05.20.2020

Paycheck Protection Program - Forgiveness Application

On Friday, May 15th, the SBA released its Form 3508, the Paycheck Protection Program Loan Forgiveness Application (the “Application”), accessible at this link, which contains four components:

(1) the PPP Loan Forgiveness Calculation Form;
(2) PPP Schedule A;
(3) the PPP Schedule A Worksheet; and
(4) an (optional) PPP Borrower Demographic Information Form.

In order to apply for forgiveness, recipients must submit parts (1) and (2) to their lender. The Application contains many details that clarify existing ambiguities in the PPP program. The following are the key takeaways.

Payroll Period Challenges. Many recipients have struggled with the challenge of how to handle payroll periods that start or end outside of their 8 week Covered Period. In the Application, the SBA has offered recipients an optional Alternative Payroll Covered Period, which will be the 8 week period beginning with the first day of their first pay period after disbursement of their PPP funds. Additionally, the Application expands the definition of Eligible Payroll Costs to include amounts incurred for payroll, but not paid as of the last date of the relevant Covered Period, so long as they are paid “on or before the next regular payroll date”.

Nonpayroll Cost Matching. For nonpayroll costs, the new definition of Eligible Nonpayroll Costs allows such expenses to be included in forgiveness if they are either paid during the Covered Period, or incurred during the Covered Period, and paid on or before the next regular billing date. This suggests that nonpayroll expenses from prior periods that are paid during the Covered Period are permissible – but, the 25% of total forgiveness limitation for nonpayroll expenses still applies.

Cash Compensation. Under the SBA’s guidance, the total amount of cash compensation that is eligible for forgiveness for each individual employee during the Covered Period is $15,385 (an annual salary of $100,000, as prorated for the Covered Period).  For these purposes, “cash compensation” includes the sum of gross salary, gross wages, gross tips, gross commissions, paid leave (vacation, family, medical or sick leave, not including leave covered by the Families First Coronavirus Response Act), and allowances for dismissal or separation paid or incurred during the Covered Period or the Alternative Payroll Covered Period.

FTE Calculation Formula; Exceptions to Reductions. The Application defines a Full Time Equivalent (“FTE”) as each employee who works 40 hours per week, with a maximum of 1.0 FTE for each employee. The Application also offers a simplified option of 1.0 FTE for 40 hours of work per week, and 0.5 for any worker who works less than 40 hours. Each recipient can elect which approach they want to take. Also, no reduction in a recipient’s FTE count must be taken for any employee who (i) refuses a good faith offer to be rehired, (ii) is fired for cause, (iii) voluntarily resigns, or (iv) requests a reduction in hours.

FTE Reduction Safe Harbor. The Application repeats the FTE Reduction Safe Harbor, under which no reduction in forgiveness is necessary for FTE reductions occurring between 2/15/20 and 4/26/20 that are restored “by not later than” 6/30/20 to the 2/15/20 level. For recipients whose Covered Period ends before June 30th, it appears they can wait to apply for forgiveness in order to take advantage of this safe harbor.

We will continue to update our clients on any further information regarding the Paycheck Protection Loan program as it becomes available. For further assistance, please contact your regular Katz Teller attorney, or John Gierl at jgierl@katzteller.com, Gabriel Kurcab at gkurcab@katzteller.com, or Jake Purcell at jpurcell@katzteller.com.

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