The good news is that much of the guidance was rehashing what was already included in the loan forgiveness application which we reviewed last week. Go to the Financial EDGe blog for recaps.
The guidance was issued in two interim final rules - one discussing loan forgiveness and a second interim final rule that discusses Borrower and Lender responsibilities when submitting and reviewing the forgiveness application.
The EDGe team separated the guidance into specific sections to make it easier to read. The sections and the guidance provided are:
Employees - Hazard pay/bonuses, laid off, voluntary separation, FTE calculation
Self-employed, Owner-Employees, Partners - Compensation
Non-payroll costs - Timing of paying bills; what's included in Covered Period
How Test #1 and Test #2 for Loan forgiveness work together - How to apply tests
Loan Review Procedures - What the SBA can and will review (hint: any loan at any time)
Lender Review - Lender requirements, Borrower's responsibilities, time to process (hint: up to 5 months)
Employees not working but still on payroll: Employees who are not performing work but are still on the borrower's payroll are eligible for forgiveness and for purposes of the application, are paid typically each day that the employee would have performed work.
Hazard pay / Bonuses
Employees hazard pay and bonuses are eligible for loan forgiveness for any employee who earns <$100,000 annualized compensation.
Laid off / Reduced hours
Borrower's loan forgiveness will NOT be reduced if they laid off or reduced the hours of an employee, then offered to rehire the same employee for the same salary and hours but the employee declined the offer. You must document the offer, the rejection, and that you notified the state unemployment office of the rejection.
Fired for cause / voluntary separation
Borrower's loan forgiveness will NOT be reduced if an employee is fired for cause, voluntarily resigns, or voluntarily requests a schedule reduction. You must document any of these situations and provide these documents upon request.
As we discussed in the loan forgiveness application review, a full time employee (FTE) has been determined to be any worker that works 40 hours or more during a week. Any employee that works <40 hours is considered a part time employee. Part time employees can be calculated two ways - # hours / 40 or as a .5 FTE. The borrower chooses the method but this method must be consistent across all application calculations.
+Self-employed, Owner-employees, Partners
Owner-employees and self employed individuals payroll compensation can be no more than the lesser of 8/52 of 2019 compensation or $15,385 (8 week of $100,000 annualized compensation.) Schedule C filers use 2019 net profit, General partners use earnings from self-employment (subject to 179 and other deductions) multiplied by .9235.
Owner-employees and self employed individuals do NOT receive forgiveness for retirement or health insurance contributions.
My good friend Kash the Bookkeeper has a great summary on her Facebook page of what self-employed people can claim. Check it out!
The cap on nonpayroll costs is 40%. Any nonpayroll costs PAID during the covered period can be included in forgiveness. This means that borrower's can include bills owed but not paid. For example, if your covered period begins June 1 and ends July 26 (under the previous 8 week rule which can still be used) - you pay your May and June utility bills on June 15, you CAN include both bills since they were paid under the covered period.
Also, at the end of your covered period you can pay your utility bill through July 26 as long as the payment is made on the next regular billing date. In this example, if you paid the July bill on August 15th (after the covered period) you can still include this bill for forgiveness. The guidance is silent but you may have to prorate the bill if the bill includes dates after the end of the covered period.
You CAN NOT make advance payments of interest on mortgage obligations.
The Principal on mortgage obligations is NOT ELIGIBLE for forgiveness.
+How Test #1 Salary Reduction and Test #2 FTE Reduction work together
As we discussed last week - there are two tests that may reduce loan forgiveness - Test #1 - Salary reduction test and Test #2 - FTE reduction test. One big question was in how did these tests interrelate if an employee met both tests. The SBA has ruled that the salary reduction test applies only to the portion of the decline in employee salary and wages that is NOT attributable to the FTE reduction.
Example - An hourly employee who worked 40 hours per week before the 24 week covered period (compared to the selected reference period) had their hours reduced to 20 hours per week with no hourly rate change. This means their FTE was reduced from 1.0 to .5. His compensation was also reduced but only because of the reduced hours. Since the hourly rate did not change the salary reduction test #1 does not apply and only the FTE reduction test #2 applies. There is the ability to restore this worker's hours to 40 by 12/31/20 and not be subject to any loan forgiveness due to an FTE reduction.
+Loan Review Procedures
The SBA may review any PPP loan of any size at any time at the SBA's discretion. They may review:
Whether a borrower calculated the loan amount correctly (based on rules and guidance available at the time of the borrower's application.)
The loan proceeds were used for allowable uses
The borrower is entitled to loan forgiveness.
The SBA may start a review if the loan documentation submitted to the SBA or any other information indicates the borrower may be ineligible for a PPP loan or the requested loan forgiveness amount.
The SBA will notify the lender that they will be conducting a review. The lender must notify the borrower in writing within five business days of receipt. The forgiveness period can run past June 30. The borrower must maintain PPP documentation for SIX years after the loan is forgiven or repaid in full.
Borrower's will have the opportunity to respond to SBA's questions during the review.
If it is determined that the borrower is ineligible for a PPP loan, the loan will NOT be forgiven. The SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.
If the forgiveness request is denied, the loan must be repaid by the borrower on or before the 2 year maturity of the loan.
There will be an appeals process if the SBA determines the borrower was ineligible for a PPP loan or the amount of loan forgiveness requested. This process will be issued in the future.
If the SBA determines a borrower was ineligible for a PPP loan, the lender is NOT eligible for a processing fee. The SBA has 1 year to seek repayment of the lender processing fee from the lender.
Lenders must perform a good faith review in a reasonable time:
Certifications on the loan forgiveness application form
Confirm receipt of the documentation of verifying payroll and nonpayroll costs as required in the application
Confirm the borrower's calculations on the main application (not the worksheets.)
Borrower's are ultimately responsible for providing an accurate calculation of the loan forgiveness and attest to the accuracy of the reported information and calculation on the loan forgiveness application.
The lender must request payment from the SBA at the time the lender issues its decision to the SBA. SBA will deduct EIDL Advance amounts (EIDL Grant) from the loan forgiveness amount remitted to the lender.
Once the application has been submitted, the lender has 60 days from receipt of a complete application to issue a decision to the SBA. The SBA has another 90 days to issue it's decision to ensure that applicable legal requirements have been satisfied. It could take up to 5 months from the date you submit your forgiveness application to receive loan forgiveness!
The EDGe team of experts now offers PPP loan forgiveness tracking for your business. If you need to talk through specific options for your business, Molly, Paula, and I are here to help. Schedule a 30 minute consultation via Zoom where we will discuss your specific business situation for only $49. If you have any questions, feel free to reach out to any of us. And keep checking our emails, blog, and social media for updates.