SBA Payroll Protection Program – Updated Guidance: July 2020

SBA Payroll Protection Program – Updated Guidance: July 2020

As the weeks have gone by without any new coronavirus-related legislation, it appears that the rules and regulations related to the Payroll Protection Program have started to solidify. We thought now would be a good opportunity to review some of the main components of the legislation and examine some of the most frequently asked questions as the forgiveness application period looms.

Key Aspects

Use of Proceeds – Payroll costs, costs related to the continuation of healthcare benefits and insurance premiums, employee salaries and commissions, interest on mortgage obligations, rent payments, utility payments, and interest on debt incurred before February 15, 2020.

Forgiveness Limitation – Mandatory payroll spending of at least 60% required to achieve full forgiveness. No more than 40% may be used toward non-payroll costs.

Timing – Borrowers have up to 24 weeks to spend their loan proceeds.

Interest Rate – Non-forgivable portion of the loan will have an interest rate of 1%

Maturity – Loans issued prior to June 5th have a maturity of 2 years. Loans issued after June 5 have a maturity of 5 years.

Deferral Period – Payments of principal and interest are deferred until the date the lender receives the forgiven amount from the SBA. If a forgiveness application is not filed by the borrower within 10 months after the end of the covered period, the deferral period ends and loan payments must be made immediately thereafter.

Additional Info – No collateral or personal guarantees are required. No fees will be charged by the government or the lenders.

Eligible Payroll Costs

A borrower’s eligible payroll costs consist of any compensation to employees in the form of:

  • Salaries, wages, or commissions, capped at $100,000 (pro-rated) per employee
  • Cash tips (based on employer records of past tips or, a reasonable, good-faith estimate)
  • Payments for vacation, parental, family, medical, or sick leave
  • Payments for the provision of employee benefits consisting of group health care coverage, including insurance premiums and retirement; and
  • Payments of state and local taxes assessed on compensation of employees (e.g: SUI & MTA)

Forgivable payroll costs include those paid or incurred during the covered period or alternative covered period as long as those amounts are paid before the next regular payroll date. Even if payroll amounts were earned in days prior to the start of the covered period, payment is determined based on the day paychecks are distributed or the day ACH transactions originate.

Maximum Amount of Compensation

Employees – The maximum cash compensation eligible for forgiveness during the 24-week covered period is $46,154 (24/52 x $100,000). This $100,000 cap does not apply to non-cash compensation such as retirement plans or group health care. If the 8-week period is chosen, the cap is $15,385 (8/52 x $100,000).

Owner-Employees, Self-Employed Individuals & General Partners – The maximum cash compensation eligible for forgiveness during the 24-week covered period is capped at the lesser of 2.5 months of $100,000 annualized ($20,833) or 2.5 months of 2019 compensation across all businesses.

No additional forgiveness is available for retirement or health insurance contributions for self-employed individuals, general partners, or owner-employees of an S-Corporation. Employer retirement contributions made on behalf of self-employed individuals or general partners are also not eligible for forgiveness. However, employer retirement contributions made on behalf of an owner-employee of an S corporation are included in eligible forgivable payroll-related costs.

Eligible Non-Payroll Costs

All of the following non-payroll costs are eligible for forgiveness as long as the service or obligation began prior to February 15, 2020. Borrowers will be able to include those costs that are incurred but not paid during the covered period as long as those amounts are paid before the next billing date.

Interest – Interest payments on business mortgage obligations on real or personal property as well as any other debt obligation.

Rent – Rent payments under lease agreements including those on equipment leases and other personal property leases.

Utilities – Defined as electricity, gas, water, transportation, telephone or internet access, gasoline for driving a business vehicle. Certain other common utilities such as garbage collection or security monitoring may also be allowed, but this should be confirmed with the lending institution.

Covered Period

The covered period begins on the date the loan proceeds are received from the lender. Businesses who received loans prior to June 5, 2020 can elect an 8-week covered period or 24-week covered period. Borrowers who received loans June 5th or later will have a 24-week covered period. An alternative payroll covered period may be used by calculating eligible payroll costs using the 24-week (or 8-week if elected) period that begins on the first day of their first period following receipt of the loan proceeds. It is expected that if the 24-week period is selected, the flexibility of the alternative payroll covered period isn’t needed.

In deciding whether to retain an 8-week covered period or to adopt the 24-week option, borrowers should consider all factors including whether all proceeds have been spent, the degree to which it has achieved maximum forgiveness and whether it has maintained their FTE workforce as compared to the applicable measuring period.

Reductions in Forgiveness Amount

Calculations will be used to determine whether the Borrower’s applicable forgiveness amount must be reduced due to statutory requirements concerning reductions in employee salary/hourly wage, reductions in full-time equivalent employees, and lastly, the minimum payroll costs requirement.

  • Salary/Hourly Wage Reductions – Any reduction by more than 25% in the total salary or hourly wage of an employee (regardless of whether they were paid in 2019 or not) whose pro-rated salary is $100,000 or less. It is compared to the total salary received during the most recent full quarter in which the employee was employed before the covered period (for most, this would be the 3 months ended March 31, 2020).
  • FTE Reductions – Any reduction in the borrower’s average number of full-time equivalent employees (FTEs) per month during the covered period (8 or 24 weeks), compared to, at the borrower’s election, the period of February 15, 2019 through June 30, 2019, or during the period of January 1, 2020 through February 29, 2020.
  • Less than 60% Payroll Costs – If less than 60% of the loan proceeds are used for payroll costs, a borrower will only be subject to a pro rata reduction in forgiveness.


Salary/Hourly Wage Reduction Safe Harbor

If there was a reduction in an employee’s wages during the covered period by more than 25% as compared to January 1 – March 31, 2020 period, borrowers still have the opportunity to eliminate this reduction if the salary/hourly levels are restored. Businesses can eliminate the pay level reduction in forgiveness if the following apply:

    1. There was a decrease in the average annual salary or hourly wage between February 15, 2020 and April 26, 2020 as compared to February 15, 2020; and
    2. The February 15, 2020 annual salary or hourly wage amount was restored as of the earlier of December 31, 2020 or the date of submission of the forgiveness application.


FTE Reduction Safe Harbor

Businesses are exempt from the reduction in loan forgiveness based on FTE employees if both of the following are met:

    1. the Borrower reduced its FTE employee levels in the period beginning February 15, 2020 and ending April 26, 2020; and
    2. the Borrower then restored its FTE employee levels to its FTE employee levels in the Borrower’s pay period that included February 15, 2020 by the earlier of the submission of the forgiveness application or December 31, 2020.

Essentially, if the borrower’s total FTE measured at the date of application for forgiveness is greater than or equal to the borrower’s total FTE for the pay period that includes February 15, 2020, then any reduction in headcount that occurred results in no loss of forgiveness.

Eligible FTE Reductions

With the exception of the Safe Harbor, in order for there to be no reduction in the forgiveness amount with a reduction in the number of FTEs, one of the following must be met:

  • Borrower made a good-faith, written offer to rehire or restore the reduced hours of an employee during the covered period or the alternative covered period, the offer was rejected and the borrower has documentation of the offer and rejection.
  • Employee was fired for cause
  • Employee voluntarily resigned
  • Employee requested and received a reduction of their hours
  • Borrower in good faith can document the inability to:
      • Rehire individuals who were employees on February 15, 2020 and
      • Hire similarly qualified employees for unfilled positions before December 31, 2020 or
      • Return to the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued related to COVID-19


Applying for Forgiveness

Businesses may submit loan forgiveness applications at any time up to 10 months following the last day of the covered period to its lender. If a borrower has used all of the loan proceeds for which they are requesting forgiveness before the end of the covered period, a forgiveness application can be submitted early. However, if the borrower does so and has reduced any employee’s salary in excess of 25%, the borrower must account for the excess salary reduction for the full covered period (8 or 24 weeks).

After submission of the forgiveness application, the lender has 60 days to review and submit to the SBA for approval. The SBA then has 90 days to act and issue a notice to the lender and borrower. Any amounts not approved as forgivable become a PPP loan. After receipt of the SBA decision, a borrower may then request a review within 30 days, if desired.

Loan Forgiveness Applications

On June 17, 2020, the SBA released two versions of the final loan forgiveness application and instructions. In addition to the standard application, an “EZ” application was issued to be used by any of the following:

  • Self-employed individuals, independent contractors or sole proprietors with no employees
  • Borrowers who did not have a salary and hourly wage reduction NOR an FTE reduction (including exceptions)
  • Borrowers who did not have a salary and hourly wage reduction AND were unable to operate during the covered period at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020


Forgiveness Documentation

While different lenders may require certain documentation, the AICPA has made the following recommendations for the minimum documents to be prepared and submitted with the application:

Documentation for Employers

  1. Payroll Tax Reports – 2020 IRS Forms 941, state income and unemployment tax returns that include the covered period. If the borrower contracts with a payroll provider or Professional Employer Organization (PEO), you can supply other documents, such as reports reflecting employment tax returns filed.
  2. Compensation and FTEs – In general, payroll reports which will include the following:
    1. Gross wages for each employee for the following:
      1. During the 8 or 24 week covered period
      2. During the most recent full quarter before the 8-week or 24-week covered period
    2. Identifying employees who during any period in 2019, received an annualized pay of more than $100k and also employees whose principal place of residence is outside the U.S.
    3. State and local employer taxes assessed on an employee’s compensation
    4. The average number of full-time equivalents (FTEs) per month for the following:
      1. During the 8 or 24 week covered period
      2. Feb. 15 through June 30, 2019 or
      3. Jan. 1 through Feb. 29, 2020
    5. For seasonal businesses, use average number of FTEs per month during the period February 15, 2019 through June 30, 2019.
  3. Group Health Care Benefits – Documentation showing total costs paid for all health care benefits, including insurance premiums paid by the organization under a group health plan. Include all employees and company owners.
  4. Retirement Plan Benefits – Documentation showing the sum of all retirement plan funding costs paid by the organization. Include funding for all employees and the company owners.
  5. Other Documentation – Canceled checks, receipts, account statements or other documentation of payment for other eligible costs incurred and paid during the covered period such as mortgage interest, lease payments, utility payments.


Documentation for Sole Proprietors, Independent Contractors and Self-Employed Individuals

  1. The 2019 Form 1040 Schedule C to verify net income for owner income replacement calculation.
  2. If you have employees, provide payroll documentation as outlined above, including documentation of healthcare and retirement benefits costs. Exclude owner from healthcare and retirement costs.
  3. Canceled checks, receipts, account statements or other documentation of payment for other eligible costs incurred and paid during the covered period such as mortgage interest, lease payments, utility payments.

Please be aware that there could still be clarification on additional items as time goes on. As further guidance is released, we will continue to update our clients on all of the necessary details.

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