Tax Law Insights

On May 15, 2020 the Small Business Administration (SBA) released a Paycheck Protection Program Loan Forgiveness Application with related instructions.  The application and instructions help answer some of the questions surrounding a business’s eligibility for forgiveness (see our prior blog for an overview of forgiveness issues).  A detailed overview of the application and instructions is available here.  Some of the key issues addressed in the application and instructions include:

• The 8 week covered period during which qualifying expenses are measured begins on the date a PPP loan is disbursed, or the first day of the first pay period following the PPP loan disbursement for payroll costs only.
• Qualifying costs must be paid or incurred during the covered period. Incurred costs for payroll must be paid on or before the next regular payroll date following the covered period to be eligible.  Incurred costs for nonpayroll costs must be paid on or before the next regular billing date following the covered period to be eligible.
• The amount of nonpayroll costs that can be forgiven is equal to 25% of the total forgiveness amount – not 25% of the PPP loan.
• Employee headcount will be measured on a 40 hour FTE basis, where an employee who works 40 or more hours a week counts as 1.0 employee and employees who work less than 40 hours will be counted proportionately (e.g. 30 hour employee/40 hour FTE = 0.75 employee). An employer can elect to use a simplified method and count all employees who work less than 40 hours as a 0.50 employee.
• Payroll costs include owner/self-employed compensation (subject to $100,000 annualized cap, which equates to $15,385 for the covered period).
• Employees are tracked on a per employee basis for purposes of the salary test (which can reduce the amount forgiven).
• If the salary test is not met but the average annual salary or hourly wage is restored by not later than June 30, 2020 there is no forgiveness reduction under the salary test.
• Employees who are fired for cause, voluntarily resigned, or voluntarily requested a reduction in hours during the covered period will not impact the headcount test (which can reduce the amount forgiven).
• If FTE employee levels are restored by not later than June 30, 2020 there is no forgiveness reduction under the headcount test.