Navigating the PPP Loan Forgiveness Application

Update: On June 17, the SBA released a revised PPP Loan Forgiveness Application, incorporating changes to the program made by the PPP Flexibility Act of 2020. SBA also published a new EZ version of the application for self-employed borrowers, or those who didn't reduce employee wages by more than 25%. Click here to view the EZ Forgiveness Application and here to view the Full Forgiveness Application.

If you've looked at the PPP Loan Forgiveness Application that was released on May 15th, you're probably wondering how in the world am I going to navigate this document and what about the stuff in here that I just don't understand? We are going to explore a couple of the more confusing concepts from the Application, provide guidance where we can, and let you know where we feel additional guidance is still necessary.

Full-Time Equivalency

One of the areas that has caused the greatest difficulty relates to the calculation of full-time equivalency (FTE). FTE aims to show the number of employees a company has, or would have, assuming everyone is working a full-time schedule. The basic FTE calculation for each employee is determined like this: take the average number of hours paid to an employee per week, divide that number by 40, and round to the nearest tenth. An example would be:

Employee A averages 36 hours per week divided by 40 hours = 0.9 FTE

Employee B averages 12 hours per week divided by 40 hours = 0.3 FTE

Employee C averages 27 hours per week divided by 40 hours = 0.675 = 0.7 FTE

Total FTE for this company with three employees is the sum of all employees, or 1.9 FTE.

This type of calculation is necessary for a couple of different time periods, as outlined throughout the Application, but it is calculated the same regardless of the time period. It is important to note that no individual's FTE can exceed 1.0, and an FTE other than 1.0 does not necessarily mean that your loan forgiveness will be reduced. A comparison must be done between a base period and the covered period (the timeframe during which you expend the PPP loan) to determine if the FTE decreased. If your FTE decreases, your loan forgiveness might have to be reduced.

Note that the Application also allows for a simplified computation whereby anyone working 40 hours or more automatically equals 1.0 FTE while everyone under 40 hours equals 0.5 FTE. What this option lacks in precision it makes up in computational ease. We would advise against using this method if many of your employees worked 40 hours or more previously and have been reduced to sub-40-hour weeks during the covered period. If most of your employees previously worked fewer than 40 hours and continue with a similar schedule, then this would be an easy way to run this calculation as well as to ensure that minimal or no reduction in your loan forgiveness is required.

Payroll Periods

In an effort to simplify the forgiveness calculation process for payroll, the Application allows the borrower to select one of two different payroll periods: the standard Covered Period, where you count eight weeks (56 days) starting on the day the PPP loan was deposited into your account OR an Alternative Payroll Covered Period, which would begin on the first day of the first payroll cycle following the date your loan was deposited. Thus, if you receive the loan on a Wednesday but your next payroll cycle begins on the following Monday, you can elect to begin counting the eight weeks from that following Monday. It is very important to note that you can only choose this Alternative Payroll Covered Period if you have a bi-weekly or more frequent (weekly, for instance) payroll cycle. If you pay monthly or semi-monthly you must stick with the standard Covered Period beginning on the date the loan was deposited. Some good news is that payroll costs incurred but not paid during either eight-week window are still eligible for forgiveness if paid on or before the next regular payroll date. You can count payroll costs that were both paid and incurred only once though.

Payroll/Non Payroll Costs

A special allowance is also made for eligible nonpayroll costs. 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. Note that there is no Alternative period for eligible nonpayroll costs - the clock starts on the day your loan is deposited into the bank. Costs that are both paid and incurred can only be counted once.

As a reminder, at least 75% of the forgiven amount must be spent on payroll costs, while no more than 25% can be spent on the eligible nonpayroll expenses. The maximum that is eligible for forgiveness is the total PPP loan you received. An example based on the explanation from p. 2 of the Application would go like this:

If you received a loan for $100,000 but only spent $55,000 on payroll costs, you would divide $55,000 by 0.75, making your maximum forgivable about $73,333. Thus, only $18,333 of eligible nonpayroll costs could be forgiven, and the remaining $26,667 would be a 1% loan over two years.

What Could Be Clearer

Here are several additional items we believe remain unclear or would benefit from additional guidance from the SBA:

1. The language of the Application leaves open the possibility that certain expenses incurred before but paid during the Covered Period can be counted for forgiveness. If you hadn't been able to make payroll in March so you paid March and April together after receiving the PPP loan, can all of this be forgiven? The same possibility presents itself if you had gotten behind on your rent but paid this extra, previous month's rent with funds from the loan. These scenarios seem to run counter to the spirit of the law, but the language of the Application leaves open these possibilities.
2. Along with the AICPA, we acknowledge that small businesses would benefit from being able to choose their eight-week forgiveness window. Additionally, an extension of the eight weeks to ten or 12 would also be advantageous to many businesses.
3. What about retirement plan contributions by an employer? It is still unclear how much of an employer's retirement plan contributions are eligible for forgiveness. Is the max simply 8/52 of the 2020 amount, even though that amount can't be known yet? What about all or part of the 2019 amount if paid during the Covered Period? Additional guidance is needed here.
4. It appears from the Application that independent contractors, proprietors, and partners in a partnership will be precluded from receiving forgiveness for the cost of their own health insurance and retirement plan contributions. If the SBA does not provide clarity or rectify this, these individuals would face a serious detriment compared to those working in incorporated enterprises.

Peter N. Riefstahl is a supervisor at Louis T. Roth & Co., PLLC, a Louisville, KY-based Certified Public Accounting firm that specializes in tax planning, accounting, and business consulting services.