sba releases paycheck protection program loan forgiveness … · program loan forgiveness...
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SBA Releases Paycheck Protection
Program Loan Forgiveness Application:
A Deep Dive Tony NittiSenior Contributor
On Friday, May 15th, the Small Business Administration (SBA) released the
application borrowers of a Paycheck Protection Program (PPP) loan must use
to determine the amount of the loan that may be “forgiven” by their lender.
While the application included instruction, the SBA failed to provide two
additional items that would have greatly benefited borrowers:
1. Narrative-based guidance, similar to previously issued interim final rules,
which ideally would clear up much of the confusion surrounding critical
definitions, from what items are included in payroll costs to the treatment of
guaranteed payments or self-rental payments.
2. Detailed blueprints for constructing a fully functioning time machine, so
nearly two million small business owners could magically transport back to a
time when this forgiveness guidance would actually be useful.
Lest you think that second item is a tad harsh, consider this: The application
confirms (with one small exception) that only those expenses paid within the 8-
week period after receiving the loan are eligible for forgiveness. Many
borrowers, however, are already half-way through that 8-week period, meaning
even if this most recent guidance were complete – and it is far from it – it would
still be entirely too late.
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Nevertheless, we’ll play the hand we’re dealt, and if this is what the application
for forgiveness is going to look like, we may as well figure out how to fill it out.
After all, we can always come back and fill in the blanks as more guidance
inevitably trickles out from the SBA or Treasury.
And you know what? Because I struggle with pattern recognition, I’m going to
give the SBA the benefit of the doubt. There HAS to be more coming that this.
As a result, I’m not going to devote space in this article to highlighting all of the
things we still DON’T know; rather, I’ll focus on what the application tells us,
and trust that I’ll soon be updating this article for the bevy of guidance still to
come.
So let’s get to it, and because this application will be used millions of times by
borrowers both big and small, we’re going to do this in painstaking detail; as in,
line-by-line detail.
But first, let’s remember what this is all about….
PPP Loans, In General
On March 27, 2020, President Trump signed into law the Coronavirus Aid,
Relief, and Economic Securities (CARES) Act, a $2.3 trillion relief package
designed to help individuals and businesses weather the economic damage
caused by the COVID-19 pandemic.
The headliner of the CARES Act was the creation of the PPP, a new loan
program under Section 7(a) of the Small Business Act designed to put nearly
$600 billion into the hands of small businesses for use in paying employee
wages and other critical expenses over the coming weeks and months.
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The reason over two million businesses rushed to the bank to grab a PPP loan,
however, was not because they were eager to saddle their struggling enterprises
with more debt. Rather, the idea is that these PPP loans are loans in name only;
once a borrower receives the funds, the amount spent over the next 8 weeks on
payroll, mortgage interest, rent and utilities is eligible to be completely forgiven.
Even better, while a cancellation of a borrower’s debt typically creates taxable
income under Section 61(a)(11) of the Internal Revenue Code, the CARES Act
provided that forgiveness of a PPP loan is completely tax free. Unfortunately,
the IRS took the shine off that “tax-free forgiveness” by recently issuing
guidance that applies a decades-old tax principle to PPP loans; a principle which
provides that expenses “allocable to tax-exempt income” are not deductible by
the payor. As a result, any expenses paid by a borrower – to the extent those
amounts are ultimately forgiven by the lender on a tax-free basis – will not be
deductible on the borrower’s 2020 tax return. While this rule reaches a logical
conclusion by preventing a borrower from effectively “double dipping” by
receiving both a tax deduction and tax-free forgiveness related to payment of
the same expenses — it served as a sucker punch to many borrowers, who had
hoped for the best of both worlds based on their reading of the CARES Act. It’s
possible Congress may pass a narrow amendment to Section 265 of the Code to
specifically permit a deduction and double dip, but for now, no deduction is
allowed.
Applying for Loan Forgiveness
On Friday, the SBA released 11 pages comprising the application for forgiveness
and the relevant instructions. The application has two critical supporting
schedules: Schedule A and the worksheet to Schedule A.
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We will begin, however, with the application itself; specifically, the
informational section that makes up the top half of the page. All instructions
will be from the perspective of the borrower.
Top of Application Instructions
The application begins by asking you to provide your name, address and EIN,
as well as SBA PPP loan number and lender PPP loan number. If you struggle
with this part, it does not bode well for what’s to follow.
Next, you’re asked to provide a few items that may seem innocuous, but that
may factor into the amount of your forgiveness:
PPP Loan Amount: This will serve as the maximum amount of loan eligible
for forgiveness, as the application seems to stick to the CARES Act – and deviate
from a previous Interim Final Rule – by limiting forgiveness to the principal of
the loan, rather than any accrued but unpaid interest.
PPP Loan Disbursement Date: The date you receive the funds
will generally signal the start of your 8-week period to accumulate expenses
eligible for forgiveness, but as we’ll see, there is 1) some flexibility in choosing
the 8-week period specific to payroll costs, and 2) certain situations where
expenses paid AFTER the expiration of the 8-week period will be eligible for
forgiveness.
Employees at Time of Loan Application: While this doesn’t appear to
have any specific application to determining forgiveness, we will see that since
you’re going to have to provide your number of employees for approximately
372 other periods, it can’t hurt to provide that detail for the date of the loan
application as well.
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Employees at Time of Forgiveness Application: Same response as
immediately above.
Economic Injury Disaster Loan Advance Amount: These amounts
were generally capped at $10,000, though later borrowers were often limited to
$1,000 per employee, not to exceed a total of $10,000. As we’ll see later, when
we arrive at Line 11 of the application – the maximum forgiveness amount – the
SBA will reduce the amount forgiven by any EIDL advance that was received.
Economic Injury Disaster Loan Application Number: Any EIDL taken
out after January 31, 2020, and used to cover payroll, was likely refinanced into
your PPP loan. As a result, the SBA is looking to gather than information here.
Payroll Schedule: You must select the box that corresponds with your
regular payroll schedule. This will help the SBA determine when payroll costs
are paid or incurred and thus eligible for forgiveness. It will also drive the
computation of full-time equivalent employees for several key periods, which
will in turn be used to determine if a reduction in the amount eligible for
forgiveness is required.
Covered Period: This is the first critical piece of information. The “covered
period” is the 8-week period generally beginning on the date you received the
loan disbursement. Only the costs paid OR incurred within the 8-week period
are generally eligible for forgiveness. Some latitude is permitted, however,
whereby certain costs are eligible for forgiveness even though they were
incurred BEFORE the covered period but paid DURING the period, while other
costs may be eligble for forgiveness even though they were incurred DURING
the covered period but paid AFTER the period.
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Specific rules govern the “paid and incurred” treatment of payroll costs. Payroll
costs are paid on the day the paychecks are distributed or the borrower
originates an ACH credit transaction. Thus, you could presumably receive PPP
loans on April 26 and immediately pay – as part of your regular payroll process
– wages that had been earned by the employees for the previous two weeks, and
include the amounts in the forgiveness calculation because the amounts had
been PAID within the covered period. What is not clear, however, is how far in
arrears you may pay wages with PPP funds and continue to count those wages
towards forgiveness. If you had not yet paid your employees for March wages
but did so immediately after receiving PPP funds in April, are those amounts
eligible for forgiveness? At the moment, nothing appears to prevent such a
result.
The application instructions further provide that payroll costs are incurred on
the day they are earned, before providing additional flexibility by allowing the
payroll costs incurred for your last pay period of the 8-week period to be eligible
for forgiveness as long as they are paid no later than the next regular payroll
date.
For non-payroll costs such as mortgage interest, rent and utilities, to qualify for
forgiveness, these expenses must either be: 1) paid DURING the 8-week covered
period, or 2) incurred during the 8-week period, and paid by its next regular
due date, even if that due date is outside the 8-week period.
Once again, it would appear that by allowing all payments made DURING the
period to be eligible for forgiveness, borrowers are permitted to pay rent,
interest, or utilities related to periods prior to the 8-week period and have those
expenses forgiven.
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Alternative Payroll Covered Period, if applicable: The instructions to
the application allow for as-yet-unseen flexibility in choosing your 8-week
covered period specific to payroll costs. You are permitted to choose an
“alternative payroll covered period,” which is the 8-week (56 day) period
beginning on the first day of the first pay period following the disbursement
date, allowing a business to neatly align its covered period with the beginning
of a pay period. Thus, if you received your PPP loan on April 20, 2020, and the
first day of your next pay period is April 26, 2020, you may elect to count the
payroll costs — and only the payroll costs — for the 8-week period beginning
April 26, 2020, rather than the 8-week period beginning April 20, 2020.
If Borrower (together with affiliates, if applicable) received PPP
loans in excess of $2 million, check the box: Uh…if your loan was less
than $2 million, you’re going to want to remember to NOT. CHECK. THIS.
BOX. The SBA recently announced what is effectively – and perhaps literally —
a get-out-of-jail free card by providing a safe harbor for those borrowers who
received less than $2 million in PPP funds. These borrowers will be treated as
having made the required certification that the loan was necessary in good faith,
and thus won’t be subject to the same additional scrutiny from the SBA that
borrowers of loan amounts in excess of $2 million will face.
With the informational items out of the way, it’s time to turn our attention to
the actual calculation, beginning with Line 1 of the application:
Line 1: Payroll Costs (Enter the amount from PPP Schedule A, Line
10).
As you’ll see, Line 1 directs us to Line 10 of Schedule A, which we can’t compute
until we’ve determined items on the Worksheet for Schedule A. As a result,
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we’re going to start on the ground floor, with the Worksheet for Schedule A, and
then build our way back up to the application.
Worksheet to Schedule A
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The Worksheet to Schedule A looks like so:
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worksheet
The worksheet allows us to perform four critical computations:
1. Most importantly, it is here where we will compute eligible
compensation for each employee,
2. We will make sure to cap the compensation of employees at
$100,000 on an annualized basis,
3. In addition, we will determine the number of full-time equivalent
employees (FTEs) for the covered period (or alternative payroll
period, if elected), and
4. We will use the FTEs determined in 3 above to determine if a
reduction in the amount eligible for forgiveness is required because
FTEs were reduced during the covered period.
Let’s get started. We begin by identifying each employee, but we do NOT
include:
• Independent contractors,
• Owner-employees,
• Self-employed individuals, or
• Partners.
Payments to independent contractors are not eligible for forgiveness. For self-
employed individuals, until told otherwise, previously issued interim final rules
provide that forgiveness related to payroll costs is purely mechanical, and is
based on 8/52 of Line 31 of the individual’s 2019 Schedule C, rather than any
amounts paid or incurred in 2020. As for payments to owner-employees and
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partners, we’ll see these amounts are pulled – with no real additional guidance
– into Schedule A and included as costs eligible for forgiveness.
Employees are segregated into two tables: Table 1 is for those with annualized
compensation for ALL pay periods in 2019 of less than $100,000. The reason
these employees are isolated is because as we’ll see, if their salaries are reduced
during the covered period, a reduction in the amount eligible for forgiveness
may be required. What is not clear is how strict the “any pay period” limits are
applied: what if an employer was paid a salary of $80,000 in 2019, but received
a bonus of $5,000 during one two-week pay period. Isn’t the annualized salary
for that two week period in excess of $100,000, even though the employee only
received total compensation of $85,000?
Table 2 is reserved for those taxpayers with annual compensation in excess of
$100,000 during 2019. These employees are isolated because the amount of
compensation eligible for forgiveness for any one employee cannot exceed
$100,000 on an annualized basis. Thus, for the 8-week period, the total
compensation costs CANNOT exceed $15,385.
Now that we understand the difference between the tables, let’s fill them out:
Table 1
Cash Compensation
The CARES Act provides that the amounts spent on “payroll costs” during the
8-week covered period are eligible for forgiveness. Including in payroll costs are
certain compensation amounts; specifically, the sum of payments of any
compensation with respect to employees that is a:
• Salary, wage, commission, or similar compensation;
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• Payment of cash tip or equivalent;
• Payment for vacation, parental, family, medical, or sick leave; or
• Allowance for dismissal or separation.
Compensation does not include, however:
• The compensation of an individual employee in excess of an annual
salary of $100,000, as prorated for the covered period. As a result, in no
situation should you enter more than $15,384 in this column for either
Table 1 or Table 2.
• Any compensation of an employee whose principal place of residence is
outside of the United States;
• Qualified sick leave wages for which a credit is allowed under section 7001
of the Families First Coronavirus Response Act (Public Law 116–127); or
• Qualified family leave wages for which a credit is allowed under section
7003 of the Families First Coronavirus Response Act (Public Law 116–
127).
Average FTE:
To determine the average full-time equivalent employees (FTEs) for the 8-week
covered period (or the alternative payroll covered period, if elected), for each
qualifying employee, determine the average number of hours worked per week
and divide by 40, before rounding to the nearest tenth. The maximum amount
for each employee is 1.0. Alternatively, you can skip the math and use 1.0 for
every employee who worked 40 hours per week and 0.5 for every employee who
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didn’t meet that standard. Either way you get there, you will ultimately arrive
at the average FTE throughout the relevant covered period.
Example. X Co. borrowed a $100,000 PPP loan on April 10, 2020. X Co.
incurred $100,000 of costs eligible for forgiveness over the next 8 weeks.
For the 8-week period beginning April 20, X Co. had the following employees:
• A, who averaged 45 hours per week during the period,
• B, who averaged 40 hours per week during the period,
• C, who averaged 28 hours per week, and
• D and E, who averaged 20 hours per week.
For the 8-week covered period, X Co. had 3.7 FTEs:
• A: 45/40 capped at 1.0
• B: 40/40 = 1.0
• C: 28/40 = .7
• D &E: 20/40 = .5 each
If X Co. chose instead to use the simplified method, it would have 3.5 FTEs:
• A: 45/40 capped at 1.0
• B: 40/40 = 1.0
• C: 28/40 = .5
• D &E: 20/40 = .5 each
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Salary/Hourly Wage Reduction
Here’s where things go off the rails a bit. The total amount of loan forgiveness
will eventually be reduced by the amount of any reduction in total ANNUAL
salary or AVERAGE wages of any employee during the covered 8-week period
who did not receive, during any single pay period during 2019, wages or salary
at an annualized rate of pay of more than $100,000. The reduction in
forgiveness amount is required if the reduction in wages over the 8-week period
is in excess of 25% of the total salary or wages of the employee during the period
from January 1, 2020 through March 31, 2020. Again, this is why employees
with annualized salary of less than $100,000 are isolated in Table 1; by
definition, only these employees can experience a reduction in salary during the
covered period that necessitates a corresponding reduction in the amount
eligible for forgiveness.
To determine the amount of reduction required, you must go through the
following steps for EACH employee:
• Step 1: Determine the average annual salary or hourly wage for each
employee during the covered period (or alternative payroll period, if
elected).
• Step 2: Determine the average annual salary or hourly wage for each
employee during the period from January 1, 2020, through March 31,
2020.
• Step 3: Divide Step 1 by Step 2.
• Step 4: If Step 3 is greater than 75%, no reduction is required. Do not fill
out the column in Table 1 for this employee.
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• Step 5: If Step 3 is LESS than 75%, a reduction is required, but as we’ll see
shortly, the reduction may be reinstated. The reduction is tentatively
determined by multiplying the amount determined in Step 2 by 75%, and
then subtracting from that result the amount from Step 1. For a salaried
employee, take this result and multiply it by 8. Then divide the amount
by 52. This is the amount of the required reduction.
• For an hourly worker, the amount of the reduction is determined by first
multiplying the average number of hours worked per week from January
1, 2020, through March 31, 2020, by the amount determined by
subtracting the amount determined in Step 1 from 75% of the amount
determined in Step 2. The result is then multiplied by 8 to arrive at the
total reduction in forgiveness.
You’re lost, aren’t you? Let’s do an example.
Example. Employee A was paid an annual salary of less than $100,000 for
2019. A was paid $8,000 during the 8-week covered period. A was paid
$20,000 for the period January 1, 2020, through March 31, 2020.
• Step 1: A’s average annual salary was $52,000 for the 8-week covered
period ($8,000/8*52).
• Step 2: A’s average annual salary was $80,000 for the period January
1, 2020, through March 31, 2020 ($20,000 *4).
• Step 3: $52,000/$80,000 = 65%.
• Step 4: n/a
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• Step 5: Before application of the safe harbor, A’s employer would reduce
forgiveness attributable to A by the following amount: $80,000 * 75% =
$60,000. $60,000 - $52,000 = $8,000. $8,000/52*8 = $1,230.
The reduction is not required, however, if a safe harbor is met. Whether the safe
harbor is met is determined via the following steps:
• Step 1: Determine the employee’s annual salary or hourly wage as of
February 15, 2020.
• Step 2: Determine the average annual salary or hourly wage for the period
from February 15, 2020 through April 26, 2020.
• Step 3: If Step 2 is greater than Step 1, the safe harbor does not apply.
Compute the reduction in forgiveness as determined in Step 5, above. If
Step 2 is less than Step 1, proceed to Step 4.
• Step 4: Determine the average annual salary or hourly wage for the
employee as of June 30, 2020. If that amount is equal to or greater than
Step 1, the safe harbor has been met. In other words, the SBA will ignore
a reduction in salary during the covered period relative to the 1st quarter
of 2020, but ONLY IF that salary is restored to what it was on February
15, 2020, by June 30, 2020.
Example. Continuing the previous example, assume that on February 15,
2020, A was being paid an annual salary of $75,000. After the arrival of
COVID-19, however, A’s average salary for the period February 15, 2020
through April 26, 2020, was reduced to $55,000. It was further reduced for
much of May, which is what resulted in A being paid only $8,000 for the
covered period. By June 30, 2020, however, A’s annual salary was increased
to $75,000. Even though A’s salary has returned only to the amount he was
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paid on February 15 ($75,000) and not the amount he was paid throughout
the first quarter ($80,000), the safe harbor is met and no reduction is
required.
If the safe harbor had NOT been met, A’s employer would enter $1,230 in the
“Salary/Hourly Wage Reduction” column in Table 1.
Table 2
Nothing new in Table 2, and you’ll notice that there is no column for
“Salary/Hourly Wage Reduction,” because again, by definition, the rules don’t
apply to any employee who earned more than $100,000 in 2019, and those
employees aren’t included in Table 2.
FTE Reduction Safe Harbor
The amount of loan forgiveness may ALSO be reduced if the borrower reduces
headcount during the covered period. Just as we saw with the reduction
resulting from reduced salary, however, the reduction may be ignored if a safe
harbor is satisfied.
Your forgiveness is reduced if your average number of full-time equivalent
employees (FTEs) during the covered period is less than the average number of
FTEs for any of the following periods, at your election:
• The period beginning on February 15, 2019 and ending on June 30, 2019;
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• The period beginning on January 1, 2020 and ending on February 29,
2020, or
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• For a seasonal employer, as determined by the SBA, either of the two
previous periods or any 12-week period between May 1, 2019 and
September 15, 2019.
As you’ll remember, we determined FTEs above in the instructions to Table 1.
But just to reinforce the concept, let’s build out this example again.
Example. X Co. borrowed a $100,000 PPP loan on April 10, 2020. X Co.
incurred $100,000 of costs eligible for forgiveness over the next 8 weeks.
For the 8-week period beginning April 20, 2020, X Co. had the following
employees:
• A, who averaged 45 hours per week during the period,
• B, who averaged 40 hours per week during the period,
• C, who averaged 28 hours per week, and
• D and E, who averaged 20 hours per week.
For the 8-week covered period, X Co. had 3.7 FTEs:
• A: 45/40 capped at 1.0
• B: 40/40 = 1.0
• C: 28/40 = .7
• D &E: 20/40 = .5 each
Using the simplified method, X Co. would have only 3.5 FTEs, so doing the
math benefits X Co. by resulting in a larger number.
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Assume further that for the periods February 15, 2019 through June 30, 2019,
and January 1, 2020 through February 29, 2020, X Co. had the following
employees:
• A, who averaged 45 hours per week during the period,
• B, who averaged 40 hours per week during the period,
• C, who averaged 40 hours per week,
• D and E, who averaged 28 hours per week, and
• F and G, who averaged 40 hours per week.
For those 8-week periods, X Co. had 6.4 FTEs:
• A: 45/40 capped at 1.0
• B: 40/40 = 1.0
• C: 40/40 = 1.0
• D &E: 28/40 = .7 each
• F & G: 40/40 = 1 each
Thus, before considering any safe harbor or reinstatement, X Co.’s amount
eligible for forgiveness of $100,000 must be reduced by multiplying $100,000
by 3.7/6.4. Thus, the forgiveness is tentatively capped at $57,813.
A borrower may ignore the required reduction, however, if a safe harbor is met.
To satisfy the safe harbor, the borrower must first use the methodology
described above to determine FTEs for two additional periods:
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1. The period from February 15, 2020, through April 26, 2020, and
2. For the pay period that includes February 15, 2020,
If the average FTEs for the first period is less than the FTEs for the second
period, the borrower must then compare the average FTEs for the second period
to the total FTEs as of June 30, 2020. If the FTEs on June 30, 2020 are greater
than the FTEs on February 15, 2020, the safe harbor is met and no reduction is
required.
Example. Continuing the example above, assume X Co. had 4.2 FTEs for the
period February 15, 2020, through April 26, 2020, and 4.5 FTEs on February
15, 2020. X Co. then reduced the hours of some of their employees and
terminated others, resulting in only 3.7 FTEs for the covered period. Because
X Co. had more employees on February 15, 2020, then during the period
February 15, 2020, through April 26, 2020, X Co. must then compare the
number of FTEs on February 15, 2020 – 4.5 – to the number on June 30, 2020.
Provided the number of FTEs on June 30, 2020 is equal to or greater than 4.5,
no reduction in forgiveness is required.
To make sense of this reduction/restoration computation, think of it like this:
the SBA will first determine if during the 8-week covered period, a business
employs fewer FTEs than it did during the elected reference period: either from
2019 or earlier in 2020. If the answer is no, then the business employs MORE
people than in the look-back periods, so no reduction is required.
If, however, the number of FTEs has gone down relative to the look-back period
– which one would expect given the current unemployment numbers – the SBA
is going to reduce the forgiveness amount, presumably because the borrower
has not met the goals of the PPP of keeping employment at pre-COVID-19
numbers.
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But…if the borrower can, at the very least, return its number of FTEs at June
30, 2020 to the level it was prior to the COVID-19 pandemic beginning
(February 15, 2020), the forgiveness will NOT be reduced, even if the February
15th, 2020 numbers are less than they were in 2019 or the average of the first
two months of 2020.
There’s one final bailout as well. If an employer can show that it made a good-
faith, written offer to rehire an employee during the covered period but was
rejected by the employee, then that reduction in headcount will not result in a
reduction in forgiveness. The same is true if an employee was fired for cause,
voluntarily resigned, or voluntarily required and receive a reduction in hours.
Make sense? No, it does not. But that’s how it’s going to work.
With that, we have finished completing the Worksheet to Schedule A, and can
now turn our attention to Schedule A itself.
Schedule A
Schedule A looks like this:
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sch A
SBA
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Information from Schedule A is used to populate several lines on the
forgiveness application. Let’s take Schedule A line-by-line.
Line 1: Enter Cash Compensation (Box 1) from PPP Schedule A
Worksheet, Table 1: Self-explanatory. Take the total amounts you entered
on this column of Table 1, but only Table 1 (at this point).
Line 2: Enter Average FTE (Box 2) from PPP Schedule A Worksheet,
Table 2: Also self-explanatory. Drop in the total FTEs for the covered period
from Table 1.
Line 3: Enter Salary/Hourly Wage Reduction (Box 3) from PPP
Schedule A Worksheet, Table 1: You get the idea. Take the total from this
column in Table 1 and drop it onto Line 3.
Line 4: Enter Cash Compensation (Box 4) from PPP Schedule A
Worksheet, Table 2: Same concept plays out now for Table 2. Enter the total
cash compensation paid. And remember, it cannot exceed $15,384 for any one
employee.
Line 5: Enter Average FTE (Box 5) from PPP Schedule A Worksheet,
Table 2: Drop in the FTEs you computed in Table 2.
Lines 6 – 8: Non-Cash Compensation Payroll Costs During the
Covered Period or Alternative Payroll Covered Period
First, some background. In addition to cash compensation, “payroll costs”
include:
1. Payment required for the provisions of group health care benefits,
including insurance premiums;
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2. Payment of any retirement benefit; or
3. Payment of State or local tax assessed on the compensation of
employees.
Schedule A asks us to put the first item on Line 6, the second on Line 7, and the
third on Line 8. These amounts are in ADDITION TO the annualized
compensation cap of $100,000. Thus, an employee could have up to $15,384 of
compensation from Table 1 or 2 included on Schedule A, as well as amounts
allocable to that employee reflecting his or her share of health costs, retirement
benefits, or state and local taxes on Lines 6-8.
Line 9: Total amount paid to owner-employees/self-employed
individual/general partners: This line is going to create some confusion.
Presumably, these individuals are not included in Table 1 or 2 of Worksheet A
because health care and retirement costs attributable to the owners/general
partners are NOT forgivable, but the instructions to Schedule A do not make
that clear. Making matters more confusing, this line does not require that the
amounts be paid as “compensation,” thus, presumably, guaranteed payments
to partners would be included.
This line also adds something new to the equation: it states that the amount is
capped at $15,384 OR THE 8-WEEK EQUIVALENT OF THEIR APPLICABLE
COMPENSATION FOR 2019, whichever is lower. This would prevent an owner
from increasing their compensation during the covered period to maximize
forgiveness by limiting the amount included in the forgivable amount to 8/52
of the owner’s compensation for 2019.
Line 10: Payroll costs (add lines 1, 4, 6, 7, 8, and 9): Do as they say.
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Between lines 10 and 11, things get interesting again. It states that if you have
not reduced the number of employees or the average paid hours of your
employees between January 1, 2020 and the end of the covered period, to skip
the rest of Schedule A. The remainder of Schedule A, however, is designed to
compute the reduction in forgiveness caused by a reduction in headcount
during the covered period relative to one of several optional look-back periods,
a calculation we performed in detail above.
Here, the SBA appears to be providing a second, simple safe harbor, which holds
that even if FTEs have been reduced relative to the elected look-back period, no
reduction is required provided FTEs are the same at the end of the covered
period as they were on January 1, 2020. Presumably, this means that a business
could have the following FTEs and experience no reduction in forgiveness:
• Average for covered period: 6
• Average for February 15 – June 30, 2019: 8
• Average for January 1 – February 29, 2020: 8
• FTEs on January 1, 2020: 7
• FTEs on the last day of the covered period: 7
Because the FTEs at the end of the period returned to the same level as January
1, 2020, the reduction DURING the covered period is ignored. Why this rule is
necessary when we already have the rehiring-before-June 30 rule relative to
February 15th is beyond me, but we’ll take it.
Line 11: Average FTE during the Borrower’s chosen reference
period: Let’s assume we DON’T satisfy either the rule discussed immediately
above OR the safe harbor for rehires before June 30, 2020. In that case, we’re
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going to have to compute the reduction in forgiveness. As a result, the SBA
wants to know our FTEs for the relevant base period we chose. Pick your base
period, compute your FTEs, and provide the numbers here.
Line 12: Total Average FTE (add lines 2 and 5): Again, we’re doing this
to compute the reduction in forgiveness when headcount is cut and not
replaced. The formula is to divide the FTEs for the covered period by the
number in Line 11, and so on this line we enter the FTEs for the covered period.
Line 13: FTE Reduction Quotient: On this line, we simply divide Line 12
by Line 11 to arrive at the reduction quotient. If the safe harbor is met, this
amount should be 1.0, and no reduction is required.
Ok, now, were going to take much of what we did on Schedule A and move it to
the application. The application will require some new information as well,
however. Let’s take a look:
Application for Forgiveness
Here she is:
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Five thousand words ago, we covered the informational top half of the
application for forgiveness. Now we jump back into the application, picking up
on Line 1.
Line 1: Payroll Costs: This work has been done. Simply drop in the amount
from Schedule A, Line 10, which summarizes the compensation, health care
costs, retirement benefits, and state taxes for each eligible employee.
Line 2: Business Mortgage Interest Payments: As a reminder, in
addition to payroll costs, the CARES Act permits forgiveness for three other
classes of expenses paid during the covered period.
• Any payment of interest on any covered mortgage obligation (not
including any prepayment of or payment of principal on a covered
mortgage obligation). The term “covered mortgage obligation” means
any indebtedness or debt instrument incurred in the ordinary course of
business that is a liability of the borrower, is a mortgage on real or
personal property, and was incurred before February 15, 2020,
• Any payment on any covered rent obligation. The term “covered rent
obligation” means rent obligated under a leasing agreement in force
before February 15, 2020,
• Any covered utility payment. The term “covered utility payment” means
payment for a service for the distribution of electricity, gas, water,
transportation, telephone, or internet access for which service began
before February 15, 2020.
As we discussed in our “paid or incurred” section, it appears mortgage interest
owed in arrears can be paid during the covered period and be forgiven, and
mortgage interest incurred DURING the covered period but paid before or on
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the next scheduled due date will also be forgivable, even if that date is after the
end of the covered period.
Enter the amount of mortgage interest “paid or incurred” during the covered
period on Line 2.
Line 3: Business Rent or Lease Payments: Enter the amount of
business rent or lease payments paid or incurred during the covered period on
Line 3. The same rules used for mortgage interest expense apply in
determining whether the expenses are paid or incurred during the covered
period.
Line 4: Business Utility Payments: Enter the amount of utility payments
paid or incurred during the covered period on Line 3. The same rules used for
mortgage interest expense apply in determining whether the expenses are paid
or incurred during the covered period.
IMPORTANT: As we’ll see in Line 10, no more than 25% of the loan
forgiveness amount may be attributable to non-payroll costs reported on Lines
2, 3, and 4.
Example. X Co. borrowed $100,000 in PPP proceeds on April 10, 2020.
Over the next 8 weeks, X Co. spent $50,000 on payroll costs and $30,000 on
rent and utilities. X Co.’s loan forgiveness is limited to $66,667, $50,000 of
payroll costs and $16,667 of rent and utilities.
Line 5: Total Salary/Hourly Wage Reduction: Lines 1-4 compute the
TOTAL amount eligible for forgiveness. As we’ve learned, however, this
amount is reduced if salaries are cut (as determined in Table 1 of the
Worksheet to Schedule A) or FTEs are reduced (as determined at the bottom
of the worksheet to Schedule A). Here, any amount attributable to a reduction
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in salaries as reported on Table 1 are reported on Line 5, reducing the total
amount eligible for forgiveness.
Line 6: On this line, we simply net the reduction on Line 5 with the sum of
costs eligible for forgiveness on Lines 1-4 to arrive at the maximum amount
eligible to be forgiven.
Line 7: FTE Reduction Quotient: One Line 13 of Schedule A, when the
safe harbor for reduction in headcount was not satisfied, we divided our FTEs
for the covered period by the FTEs for the base period to arrive at the quotient
that must be multiplied by the maximum amount eligible for forgiveness to
determine the required reduction. That quotient from Line 13 is inserted onto
Line 7 of the application.
Line 8: Modified Total: In Lines 8-10, we will determine the forgiveness
amount. It is the LESSER of three amounts:
1. Line 8: The net amount from Line 6 (total costs less salary reduction
amount) multiplied by the quotient on Line 7 for headcount reduction,
2. Line 9: the principal balance of the loan, and
3. Line 10: The payroll costs (Line 1 of the application) divided by 75%. This
line ensures that no more than 25% of the total forgiveness is attributable to
non-payroll costs.
Line 9: PPP Loan Amount: Enter the PPP loan amount.
Line 10: Payroll Cost 75% Requirement: Here, divide the total payroll
costs from Line 1 by 75%.
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Line 11: Forgiveness Amount: We’ve done it! The lesser of Lines 8, 9, and
10 is your forgiveness amount.
If you’ve stuck with me this long, you’re exactly the type of glutton for
punishment who would like nothing more than to take EVERYTHING we just
did and work through a real-life example. Let’s do it.
CASE STUDY
During 2019, X Co. had 6 employees. F is the sole shareholder of X Co. The
total costs X Co. incurred for all payroll costs were as follows:
Total 2019 costs
NITTI
Thus, total payroll costs were $741,000. The total salaries of B and F are
capped at $100,000, however, resulting in total payroll costs of $621,000 for
purposes of determining X Co’s loan amount. In addition, X Co. paid rent and
utilities of $129,000, for total costs of $750,000.
• A, B, C, E and F work 40 hours a week. D works 20 hour a week.
• On March 15, 2020, X Co. let A go because of dwindling work caused by
the COVID-19 pandemic.
• On April 1, 2020, C’s salary was cut from $90,000 to $55,000.
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• On April 10, X Co. borrowed $129,375 ($621,000 in payroll
costs/12*2.5) in PPP loan proceeds. X Co. received the money on April
16, 2020, which corresponded nicely with the beginning of X Co.’s
twice-monthly pay period.
For the 8-week period beginning April 16, 2020, X Co. incurred the following
costs:
Costs incurred during covered period
NITTI
All of these costs were either paid within the 8-week period, or earned within
the period and paid within a few days of the end of the period on X Co.’s
regular payroll due date.
• On April 25, X Co. paid March rent and utilities of $11,000. They made
additional $11,000 payments for April, May and June, with the June
payment made on June 1st. Thus, total non-payroll costs were $44,000.
• June 11, 2020 arrives, and the 8 week period is over. On June 25th, X Co.
rehires A.
• At the beginning of July, X Co. is now ready to apply for forgiveness.
Let’s work through the steps:
X Co turns first to the application, and fills out the relevant information on the
top half of the form.
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Loan Amount: $129,375
Loan Disbursement Date: April 16, 2020
Employees at Time of Loan Application: 5
Employees at Time of Forgiveness Application: 6
EIDL Information: X Co. did not take out an EIDL, so these two sections
are inapplicable.
Payroll Schedule: Twice a month.
Covered Period: April 16 – June 11, 2020.
Now, we have to jump to the Worksheet for Schedule A, and start computing
compensation costs and possible reductions in the amounts eligible for
forgiveness.
Worksheet A
We start by completing Table 1:
Worksheet, Table 1
NITTI
A few things to note:
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• B and F are not included in Table 1 because they earned more than
$100,000 in 2019.
• Because C and D work only 20 hours a week, they are only .5 FTE each.
Most importantly, C had his salary cut from $90,000 to $55,000 on April 1,
2020. As a result, we have to work through the steps to see if forgiveness must
be reduced.
Step 1: Determine the average annual salary or hourly wage for each
employee during the covered period (or alternative payroll period, if
elected). C’s average salary during the period was $55,000.
Step 2: Determine the average annual salary or hourly wage for each
employee during the period from January 1, 2020, through March 31, 2020. C
was paid an annual salary of $90,000 from January 1 – March 31, 2020.
Step 3: Divide Step 1 by Step 2. The result is 61%.
Step 4: If Step 3 is greater than 75%, no reduction is required. Do not fill out
the column in Table 1 for this employee.
Step 5: If Step 3 is LESS than 75%, a reduction may be required. The
reduction is tentatively determined by multiplying the amount determined in
Step 2 by 75%, and then subtracting from that result the amount from Step 1.
This is $67,500 ($90,000 * 75%) - $55,000, or $12,500. We then divide
$12,500 by 52 and multiply it by 8, or $1,923. This is the amount of the
required reduction.
The reduction is not required, however, if a safe harbor is met. Whether the
safe harbor is met is determined via the following steps:
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Step 1: Determine the annual salary or hourly wage as of February 15, 2020.
This was $90,000.
Step 2: Determine the average annual salary or hourly wage for the period
from February 15, 2020 through April 26, 2020. This was $90,000 from
February 15 – April 1 and $55,000 from April 1 – April 26, 2020. This comes
to an average annual salary of approximately $68,000.
Step 3: If Step 2 is greater than Step 1, the safe-harbor does not apply.
Because Step 2 is less than Step 1, however, we must proceed to Step 4.
Step 4: Determine the average annual salary or hourly wage for the employee
as of June 30, 2020.This remains $55,000. Because this amount is not equal
to or greater than Step 1 ($90,000), the safe harbor does not apply. X Co.’s
forgiveness must be reduced by $1,923 attributable to Employee C.
Next, we populate Table 2:
Worksheet, Table 2
NITTI
B belongs in Table 2, because she had annualized salary for 2019 in excess of
$100,000. Her salary for 2020 also exceeded an annualized rate of $100,000,
meaning she is capped at compensation costs of $15,384. You’ll also note that
F, the shareholder-employee, is NOT included on Table 2 because F is a
shareholder, and will be dealt with separately on Schedule A.
Next, we must determine if any reduction is required due to headcount.
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Reduction in Forgiveness Due to FTEs
As determined in Tables 1 and 2, X Co. had 3.5 FTEs during the covered
period. X Co. must compare these FTEs to the amounts in either of the two
periods:
• February 15 – June 30, 2019: X Co. had 4.5 FTEs (1.0 for each of A, B, C,
and E and .5 for D). Presumably, F, the owner, doesn’t count towards
FTEs in any scenario.
• January 1 – February 15, 2019: X Co. had 4.5 FTEs.
Thus, regardless of the base period chosen, X Co. had a reduction in FTEs
during the covered period relative to the base period. As a result, we
tentatively have a reduction quotient of 3.5/4.5
This quotient, however, will be eliminated if either of two scenarios are met:
1. X Co.’s FTEs are the same on January 1, 2020, (4.5) and the end
of the covered period (3.5) This test is not met.
2. X Co. satisfies the safe harbor. To satisfy the safe harbor, X Co.
must first determine its FTEs for :
• The period from February 15, 2020, through April 26, 2020, and
• For the pay period that includes February 15, 2020.
The result for period a) would be less than 4.5 because A was terminated on
April 1. The result for period b) would be 4.5. Because the average FTEs for the
first period is less than the FTEs for the second period, X Co. must then
compare the average FTEs for the second period (4.5) to the total FTEs as of
June 30, 2020. Because X Co. rehired A in June, X Co.’s FTEs are again 4.5 on
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June 30. As a result, the safe harbor is met, and no reduction is required. The
reduction quotient is 1.0.
Next, we flip over to Schedule A:
Schedule A:
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Schedule A
You’ll note that the amounts for Line 6, 7, and 8, come from the table above
where all payroll costs for the 8-week period were detailed. We did not include
amounts paid to F, the owner-employer, because it appears non-compensation
payroll costs for owners are not forgivable. Whether this is correct is still a
matter of dispute.
• On Line 9, we cap F’s compensation at $15,384.
• Line 11 reflects the 4.5 FTEs X Co. had during the two base periods (1
each for A, B, C, and E and .5 for D).
• Line 12 reflects the sum of Lines 2 and 5.
• Line 13, however, reflects that X Co. determined that the safe harbor
was met, and thus the reduction quotient is 1.0.
Now that Schedule A has been filled out, we can head over to the application
and finish this thing off:
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Application
For the sake of simplicity, I combined the rent/utility payment on Line 3.
On Line 5, we move over he reduction attributable to Employee C.
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On Line 6, we determine our maximum forgivable costs of $116,806. We should
pause for a moment and notice that this is significantly less than the $129,374
that was borrowed. What makes up the difference?
• For starters, basic math. X Co. terminated Employee A and slashed the
salary of Employee B. Thus, payroll costs were reduced.
• Next, at least currently, we are treating the non-compensation payroll
costs paid to F, the owner, as being ineligible for forgiveness. This is
another $14,000. Thus, we would expect the total forgivable costs to be
less than $100,000, but it’s actually at $116,806.
• X Co. incurred $129,000 in non-payroll costs. We would expect that to
come to about $20,000 for the 8-week period. But by paying rent and
utilities in arrears, X Co. had total rent costs of $44,000, bringing the
total forgivable costs back above $100,000 to $116,806.
Next, Line 7 would reduce the maximum forgivable amount resulting from a
loss in FTEs if the safe harbor hadn’t applied. Because X Co. satisfies the safe
harbor, the quotient is 1.0, and Line 8 is the same as Line 6.
Finally, our forgiveness is again limited to the lesser of:
• Line 8: the total determined above, or $116,806,
• Line 9: the PPP loan amount of $129,375, or
• Line 10: the total payroll costs ($74,729) divided by 75%, or $99,638.
Thus, X Co. is stuck with forgiveness of $99,638. This haircut is required to
ensure that no more than 25% of the total forgiveness is attributable to non-
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payroll costs. In this case, payroll costs of $74,729 are exactly 75% of the total
forgiveness of $99,648.
It’s a harsh result, but it could be worse. The SBA could have applied the
reduction for lost employees/reduced salary to the LESSER of the three
numbers. Or, in the worst case scenario, the SBA could have mandated that if
75% of the loan proceeds were not used on payroll costs – as was the case here
– NONE of the loan would be forgiven.
To seek forgiveness of a PPP loan, a borrower must submit this application to
the lender that is servicing the loan, and must include the following items:
-Documentation, including payroll tax filings reported to the Internal Revenue
Service and state income, payroll and unemployment insurance filings,
verifying the number of full-time equivalent employees on payroll and pay rates
for the following periods:
• The 8-week covered period of the loan,
• February 15, 2019 through June 30, 2019 or January 11, 2020 or February
29, 2020, depending on the dates used to measure any drop in employees
or salary as required by Section 1106(d)
• In the case of a seasonal employer, February 15, 2019, through June 30,
2019,
• The last full quarter prior to the covered period,
• February 15, 2020 through April 27, 2020.
-Documentation, including cancelled checks, payment receipts, transcripts of
accounts, or other documents verifying payments on covered mortgage
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obligations, payments on covered lease obligations, and covered utility
payments, and
-A certification from a representative of the eligible recipient authorized to
make such certifications that the documentation presented is true and correct
and the amount for which forgiveness is requested was use to retain employees,
making interest payments on a covered mortgage obligation, make payments
on a covered return obligation, or make covered utility payments, and
-Any other documentation the SBA determines necessary.
No eligible recipient will receive forgiveness without submitting to the lender
the required documentation. No later than 60 days after the date on which a
lender receives an application for loan forgiveness from an eligible recipient,
the lender must issue a decision on the application.
Look, this isn’t the end of the story. There has to be more guidance coming out,
and when it does, we’ll get this cleaned up. Or maybe I’m wrong, and the SBA
will simply leave two million borrowers twisting in the wind, in which case this
article is the best shot you’ve got at figuring this all out. If that’s the case,
I really hope this helps.