SBA Releases Instructions and Forms for PPP Loan Forgiveness Calculations

The Small Business Administration (SBA) has released SBA Form 3508, the Paycheck Protection Program (PPP) Loan Forgiveness Application with instructions and detailed calculations. The SBA has also announced they will soon issue additional guidance and regulations to further assist borrowers as they complete their applications. This application does not consider any changes that could come via the HEROES Act passed by the House of Representatives on May 15^th, 2020  as that now awaits Senate action.  The application considers the current rules dictating an 8 week covered period and the 75/25 percent rule. The House bill did recommend changes to those rules.

Key Highlights from the Instructions

Regarding Payroll Calculations:

• The covered period is broken out into a 56 day period beginning with the date Borrower received its PPP loan proceeds
  • For example, if the Borrower received its PPP loan proceeds on Monday, April 20, the first day of the Covered Period is April 20 and the last day of the Covered Period is Sunday, June 14.
• Borrowers with a bi-weekly or more frequent payroll schedule may elect an alternate period  that begins on the first day of their first pay period following their PPP Loan Disbursement Date
  • For example, if the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20. Borrowers who elect to use the Alternative Payroll Covered Period must apply the Alternative Payroll Covered Period wherever there is a reference in this application to “the Covered Period or the Alternative Payroll Covered Period.” However, Borrowers must apply the Covered Period (not the Alternative Payroll Covered Period) wherever there is a reference in this application to “the Covered Period” only.
• Payroll costs are considered paid on the day that paychecks are distributed or the Borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period).
• Self-employed and SE partner income for payroll costs calculations are based on the 2019 amounts.
• The application requires listing employees and last four of SS# for compensation calculation or providing an equivalent third party report and clearly excludes independent contractors.
• Full Time Equivalent Employees (FTE) are calculated based on a 40 hour week. 
  • Please note that a Borrower may elect a simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the Borrower.
• Safe harbor calculations for a greater than 25% salary reduction are based on restoration of that salary as of June 30th.   
• There are also adjustment exceptions for FTE calculations for offers to rehires that rejected offers, resignations, requests for reduction of hours or termination for cause.

Eligible Non-Payroll Costs Consist of :

(a) covered mortgage obligations: payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020 (“business mortgage interest payments”);

(b) covered rent obligations: business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020 (“business rent or lease payments”); and

(c) covered utility payments: business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020 (“business utility payments”).

An eligible non payroll cost 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 the billing date is after the Covered Period. Eligible non payroll costs cannot exceed 25% of the total forgiveness amount.

Documents required to be submitted with loan forgiveness application include

Payroll documentation verifying compensation and non-cash benefits for payroll costs

1. Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
2. Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period:
3. Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941); and
4. State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state.
5. Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the Borrower included in the forgiveness amount

FTE Documentation may include payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state.

Non-payroll documentation

1. Business mortgage interest payments: Copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments from the Covered Period; or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments.
2. Business rent or lease payments: Copy of current lease agreement and receipts or cancelled checks verifying eligible payments from the Covered Period; or lessor account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments.
3. Business utility payments: Copy of invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks, or account statements verifying those eligible payments

Other documents must be maintained but not submitted includes documentation supporting the Borrower’s certifications as to the necessity of the loan request and its eligibility for a PPP loan, documentation necessary to support the Borrower’s loan forgiveness application, and documentation demonstrating the Borrower’s material compliance with PPP requirements. The Borrower must retain all such documentation in its files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of SBA, including representatives of its Office of Inspector General, to access such files upon request.

DDK has established a dedicated PPP loan forgiveness team to assist you in planning and applying for loan forgiveness. Please click here to contact our PPP Task Force if you need guidance and insights based on your situation.