By Practice Manager, Cody Gehman, CPA
A collective sigh of relief could be heard on May 14. What had happened: Borrowers welcomed the issuance of an automatic safe harbor for those who borrowed less than $2 million and who, according to the SBA, will be deemed to have made the required certification concerning the necessity of the loan request in good faith. This was a positive announcement coming after weeks of confusion about, and scrutiny of, the program, particularly when it was reported that large companies such as Shake Shack and the LA Lakers received funding through the PPP. Although these companies returned the funds after much public scrutiny, the discussion of who “needs” funding took center stage.
With that scrutiny in mind, the SBA announced they would review any PPP loans made in amounts exceeding $2 million. This raised the question, what potential penalties lie ahead for those who aren’t sure if they meet the “necessity” standard they had to certify on their applications? The safe harbor is a positive development and the SBA struck another positive note with their much-anticipated loan forgiveness application. Do we have clarity on all the ins and outs of the PPP now? Not completely, but we are in a much better place now from which to move forward. Another positive development came out of D.C. yesterday when the House voted to approve a bill easing the requirements relating to the use of PPP funding. Highlights of the proposal include extending the forgiveness period from eight weeks to twenty-four weeks, lowering the payroll spending requirement from 75% to 60%, lengthening the amount of time borrowers would have to repay any loan funds not forgiven from two years to five years, PPP borrowers would also be eligible to participate in the payroll tax deferral program under the CARES Act, and increasing the deferral period for interest on the PPP loan to ten months from six months.
A reminder: forgivable costs include payroll costs, business mortgage interest payments, business rent or lease payments, and business utility payments. Some key highlights that we learned from the SBA loan forgiveness application (SBA Form 3508) release are listed below. The complete loan forgiveness application can be viewed here.
– SBA Form 3508 requires that a borrower who, along with his or her affiliates, received aggregate PPP funds greater than $2 million, must check a box on the form that alerts the SBA to the size of the aggregate loan. This will flag PPP loans that the Treasury Department will then audit.
– The SBA provides an “Alternative Payroll Covered Period” that caters to borrowers with a biweekly or more frequent payroll schedule. This allows borrowers to elect to calculate eligible payroll costs using the eight-week period that begins on the first day of their first pay period following the disbursement of PPP proceeds. This alternate payroll cover period only pertains to the payroll costs, while other forgivable costs have to be incurred and paid during the standard covered period which is still the 8 weeks, but starting the day the borrower receives the funds.
– One clarifying piece of information that is a welcome surprise is the “incurred and paid” language regarding payroll costs. In the guidance, payroll costs are considered paid on the day that paychecks are distributed. Payroll costs are considered incurred on the day that the employee earned the pay. There is now some flexibility available for PPP funds, as payroll cost incurred but not paid during the borrower’s last pay period of the cover period (or alternative cover period) are eligible for forgiveness.
– For eligible nonpayroll costs, these 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 cover period is over.
– Compensation to owners is listed separately from employee pay on the application, with instruction that compensation to owners be capped at $15,385 or the eight-week equivalent of their applicable compensation in 2019, whichever is lower.
– A full-time employee (FTE) is defined as 40 hours, not 30 hours, as defined by the Affordable Care Act (ACA), which was the method previously thought to be the standard to use. The application does provide a simplified method to count any employee under 40 hours as 0.5 regardless of actual hours worked. Safe harbor applies as long as the person’s FTE level is restored by June 30 (legislators are looking to extend this date) to the same level that existed on February 15, 2020.
– Business rent or lease payments extend to lease agreements for real or personal property.
– The salary and hourly wage reduction applies only to employees whose salary or hourly wages were reduced more than 25% during the covered or alternate covered period compared to the period January 1, 2020 through March 31, 2020.
– The FTE reduction exception applies and does not reduce the borrower’s loan forgiveness for any positions for which the borrower made a good faith, written offer to rehire the employee, who then rejected the offer, or for any employees who were fired for cause, voluntarily resigned, or voluntarily requested (in writing) and received a reduction in their hours.
– Documentation that the borrower must submit to its lender along with its loan forgiveness application include:
– Bank account statements
– Tax forms
– Receipts
– Average FTE counts
– Documents verifying non-payroll expenses such as mortgage statements, lease agreements, and invoices
If you have any questions about SBA Form 3508 or other elements of the PPP, please contact your CPA. We will continue to update you on movements within the SBA and how they might affect your financial future. In the meantime, we wish you well in these unprecedented times.
Cody is a graduate of Shippensburg University with bachelor’s degrees in both Accounting and Finance. He obtained his CPA license in 2016.