within the Covered Period, the borrower may elect an Alternative Payroll Covered Period (Alternative Period) beginning on the first day of the first pay period following the PPP loan proceeds receipt date. *This Alternative Payroll Covered Period is applicable only for payroll related costs.
  • Payroll costs are considered paid on the day that the paychecks are distributed, or the date the borrower originates the ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned.
  • Wages per employee or owner is capped at $15,385, and may include bonus and hazard pay, for the Covered Period or Alternative Period.
  • Employer state and local taxes assessed on employee salary and wages (e.g. state unemployment insurance tax) are includable as they are incurred and paid.
  • Eligible non-payroll costs (covered mortgage obligations, covered rent obligations, or covered utility obligations) do not have a mechanism for an alternative date of payment. Borrowers should measure non-payroll costs incurred and paid in the 8-week period and strive to have two months’ worth of eligible expenses paid in the covered period. Pre-payments of interest or debt obligations are not allowable.

Unresolved Forgiveness Calculation Questions

  • Utility expenses are defined as electricity, gas, water, transportation, telephone, or internet access. If the borrower has other costs they consider to be utilities, the reasonableness of these costs in association with the intent of the loan should be assessed and documented.
  • The CARES Act specifically includes as an allowable use of the loan “interest on any other debt obligations that were incurred before the covered period.” There is no mention of this in the SBA’s forgiveness application, thus it may be inferred that while you could use the PPP proceeds for this obligation, those costs would not be forgiven. If you choose to use PPP loan proceeds for interest on non-mortgage debt, those costs should be treated as a loan incurring 1% interest over the 2-year period. Contact your AAFCPAs Partner to discuss debt qualification under the loan forgiveness terms.
  • No further definition of health insurance was provided. Until further clarification is issued, borrowers should assess the reasonableness of other plans (such as dental, vision, and etc.) in alignment with the intent of the loan, and document their interpretation.

Forgiveness Reduction Clarifications and Changes

  • The order of application of reduction calculations was outlined in an effort to determine the effect of each calculation on total forgiveness.
  • One FTE employee is defined as an employee who works 40 hours per week. This is a change from the assumed 30 hours per week typically used under the Internal Revenue Code definition noted in §54.4980H-3.
  • FTE calculation periods are based upon the election of the borrower and include seasonal employees under a newly introduced measurement period.
  • An exception was introduced to the FTE Quotient for employees who reject an offer to return to work, were fired for cause, voluntarily resigned, or voluntarily requested a reduced work schedule (which could include employees requesting less hours for childcare purposes or leave requests). An interim rule issued on May 22nd further clarified the exact steps a employer would need to take to avail themselves to this exception, which included a requirement to inform state unemployment agencies of the employees’ rejected offer of employment within 30 days of the rejected offer.
  • The FTE reduction safe harbor provides a clear and concise exception for those employees rehired no later than June 30, 2020.
  • The 75% payroll rule was clarified noting that the calculation is based on eligible costs incurred during the Covered Period, or Alternative Covered Period, versus the total loan proceeds.
  • The borrower may choose not to include non-eligible payroll costs in the forgiveness calculation. This is significant for the purposes of the 75% Payroll Rule and if applied appropriately can allow borrowers to maximize their forgiveness.
  • Any Economic Injury Disaster Loan (EIDL) advances (typically $10,000) will be reduced directly from final loan forgiveness.

Application Process and Required Documents

  • Borrowers must attest to certain certifications on the application. While some are similar to the initial loan application, there are new certifications. The application requires a signature of an authorized representative of the borrower.
  • The application includes a check box for loans received, together with its affiliates, over $2 million. This is likely meant to clearly highlight those borrowers whose applications may be subject to audit by the SBA.
  • The application appears to be standard for all borrowers, however, individual banks may require more information or additional applications.
  • A robust list of backup documents are required to be submitted with the application. Additionally, the application instructions include a list of other suggested documents to maintain and make available as part of the application process.
  • Optional demographic information is included on the application. This suggests that the SBA is interested in collecting data on borrowers to assess if they met applicant targets as originally intended.

How May AAFCPAs Help?

AAFCPAs understands how complicated this constantly changing environment is. We have formed a COVID-19/CARES Act Task Force dedicated to studying and advising clients on the business implications of new legislation and the changing business dynamics caused by the Coronavirus. AAFCPAs will continue to analyze available guidance and keep you informed as things change or questions become clarified.

We advise borrowers to reach out to your AAFCPAs Partner to discuss your particular facts & circumstances so we may ensure you remain in compliance while maximizing your opportunity for debt forgiveness.

  • Utilizing our internal expertise and calculator tool, we can assist with forecasting and modeling the PPP loan forgiveness calculation which will include scenario planning and strategies to maximize the forgiveness amount.
  • We assist with monitoring of actual costs to planned costs over the 8-week period.
  • We provide guidance on optimizing application of costs to various sources of funding received.
  • We provide assistance with the preparation of the final PPP Loan Forgiveness Calculation.
  • We review management-prepared loan forgiveness calculations and provide guidance on compliance and maximizing debt forgiveness.

If you have any questions or need assistance, please contact Courtney McFarland, CPA, MSA at 774.512.4051, cmcfarland@nullaafcpa.comBrittany Besler, MBA, CPA, Esq. at 774.512.9001, bbesler@nullaafcpa.com; or your AAFCPAs Partner.

About the Authors

Brittany Besler
Brittany possesses a unique combination of tax, legal, and business backgrounds, and is a valuable member of AAFCPAs’ Tax practice. She provides tax planning, research, and compliance solutions for corporations, partnerships, nonprofits, individuals, estates & trusts. Brittany advises businesses and individuals on various federal, state, local and foreign tax-related issues, including counseling clients on the consequences of new and updated tax laws. She assists clients in the creation of appropriate and optimal organizational structures, and advises on tax planning and tax exemption compliance. She advises newly-formed and well-established nonprofit clients on meeting compliance requirements of various government agencies, including the IRS rules on fundraising and political activities.
Courtney McFarland
Courtney is an audit partner in the firm’s Healthcare Practice with over 15 years of assurance experience and a comprehensive understanding of the nuances of the healthcare industry. She delivers a full range of solutions solving the challenges that AAFCPAs’ healthcare clients face, including: audits in accordance with Uniform Guidance/Single Audit and Government Auditing Standards, 340B pharmacy program requirements, best practices for reconciliation & analysis of statistical and programmatic data, tracking and monitoring risk-based contracts, maximizing reimbursements, and guidance on healthcare reform. Courtney is a member of AAFCPAs’ Revenue Recognition Task Force, dedicated to helping the firm and clients understand best practices for an efficient and effective implementation of the robust new framework.