On May 15, 2020, the Small Business Administration (SBA) released an application form and related instructions to be used when requesting forgiveness of Paycheck Protection Program (PPP) loan amounts received by employers under the Coronavirus Aid, Relief, and Economic Security (CARES) Act as signed into law by President Trump on March 27, 2020. A quick shout out to Andrea Carr, CPA who created a fillable version of this form which can also be downloaded here.
The forgiveness application is very detailed and, at times, somewhat confusing, even for us accountants who frequently run these types of calculations. You’ll want to be very detailed and methodical in carefully following the wording used by the SBA within the application and supporting instructions. Notwithstanding the complexity of the application, the American Institute for Certified Public Accountants (AICPA) has issued a response to the effect that even more guidance from the SBA is needed to address situations, for example, when exemptions are needed for borrowers who have made good-faith, written offers to rehire former workers when the offers were declined by those workers. Needless to say, we may see another draft of this application which could contain even more calculations, reductions, and exemptions.
Short of donning a set of Luke Skywalker robes, climbing Mount Kilimanjaro, and sacrificing a young yak by the light of a super blue blood moon in order to request loan forgiveness (that also works), completing this application will take a lot of time, especially if you have quite a few employees. While for-profit, non-profit, and sole proprietors are all participating in the PPP loan program, I’ll only reference non-profit organizations in the following highlights that may be of some help as you go through the application:
The application is submitted to the lender from whom your organization received the loan proceeds; do not send the application to the SBA.
The eight-week covered period begins on the day your organization received the PPP loan proceeds (“the Loan Disbursement Date”) unless you elect to use the alternative payroll covered period (see the next bullet point).
The alternative payroll covered period is only available for payroll periods that are bi-weekly or more frequent than bi-weekly. In this case, your eight-week covered period will begin on the first day of the first pay period following the Loan Disbursement Date. Note that the first day of the covered period is not the next pay date, but the first day of the next pay period when using the alternative payroll covered period.
Within the PPP Schedule A Worksheet, you’ll calculate the “Average FTE” of all staff paid during the covered period. This calculation is performed in both Table 1 (annual salaries of $100K or less) and Table 2 (annual salaries over $100K) and is essentially a headcount. Since you’ll be attaching a list of each employee and the amount of compensation paid during the covered period, you’ll want to be sure to add an “Average FTE column” that lists the FTE for each employee. For example, staff working 40 hrs/week would be 1.0 FTE; 30 hrs/week would be 0.75 FTE, etc.
There is an FTE reduction quotient in the Schedule A Worksheet that effectively reduces the costs eligible for forgiveness unless you meet the “reduction safe harbor” test. Basically, if you did have a reduction in your employees’ FTE count during the period February 15 through April 26, you’ll want to make sure that you increase your FTE count for the pay period covering June 30, 2020. If you can get your FTE figure as high as possible for the pay period covering June 30, 2020, you’ll stand a good chance of meeting the FTE safe harbor test that will avoid a reduction to qualifying compensation.
Within the Schedule A Worksheet, there is also a separate salary/hourly wage reduction which reduces the payroll costs eligible for forgiveness if the total payroll during the covered period is less than 75% of the average amounts paid during the period January 1, 2020 through March 31, 2020.
What the forgiveness application does not address is the big elephant in the room: how solvent or profitable can an organization be and still obtain PPP loan forgiveness? Earlier this week, the SBA did announce that those employers who accepted Paycheck Protection Program (PPP) funds of less than $2 million will be assumed to have performed the required certification concerning the necessity of their loan requests in good faith. (Too good to be true? We'll see if this holds up.) Earlier this month, the SBA did remind borrowers of their certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” and that criminal liability could result if these certifications were falsely certified. While your lender may request bank statements and financial statements to gauge this, the PPP loan application is currently silent on this matter.
Essentially, it seems that the SBA is treating all organizations (and companies) as if loss of support and revenue happened right when the coronavirus hit, like a retail store or a restaurant. For many nonprofit organizations, the effects of this pandemic have yet to be seen when considering grants, contracts, or even membership dues that may not be renewed. In these cases, the fact that the payroll covered period starts on the Loan Disbursement Date seems inappropriate. If this is your situation, I would suggest taking full advantage of the loan forgiveness to the greatest extent you can, knowing you’ll need the cushion when the tougher times do eventually rear their ugly heads.
If this is all too daunting and you opt for the aforementioned Luke Skywalker route, may the force be with you.