Deep Dive: PPP Loan Forgiveness Guidance
In last week’s blog, we took a first look at the Paycheck Protection Program (PPP) loan forgiveness application.
On Friday, May 22, 2020, just one week after releasing the forgiveness application, the Small Business Administration (SBA) and the Department of Treasury released additional guidance in the form of an interim final rule on loan forgiveness. While the rule provided some clarity, additional guidance is still necessary in many areas. We’ll continue to keep you up-to-date with timely and relevant posts as guidance is issued and new laws are passed, including the much-needed PPP Flexibility Act.
This week’s blog will take a deep dive into aspects of the interim final rule that will be of interest to the restaurant industry.
Confirmation that for purposes of payroll costs only, certain borrowers have the choice to use the regular covered period or the alternative payroll covered period:
* For stylistic ease, when discussing payroll costs, we will refer to the “covered period or alternative payroll covered period” as a restaurant’s “elected covered period.”
Confirmation that salary or wages paid to furloughed employees, bonuses and hazard pay are eligible for loan forgiveness if paid during the elected covered period:
- In general, payroll costs paid or incurred during the eight consecutive week (56 days) covered period are eligible for forgiveness. Restaurants can choose an eight-week covered period that begins on either:
- The date of disbursement of the restaurant’s PPP loan proceeds (i.e., the start of the covered period); or
- The first day of the first payroll cycle in the covered period (the “alternative payroll covered period”*).
- Only restaurants with biweekly (or more frequent) payrolls can elect to use the alternative payroll covered period. Restaurants that elect to use this alternative covered period for payroll costs will be able to align the start of their covered period with the beginning of a pay period.
- Example: A restaurant has a bi-weekly payroll schedule (i.e., payroll is paid every other week). The restaurant’s eight-week covered period begins on June 1 and ends on July 26. The first day of the restaurant’s first payroll cycle that starts in the covered period is June 7. The restaurant may elect an alternative payroll covered period for payroll cost purposes only that starts on June 7 and ends 55 days later (for a total of 56 days) on August 1. Payroll costs paid during this alternative payroll covered period are eligible for forgiveness. In addition, payroll costs incurred during this alternative payroll covered period are eligible for forgiveness as long as they are paid on or before the first regular payroll date occurring after August 1. Payroll costs that were both paid and incurred during the covered period (or alternative payroll covered period) may only be counted once.
Confirmation that retirement and health insurance contributions for owner-employees and partners are included in their $100,000 per year cap:
- Restaurants can receive forgiveness for salary and wages paid during the elected covered period to furloughed employees as long as they do not exceed an annual salary of $100,000, as prorated for the covered period. This is consistent with the language in the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the purpose of the PPP program, by enabling restaurants to continue paying their employees even if those employees are not able to perform their day-to-day duties due to lack of economic demand or public health considerations such as mandated closures.
- In addition, hazard pay and bonuses paid during the elected covered period to employees whose total compensation does not exceed $100,000 on an annualized basis are also eligible for loan forgiveness because these amounts constitute a supplement to salary or wages and are thus a similar form of compensation.
†Less Section 179 expense deductions claimed, unreimbursed partnership expenses, and depletion from oil and gas properties.
Clarification of when payroll costs are incurred for employees who are not performing work:
- The loan forgiveness application introduced a limitation on the amount of owner and partner compensation that is eligible for loan forgiveness. The latest guidance confirms this cap and clarifies what can be included in compensation amounts for owners and partners. Amounts paid during the elected covered period to owner-employees and partners are limited to the lower of $15,385 (the eight-week equivalent of $100,000 per year) or the eight-week equivalent of their applicable compensation for 2019 (8/52 of 2019 compensation). Owners are capped by the amount of their 2019 employee cash compensation plus 2019 employer retirement and health care contributions made on their behalf. General partners are capped by the amount of their 2019 net earnings from self-employment† multiplied by 92.35%.
- The latest guidance confirms that no additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals or general partners, since these expenses are paid out of their net self-employment income.
- Restaurants are generally eligible for forgiveness for payroll costs paid or incurred during the elected period. Payroll costs are considered paid on the day that paychecks are distributed or that the restaurant initiates an ACH credit transaction and are considered incurred on the day that the employee’s pay is earned (i.e., on the day the employee worked). Payroll costs incurred during the last pay period of the elected covered period but not paid during the restaurant’s elected covered period are eligible for forgiveness so long as they are paid on or before the next regular payroll date.
- The latest guidance clarifies that for employees who are not performing work but are still on a restaurant’s payroll, payroll costs are incurred based on the restaurant’s established schedule, which will typically be each day that the employee would have performed work.
Confirmation of the “paid and incurred” nonpayroll cost rule:
‡Business utilities include the distribution of electricity, gas, water, transportation, telephone, or internet access.
- Consistent with the loan forgiveness application, the latest guidance provides that nonpayroll costs (mortgage interest, rent, and utilities‡) are eligible for forgiveness if 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. It is anticipated that the current 25% cap on nonpayroll costs will prevent excessive inclusion of nonpayroll costs.
- Example: A restaurant’s covered period begins on June 1 and ends on July 26. The restaurant pays its May and June electricity bill during the covered period and pays its July electricity bill on August 10, which is the next regular billing date. The restaurant may seek loan forgiveness for its May and June electricity bills, because they were paid during the covered period. In addition, the borrower may seek loan forgiveness for the portion of its July electricity bill through July 26 (the end of the covered period), because it was incurred during the covered period and paid on the next regular billing date.
Reductions to Loan Forgiveness
Clarification of the impact of headcount reductions on loan forgiveness amounts:
**A restaurant may choose between a reference period of February 15, 2019–June 30, 2019 or January 1, 2020–February 29, 2020.
Clarification of the exemption from the headcount reduction penalty for offers to rehire and addition of a new exemption for offers to restore previous reduction in hours:
- The CARES Act provides that a reduction in headcount will generally result in a reduction in the loan forgiveness amount, unless an exception applies. Restaurants can determine if they had a headcount reduction by comparing the average number of full-time equivalent employees (FTEs) during the elected covered period to the average number of FTEs during the selected reference period.** The total amount of eligible expenses available for forgiveness is reduced proportionally by the percentage reduction in FTE employees.
- To determine the number of FTEs, restaurants divide the average number of hours paid for each employee per week by 40, capping this quotient at 1.0. Employees who work 40 hours or more during the elected covered period equal one FTE.
- Restaurants have a choice in determining the FTE count for employees who were paid for less than 40 hours per week:
- Restaurants can calculate the actual average number of hours a part-time employee was paid per week during the elected covered period. For example, if an employee was paid for 30 hours per week on average during the elected covered period, the employee could be considered to be an FTE employee of 0.75 (30/40). Similarly, if an employee was paid for ten hours per week on average during the covered period, the employee could be considered to be an FTE employee of 0.25 (10/40). The instructions to the loan forgiveness application require the results to be rounded to the nearest tenth.
- Alternatively, restaurants can elect to use a full-time equivalency of 0.5 for each part-time employee.
- Restaurants may select only one of these two methods and must apply that method consistently to all their part-time employees for the elected covered period and the selected reference period.
- The interim rule confirms that the FTE reduction test is performed on an aggregate basis, rather than on an employee-by-employee basis.
- Example: Assume a restaurant had 10.0 FTE employees during the reference period and 8.0 FTE employees during the elected covered period. Since the percentage reduction in FTE employees is 20%, eligible expenses available for forgiveness are also reduced by 20%, leaving only 80% of otherwise eligible expenses available for forgiveness. The loan forgiveness application comes to the same result by following the language in the CARES Act and dividing the average number of FTEs in the elected covered period by the average number of FTEs in the reference period (8/10 = 80%) and multiplying this result by the loan forgiveness amount.
Confirmation that loan forgiveness will not be reduced if an employee is fired for cause, voluntarily resigns or voluntarily requests a schedule reduction:
- As stated above, loan forgiveness amounts are subject to a potential reduction penalty if the average weekly number of FTEs in the elected covered period is less than the average weekly number of FTEs in the chosen reference period. When counting FTEs for this purpose, the loan forgiveness application provides that restaurants can include in their FTE count any positions for which they made a good-faith, written offer to rehire an employee during the elected covered period which was rejected by the employee.
- The interim final rule on loan forgiveness adds a second, similar exemption for restaurants that previously reduced an employee’s hours and offered to restore the employee’s hours at the same salary or wages. These employees should also be included in the restaurant’s FTE count for purposes of determining whether there has been a headcount reduction.
- In calculating its loan forgiveness amount, a restaurant may exclude any reduction in FTE headcount that is attributable to a specific employee if:
- The restaurant made a good faith, written offer to rehire the specific employee (or, if applicable, restore the reduced hours of such employee) during the elected payroll costs covered period;
- The offer was for the same salary or wages and same number of hours as earned by this same employee in the last pay period prior to the separation or reduction in hours;
- The offer was rejected by the employee;
- The restaurant has maintained records documenting the offer and its rejection; and
- The restaurant informed the applicable state unemployment insurance office of the employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.
Clarification of the impact of salary and wage reductions on loan forgiveness amounts and a simplified computation of the reduction for salaried employees:
- The loan forgiveness application expanded the “offer to rehire” exemption to include employees who, during the elected covered period, had an FTE reduction event (i.e., were fired for cause, voluntarily resigned or voluntarily requested and received a reduction of hours). The interim final rule confirms that when determining if there has been an FTE reduction, restaurants may count these employees at the same FTE level that they represented immediately before the FTE reduction event. This borrower-friendly exemption will ensure that restaurants are not penalized for decreases in employee headcount that are the result of employee actions and requests.
Clarification that the salary or wage reduction applies only to the portion of the decrease in employee salary and wages that is not attributable to the FTE reduction:
- Restaurants must reduce the amount of loan forgiveness by the total dollar amount of the salary and wage reductions that are in excess of 25% of base salary or wages between January 1, 2020, and March 31, 2020, unless the exception for restoring salary and wage applies.
- The salary and wage reduction test described above is performed on an employee-by-employee basis for each protected employee; that is, each employee that was first hired in 2020 and each existing employee who was not paid more than the annualized equivalent of $100,000 in any pay period in 2019.
- The loan forgiveness application includes a multi-step calculation to determine if a protected employee had a salary and wage reduction. To determine if a salaried protected employee had a salary and wage reduction, the application uses average annual salary in the calculation. In a deviation from the application, the interim rule includes an example based on weekly salary paid during the reference and elected covered periods.
- Example (adapted from the interim rule): A restaurant reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the elected covered period. The salary and wage reduction is $400, determined as follows:
- The first $250 (25% of $1,000) per week is exempted from the salary and wage reduction.
- The resulting reduction is $50 per week, computed as follows:
- $1,000 salary per week - $250 reduction exemption = $750
- $750 - $700 reduced wage = $50 weekly reduction.
- This $50 weekly reduction translates to $400 as the salary/hourly wage reduction for the elected covered period ($50 times eight weeks). This amount is entered in Table 1 of the PPP Schedule A Worksheet.
Confirmation that restaurants can avoid reductions in loan forgiveness amounts by restoring FTEs and salaries and wages by no later than June 30, 2020:
- To avoid restaurants being doubly penalized for both FTE and salary and wage reductions attributable to the same employee, the interim rule confirms that the salary or wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the headcount reduction.
- Example: An hourly wage employee had been working 40 hours per week during a restaurant’s selected reference period (see ** above), and thus was an FTE employee of 1.0. During the restaurant’s elected covered period, the restaurant reduced the employee’s hours to 20 hours per week. As a result, the employee became an FTE employee of 0.5. Assume there was no change to the employee’s hourly wage rate during the covered period. Because the hourly wage rate did not change, the reduction in the employee’s total wages is entirely attributable to the FTE employee reduction. As a result, the restaurant is not required to perform a salary/wage reduction calculation for that employee.
- The CARES Act provides two safe harbors that will eliminate the loan forgiveness reductions discussed above. The first safe harbor provides that if certain employee salaries and wages were reduced between February 15, 2020, and April 26, 2020 (the safe harbor period), but a restaurant eliminates those reductions no later than June 30, 2020, the restaurant is exempt from any reduction in loan forgiveness amount that would otherwise be required under the more than 25% reduction test. The second safe harbor provides that if a restaurant eliminates any reductions in FTE employees occurring during the safe harbor period no later than June 30, 2020 or earlier, the restaurant is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in FTE employees.
- The interim rule confirms that use of the safe harbors to eliminate loan reductions does not impact the requirement that at least 75% of the loan forgiveness amount must be attributable to payroll costs.
Procedures and Administration
Clarification of the Loan Forgiveness Process:
Confirmation of the timing for repayment of loans that are not forgiven in whole:
- The new guidance confirms much of what we already knew about the loan forgiveness process. At the conclusion of the covered period, restaurants submit completed loan forgiveness applications to their lenders, who have 60 days to render a decision to the SBA either approving (in whole or in part) or denying loan forgiveness. Consistent with the language in the CARES Act, the SBA has a 90-day statutory period to remit the appropriate forgiveness amount to the lender. The latest guidance provides an extension of the 90 days in instances where the SBA is reviewing the loan or the loan application.
- Concurrent with the release of the interim rule on PPP loan forgiveness, the SBA issued an interim final rule on SBA Loan Review Procedures and Related Borrower and Lender Responsibilities. The SBA’s guidance provides details regarding its discretionary review process for loans of any size. These reviews can take place before the lender has rendered its forgiveness decision, during the 90-day SBA statutory period, or any time within the six-year window after the date a loan is forgiven or repaid in full. It should be emphasized that the SBA’s discretionary review process applies to loans of any size and does not replace the mandatory review of loans in excess of $2mm.
The latest guidance confirms that if only a portion of the loan is forgiven, or if the forgiveness request is denied, any remaining balance must be repaid with interest on or before the two-year maturity of the loan.
Restaurants must submit documentation with their applications to support the following:
- Payroll Costs: Verification of cash compensation and non-cash benefit payments from the covered period or alternative payroll covered period
- FTE: Average number of FTE employees on payroll per month between February 15, 2019–June 30, 2019, or January 1, 2020, and February 29, 2020
- Nonpayroll Costs: Proof of existence of the obligations and services prior to February 15, 2020, plus proof of eligible payments made
Restaurants must maintain additional documentation for six years after their loan is forgiven or repaid:
- Employee-by-employee listing, including: cash compensation, each employee’s FTE equivalent count, computation of salary/hourly wage reduction and FTE reduction safe harbor.
- Loan application documentation and certification regarding the necessity of the loan
- Demonstration of borrower’s material compliance with PPP requirements
- Records demonstrating FTE reduction events (terminations for cause, voluntary resignations or voluntary requests for schedule reductions)
For more information on how BDO can assist you with PPP loan forgiveness, contact one of our Restaurant Practice Leaders.