On May 15, 2020, the Small Business Administration (SBA) and the US Department of the Treasury released a Paycheque Protection Program (P3) loan forgiveness request. While the 11-page document clarifies some issues, it leaves others unanswered; the SBA and the Treasury have indicated that further guidance will be released.
A significant concern for a number of businesses is that 75% of the loan proceeds must be used for salary costs in order to qualify for loan forgiveness. Many of these companies believe that they will not be able to meet this standard because in many cases their salary costs will not equal 75% of the PPP loan amount. They hoped that this percentage would be reduced and that the list of authorized non-salary expenses would be expanded, which has not yet been the case.
Companies that have had to shut down during the crisis or put a significant number of employees on leave are concerned about the requirement that labor costs must be incurred and paid within the eight week period of receipt by the borrower of the loan proceeds (the “Covered Period”). Many of these companies do not feel they can restart or expand their operations in such a short period of time, making it difficult, if not impossible, to maximize their ability to obtain a forgiveness of all or part of the loan.
A law was introduced in the US Senate that would increase the period from eight weeks to 16 weeks. In the meantime, borrowers will have to comply with the period covered rule, with one modification, which we discuss below.
Other period covered by payroll
The agencies have authorized a minor change to the period covered rule. Under this change, borrowers with a bi-weekly or more frequent pay schedule can calculate salary costs with the eight-week period starting on the first day of the first pay period following the date they received the loan proceeds. PPP.
For example, if the loan proceeds were received on April 20 and the first day of a borrower’s next pay period is April 24, the first day of the covered alternative pay period would be April 24 and the last day of the period would be June 19. This only applies to salary costs; it does not apply to the tracking of non-salary costs.
Personnel costs incurred but not paid during the borrower’s last pay period are eligible for a rebate if paid on or before the next regular payment date.
Mortgage interest on a commercial mortgage bond on real or personal property that was incurred before February 15, 2020 is eligible for a discount. However, a borrower cannot prepay the interest, nor can it use the loan proceeds to pay off the principal.
Commercial rents or lease payments, for real or personal property, for leases in effect before February 15, 2020 are eligible for the rebate. In addition, the borrower’s expenses for electricity, gas, water, transportation, telephone or Internet access for services that began before February 15, 2020 are eligible for a rebate.
Eligible non-salary costs must be paid during the Covered Period or incurred during the Covered Period but paid before the next regular billing date, even after the end of the Covered Period. These fees cannot exceed 25% of the total amount of the discount.
Number of employees
According to the app, to determine the number of full-time equivalent (FTE) employees, a borrower would base it on a 40-hour work week. A borrower can treat all employees who work less than 40 hours per week as half of an FTE.
Reduced remittance of PPP loans
There are two tests that can be used to reduce the amount to be remitted; the employee test and the salary test. Below are the tests described in article 1106 of the CARES law.
The amount to be remitted can be reduced by multiplying the amount to be remitted by a fraction.
The numerator of the fraction is the average number of FTE employees during the Covered Period or the Alternative Payroll Covered Period.
The denominator of the fraction is the number of FTEs during one of the two reference periods: (1) from February 15 to June 30, 2019; or (2) from January 1 to February 29, 2020 (each a reference period).
The borrower chooses the period he wants to use for the denominator. For example, if a borrower has 100 FTEs during the Covered Period or the Alternative Payroll Covered Period, and the same number in either of the two Reference Periods, there is no reduction based on the number of employees.
The amount to be forgiven will be equal to the reduction in the salary or total salary of any employee during the period covered or the period covered in the alternative pay greater than 25% of the salary or the total salary of the employee during the period. most recent full quarter in which the employee was employed, including only those employees whose salary or annual salary is less than $ 100,000.
Elimination of employee and salary testing
An employer can remove the application of these two tests by (1) rehiring workers laid off between February 15, 2020 and 30 days after the enactment of the CARES Act (April 26, 2020), provided these employees are rehired before June 30, 2020 and (2) eliminate any reduction in salary or wages made between February 15, 2020 and April 26, 2020 by June 30, 2020.
With respect to the rehiring of laid-off workers, if the borrower has made a good faith written offer to rehire an employee during the period covered or the period of alternative pay coverage that was rejected by the employee, the employee does not have to be included in the FTE calculation. In addition, if an employee has been terminated for cause, has voluntarily resigned, or has voluntarily requested and obtained a reduction in hours, that employee does not have to be included in the calculation of FTEs.
Amount of forgiveness
The request provides that a borrower can qualify for a discount for the lesser of the following:
- The amount of the PPP loan;
- The modified total as calculated below; or
- The total salary costs incurred or paid during the applicable coverage period divided by 0.75.
The amended total is calculated by (a) adding the sum of the authorized salary and non-salary costs; b) by subtracting the amount of the reduction required by the salary criterion (discussed above); (c) by multiplying the difference by the average number of FTEs during the covered alternative pay period, as determined in the employee’s test (as discussed above); and (d) dividing the product by the average number of FTEs during the selected reference period.
The application contains seven certifications that the borrower must do. These need to be carefully considered.
One of the certifications requires the borrower to acknowledge that if the P3 proceeds have been used for unauthorized purposes, the federal government can pursue recovery of amounts and / or charges of civil or criminal fraud. Another indicates that “knowingly making a false statement to obtain pardon” is punishable by various criminal laws.
The request lists the documents that must be submitted by the borrower with the request. Documentation includes the PPP Annex A worksheet, or its equivalent.
It also provides a list of records that must be kept by the borrower. All these records must be kept for at least six years from the date of cancellation or repayment of the loan; the borrower must also allow the representatives of the ASB to access these files on request.