SBA Issues PPP Loan Forgiveness Guidance

The wait is over for small businesses looking for guidance from the Small Business Administration regarding the PPP loan forgiveness process. The new guidance that was promised for the end of April was issued on May 15, answering key questions borrowers have had since the program was enacted. The 11-page document, SBA Form 3508, includes the PPP Loan Forgiveness Calculation Form and PPP Schedule A, both of which must be submitted to the lender. The document also contains instructions and a worksheet to facilitate the process.

Questions Answered

Determining forgivable costs: At the core of PPP loan forgiveness, is the requirement that at least 75% of the loan proceeds be spent on payroll with the remaining 25% spent on other expenses, such as mortgage interest payments or rent, and utility costs. The issue for many businesses was whether the expenses had to be paid within the eight-day “Covered Period” that begins on the date they receive the loan to be eligible for forgiveness.

Under the new guidance, businesses can report payroll costs in one of two ways: First, as paid on the day paychecks are distributed or when the business originates an ACH transfer to its employees’ bank account. Second, as they are incurred when employees earn their pay. In other words, payroll costs incurred but not paid during the business’s last pay period of the Covered Period are eligible for forgiveness as long as they are paid out with the next regular payroll date.

For businesses with a biweekly or weekly payroll schedule, the guidance provides for an “Alternative Payroll Covered Period” that allows them to calculate payroll costs using the eight-week period starting on day one of the first pay period after they receive their PPP funds. However, for purposes of reporting non-payroll costs, these businesses must still use the standard Covered Period.

“Good Faith” efforts to rehire employees: Another concern centered on the forgiveness requirement that businesses must hire back any employees temporarily furloughed or laid off within the eight-day covered period. The new guidance clarifies the requirement in a good way for businesses. Businesses that make a “good faith” effort to rehire employees who then decline the offer are exempt from the loan forgiveness reduction. The same exemption applies for employees who were fired for cause, voluntarily resigned, or voluntarily requested a reduction in hours.

Also, the guidance clarifies how to calculate “full-time equivalents” for employees, which is an essential element for reporting forgivable costs.  An important change is that an FTE is someone who works 40 hours per week, not 30 as originally published.  Also, part-time employees can either be treated as ½ of an FTE or use actual hours to round up to the nearest tenth.  For example, an employee who works 12 hours per week can count as ½ FTE, but that treatment needs to be consistent.  If another employee works 30 hours they also count as ½ FTE.  Or you can say the employee who works 30 hours counts as .8 of an FTE but then the person working 12 hours counts as .3 FTE.

Lingering Concerns

The most significant area of concern for many businesses is the limited, eight-week period for spending funds. The challenge for many businesses is meeting the 75% payroll requirement when they are unable to reopen fast enough or rehire employees in that time frame. This is an area that many lawmakers, as well as the President and Treasury Secretary, have pointed to as a priority technical fix, with some suggesting that the period could be extended to as long as 24 weeks.

Working Through the Numbers

SBA Form 3508 does include a calculation worksheet. However, as with any calculation, its accuracy is only as good as the inputs. In this case, the inputs are based on your interpretation of the provisions. We expect further clarification through additional guidance in the near future. It would be important to begin working with your advisor to ensure you are on track to meeting the forgiveness requirements.