On Friday May 15th, the Small Business Administration (SBA) issued the Paycheck Protection Program (PPP) Loan Forgiveness Application. The accompanying instructions provide details on calculating forgivable amounts under the PPP program.
A key option included in the instructions and form is the “Alternative Payroll Covered Period.” Employers are presently expected to spend 75% of PPP funds during the 8-week window that begins on the day loan funds are disbursed (a date that was almost completely outside of the employer’s control). Depending on how the employer’s normal pay schedule happens to align with the date funding is received, they may face challenges meeting the strict spending requirements, particularly if they laid off workers. Under the alternative method, an employer with a biweekly (or more frequent) pay schedule, could elect to begin the 8-week period at the beginning of the first pay period after their loan is disbursed. This may provide more time to recall laid off workers and restore schedules that had been reduced due to the pandemic. It should also reduce accounting challenges associated with pay periods that may be split if the 8-week period begins on an arbitrary date.
While the instructions do not provide the comprehensive guidance many businesses have sought, there are other important clarifications and details, including:
- FTE reduction calculations are clearly separate from the 75% payroll cost requirement, so even if an employer spent 75% of funds on otherwise eligible payroll costs, forgiveness can still be reduced because of headcount reductions. This would appear to prevent an employer from making up for headcount reductions by simply paying the remaining workers more.
- Eligible non-payroll costs 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 that date is after the covered period. This may be helpful where billing is delayed (such as certain utilities.)
- The definition of payroll expenses in the Schedule A instructions would seem to exclude health insurance costs for self-employed individuals (such as members of an LLC) as it references “employee health insurance.”
- Compensation to owners (including the self-employed) are subject to a strict cap of $15,385 (or the eight-week equivalent of 2019 compensation, whichever is less), so accelerating payroll during the covered period would not allow for more compensation to an owner.
In recent weeks we’ve spoken to a variety of executives who face challenges in utilizing PPP funds. In some cases, the business experienced headcount reductions before the pandemic and the loan amount simply exceeds current payrolls, in other scenarios, businesses do not wish to “waste” funds bringing back workers when there’s little for them to do and the business would prefer to cover other costs, such as rent. At present, other than returning excess funds, the only real option is allowing more of the loan to remain a loan.
Strictly speaking, the 75% requirement was not part of the CARES Act, but a regulatory action by the Department of the Treasury. Since payroll was the basis on which loan amounts were calculated, Treasury determined that most of the money should go towards payroll. Despite repeated calls from businesses, media and lawmakers, Treasury has thus far resisted a regulatory change. On the legislative front, a bipartisan bill has been introduced in the Senate, the “Deadline Extension Adjustment for Loans” or DEAL Act, which would extend the forgiveness period from 8 to 16 weeks, allowing businesses to stretch the funding to better meet their particular needs. The bill has been referred to committee and it’s unclear when or if it will be voted on by the full Senate. Although either change would be welcome, businesses who delay bringing back employees in hope of a regulatory or legislative fix, may run out of time to meet existing requirements if they remain unchanged.
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