by Joel Shabsin, CPA
On Saturday, May 16th, the SBA issued the Paycheck Protection Program Loan Forgiveness Application and clarified many of the questions we were getting from our clients. The full application which runs 11 pages including definitions, instructions and worksheets can be downloaded from the SBA website, WWW.SBA.gov. It’s hard to find so just follow the following links under funding programs on their main page.
- Click on Coronavirus Relief Options
- Scroll down and click on the Payroll protection program
- Click on loan details and forgiveness
- Scroll down and click on download the Paycheck Protection Forgiveness Loan forgiveness instructions and application
The application defines the covered period as the 8 week (56 day) from the date the loan proceeds are received, but it sets up an “alternative payroll covered period” which allows the borrower with a biweekly or more frequent pay period to calculate eligible payroll costs using the 56 day period that begins on the first day of their first pay period following the loan disbursement date. For example assume the loan was received on April 20. Under the covered period, the borrower would count April 20th as the first day of the 8 week period and the period would end on June 14th. Under the Alternative payroll period assuming the first day of the first payroll period after April 20th was April 26, the last day of the covered period would be June 20th. This allows the borrower with pay periods other than weekly periods to include 8 weeks of pay in the calculation. Employer’s who pay more than bi weekly should adjust their pay periods to every two weeks so they can qualify to use the alternative payroll covered period.
The other non payroll costs such as rent, utilities and interest do not have an alternative covered period and the 8 weeks for these costs begin on the date the loan proceeds are received. However the application states that these expenses can be handled on an accrual basis as long as they are incurred during the covered period and paid before the next regular billing date, even if the billing date is after the covered period. It also states that eligible non payroll costs cannot exceed 25% of the total forgiveness amount. For example, assume that the loan amount was $50,000 and payroll costs were $35,000 during the covered period. Since payroll costs were not 75% of the loan amount, not all of the loan would be forgivable and only 33 and 1/3% of payroll costs (25%/75%) can be used for rent, utilities and interest. So 1/3 of $35,000 is $11,666 making the loan forgiveness $46,666. 25% of $46,666 is $11,666. If payroll costs during the covered period were only $25,000 only $8333 could be used for loan forgiveness making total forgiveness only $33,333 for the $50,000 loan
Like most government created forms the application is complex and consists of 3 calculation sections:
- Worksheet A to calculate cash compensation, Average FTE and the salary/hourly wage reduction
- Schedule A which takes information from the Worksheet and adds in non-cash compensation payroll costs for health insurance, retirement plans and state and local employer payments assessed on payroll to determine total payroll costs. It also handles the full time equivalency reduction calculation if any.
- The loan application itself which takes the payroll costs from Schedule A and adds in the interest, rent and utility payments allowed, and calculates the forgiveness amounts. It also includes demographic data and questions about employee counts, EIDL advance amounts, pay periods, covered period dates and other loan information.
It also has a signature page that includes 7 separate representations and certifications that must be initialed and signed by an authorized representative of the borrower.
Included with the application are detailed instructions similar to instructions you would expect to see for income tax forms. Part of the instructions include the documentation required for loan forgiveness.
Payroll: Bank account statements or 3rd party payroll service provider reports for the periods that overlap with the covered period along with IRS form 941 or its equivalent and state quarterly unemployment insurance tax filings that cover the same period.
Non cash payroll: Payment receipts, cancelled checks or account statements documenting employer contributions to employee health insurance and retirement plans.
Non payroll: Documentation verifying the existence of the obligations prior to February 15, 2020 and eligible payments during the 8 week covered period.
- Business mortgage interest payments: Copy of lender amortization schedules and receipts or cancelled checks verifying eligible payments during the covered period or lender account statements from February, 2020 to one month after the covered period.
- Business rent or lease payments: Copy of current lease agreement and receipts or cancelled checks verifying eligible payments from the covered period or lessor account statements from February, 2020 to one month after the covered period ends.
- Business utility payments: Copies of invoices from February 2020 and those paid during the covered period and receipts, cancelled checks or account statements verifying those eligible payments.
All documents related to the PPP loan must be kept for 6 years after the loan is forgiven or repaid in full.
Make sure your clients who receive the PPP loan understand the documentation that will be required to get the loan forgiven. Also make sure they know they have to apply for forgiveness using the SBA’s application and be ready to assist them in the application process. Remember the lenders have 60 days after receipt of the application to make a decision on the forgiveness.
Finally, as an added value to your clients, you are in a position to review what they are currently doing and assist them so they can obtain the maximum forgiveness allowed, for example, making sure they understand the Safe harbor exemption for the FTE reduction in the forgiveness calculations or monitoring their payroll levels to insure that they meet the 75% level for forgiveness without reduction. These can be billable hours along with assistance to complete the Application for Payroll Protection Program Loan Forgiveness.
Caution: This information is for tax professionals only. It is not intended as specific advice for taxpayers.