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SBA Announces PPP Loan Forgiveness Application

On May 15, 2020, the Small Business Administration (SBA) announced the Paycheck Protection Program (PPP) loan forgiveness application. The application helps clarify some aspects of loan forgiveness that have been generating questions and concerns from loan recipients. Borrowers will be happy to see flexibility in some areas and better definition in others. The application also resolves some questions regarding safe harbor for companies with a reduction in headcount during the loan period.

For a full discussion of the PPP program and loan forgiveness, read Frazier & Deeter’s full Paycheck Protection Program FAQ document.

Important Clarifications


Expenditures “incurred” versus “Paid”, during the 8 week “Covered Period”

The application instructions indicate that either is okay. Instructions state that “costs incurred but not paid during the Borrower’s last pay period of the Covered Period are eligible for forgiveness if paid on or before the next regular payroll date.”

For Payroll costs only, borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight -week (56 day) period that begins on the first day of their first pay period following their PPP loan disbursement date.

For example:

  • April 20: PPP loan funded
  • April 26: First day of first pay period following PPP loan disbursement
  • April 26: First day of Alternative Payroll Covered Period
  • June 20: Last day of Alternative Payroll Covered Period

For non-payroll expenses, “cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.”

Eligible Utilities

This has been another big topic of debate. The loan forgiveness application language issued on May 15th has helped clarify this aspect of forgiveness, stating that you may include “business payments for a service for the distribution of electricity, gas, water, transportation, telephone or internet access for which service began before February 15, 2020.” The “transportation” inclusion supports the 4/14/20 IFR issued that listed gas you use driving your business vehicle.

NOTE that security systems or credit card processing, full Common Area Maintenance (CAM) charges and waste removal are NOT included in the SBA clarification. Forgiveness should be considered for certain CAM charges provided detail of the underlying permissible “utility” expenditures are bifurcated and documented, and agreed upon, by lessee and lessor.

Calculating full-time equivalents (FTEs)

While the CARES act generally defined an FTE as an employee working 30 hours per week, the SBA calculation for loan forgiveness is based off of a 40-hour work week.

The PPP forgiveness application instructions state the borrower should calculate the average number of hours paid per week for each employee during the “Covered period”, divide by 40 and round to the nearest tenth. The maximum for each employee is capped at 1.0.

A simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the Borrower. Employees working more than 40 hours cannot count for more than one FTE.

How can I determine if my forgiveness amount is reduced by pay decreases or reduced headcount?

The SBA’s Schedule A worksheet provides the calculation for pay reduction that will apply to borrowers who have reduced headcount by more than 25%. It also provides the calculation for your full-time equivalent reduction.

That said, there are certain safe harbors available. The SBA will not reduce loan forgiveness of FTE reductions if the Borrower made a good-faith written offer to rehire an employee and the offer was rejected by the employee. The other FTE reduction scenario that falls under safe harbor is if employees were fired for cause, voluntarily resigned or voluntarily requested a reduction of their hours during the 8-week period.

Safe harbor also exists if the borrower rectifies the reduction in pay by June 30, 2020. Specifically, if the average annualized salary (or hourly wage) as of June 30, 2020 is equal to or greater than the annual salary or hourly wage as of February 15, 2020, the reduction will be deemed to have been eliminated and safe harbor will apply.

The long-awaited loan forgiveness application process has arrived, and PPP borrowers should work with their advisors to ensure they are well prepared to file for forgiveness. The Frazier & Deeter CARES Act Program team has developed tools to help borrowers pursue loan forgiveness. Please visit our PPP Program page or contact your FD advisor to get started.

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