Paycheck Protection Program Loan Forgiveness Application: Tips, Tricks and Traps

On May 15, the Small Business Administration published its Paycheck Protection Program Loan Forgiveness Application.

The loan forgiveness application answers a number of questions and, thankfully, provides some useful shortcuts for borrowers.

I’m going to quickly summarize the highlights…

Alternate Payroll Covered Period

Perhaps responding to the pleas from accountants, the loan application allows borrowers to work with their usual payroll schedule. That’s great news. It means that small businesses don’t need to force their payroll to match the eight week “testing period” which the Section 1106 statute says the forgiveness formula looks at.

Here’s the actual language from the application instructions:

For administrative convenience, 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 (the “Alternative Payroll Covered Period”).  For example, if the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20.  Borrowers who elect to use the Alternative Payroll Covered Period must apply the Alternative Payroll Covered Period wherever there is a reference in this application to “the Covered Period or the Alternative Payroll Covered Period.”  However, Borrowers must apply the Covered Period (not the Alternative Payroll Covered Period) wherever there is a reference in this application to “the Covered Period” only.

But a note. Borrowers use the alternative payroll covered period only for payroll. Not for rent, interest or utilities.

Accrual-ish Accounting Allowed

Another useful accommodation from the SBA? The loan application tweaks the requirement that spending be “paid and incurred” during the eight week covered period or alternate payroll covered period. The specific tweak? The forgiveness application allows accrual accounting.

For payroll costs, for example, the loan application says this:

Payroll costs are considered paid on the day that paychecks are distributed or the Borrower originates an ACH credit transaction.  Payroll costs are considered incurred on the day that the employee’s pay is earned.  Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date.

This change (see the part I boldfaced) means small businesses don’t need to completely reschedule their payroll cycle to start on the day the PPP loan funds appear.

And the loan application provides a similar accommodation for rent, interest and utilities costs, stating:

An eligible nonpayroll 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.

Usefully, the loan application also lists out what “counts” as utilities: “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.”

Owner Compensation Capped at 2019 Compensation Levels

The loan application provides several other useful answers about how forgiveness works too.

For example, the application caps owner compensation payroll costs to what was paid in 2019. Here’s the slightly parsed language from the application instructions with a key bit boldfaced:

any amounts paid to owners (owner-employees, a self-employed individual, or general partners)… capped at $15,385 (the eight-week equivalent of $100,000 per year) for each individual or the eight-week equivalent of their applicable compensation in 2019, whichever is lower.

That rule surprises no one, probably. But folks wondered if a bump in owner compensation might allow someone to get their payroll costs up. (You can’t blame people for thinking about this.)

Proprietor and Partner Draws Required

The accountants have argued a lot about whether the owner compensation replacement needs to be paid. Some said you just needed to “show” a copy of the borrowers 2019 tax return.

The paycheck protection program loan forgiveness application says different. Here’s the actual instruction from for owner’s compensation with the kit bit boldfaced:

Line 9:  Enter any amounts paid to owners (owner-employees, a self-employed individual, or general partners).

A New Pay Rate Reduction Safe Harbor?

The loan forgiveness application appears to me to create a new safe harbor for salary or wage rate reductions.

You maybe know this, but if an employer reduces people’s wages, that may reduce the loan forgiveness amount.

The guidance received earlier from SBA said that if an employer reverses earlier salary and pay rate reductions by June 30, no reduction in the forgiveness occurs. (Which is good.)

The loan application’s instructions for determining whether or not an adjustment occurs also appears to look at bumps up in wages. Another comparison looks at the average wages paid on February 15, 2020 and then “the average annual salary or hourly wage between February 15, 2020 and April 26, 2020.”

That would seem to mean—and this makes sense—that if employee salary and wage rates moved around a bit but people on average make as much as they did before, no adjustment.

Simplified FTE Formula

I may as well mention that the application describes a simplified full-time-equivalent formula that firms can use. That’s handy…

That method? The simplified method 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.

No 75% Threshold?

And then two quick other things obvious from the loan forgiveness application.

At least a handful of accountants—including me—worried that you needed to spend at least 75% of your loan amount on payroll to get forgiveness.

So, to use a worst case scenario to explain, suppose the bank bungled your PPP loan. Suppose they gave you $25,000 instead of $20,000. (Maybe they did this because they incorrectly treated your 1099 independent contractors as employees.)

Further suppose that your payroll costs for the covered period only ever could have equaled $15,000.

Had the bank funded the right amount–$20,000 in this example—you would hit the 75% threshold and be fine.

But $15,000 equals 60% of $25,000. And so if the 75% worked the way some of us worried, you were, well, a cooked goose.

The loan forgiveness application describes calculations that indicate your total forgiveness just needs to include at least 75% payroll costs.

The actual formula does this by limiting forgiveness to the amount calculated as your total payroll costs divided by .75.

For example, with $15,000 of payroll costs, that means up to $20,000 of forgiveness. Because $15,000/.75 equals $20,000.

In this case, it doesn’t matter if you incorrectly received $25,000.

No Self-employed Sole Proprietor Haircut

One other bit of good news. As some worried and as I discussed in another earlier blog post, self-employed people possibly only received forgiveness for payroll costs. So, not for rent, utilities and interest.

The loan forgiveness application indicates these small businesses possibly can receive for more than just payroll. Theoretically, these small businesses may be able to plug some rent, interest and utilities costs into the formula.

Two Final Thoughts

Let me leave you with two final thoughts about the loan forgiveness application.

First, many small business borrowers probably want to get their accountant’s help with the application. The reason? The application form requires accounting that probably exceeds the skills and comfort level of many small business owners. In other words, completing the PPP loan forgiveness application resembles a simple tax return. (Check out the form and instructions now to see if you’re in the boat. There’s a link to the form and instructions below.)

Second, accounting firms with lots of PPP loan borrowers need to plan on helping clients with these loan applications this summer. So train people. Devise workflow procedures. Schedule resources. In other words, basically another “mini-tax season” during the summer. When thought you might be able to take a break. And then when you’re working on the tax returns due July 15.

Other Resources You May Find Useful

Here’s a link to the actual loan forgiveness application.

These earlier blog posts may be useful: Paycheck Protection Program Formula Illustrated and Explained and Payroll Protection Program Certification Safe Harbor.

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