Under the Paycheck Protection Program (PPP) created by the CARES Act, loans may be forgiven if borrowers use the proceeds to maintain their payrolls and pay other specified expenses. The Treasury Department and Small Business Administration recently released the application form and instructions for PPP loan forgiveness. In addition to providing the general instructions for applying for loan forgiveness, the instructions provide explanations of the following:
- How to calculate full-time equivalents (FTEs) for PPP loan forgiveness purposes;
- The Covered Period, including the option to use an Alternative Covered Period for addressing payroll costs;
- How to handle expenses that are not both incurred and paid in the eight-week covered period; and,
- What support documents will be required.
Calculation of Full-time Equivalents (FTEs)
Under the PPP loan program, a reduction in full-time equivalents (FTEs) during the covered period will result in a proportionate reduction in loan forgiveness. The instructions provide borrowers with two ways to calculate the number of FTEs. The first is to determine the average number of hours worked by each employee per week during the Covered Period and divide that number by 40. The result is rounded to the nearest 1/10th and capped at 1.0. Alternatively, borrowers can count all employees who average 40 or more hours per week as 1.0 and each employee working less than 40 hours as 0.5. Once the borrower has calculated each employee’s FTE status, the results are aggregated.
The Covered Period and Alternative Covered Period
To qualify for forgiveness, loan proceeds must be used during the Covered Period, defined in the instructions as the eight-week (56-day) period commencing upon the date the loan is disbursed.
For administrative convenience, borrowers who pay employees at least as often as biweekly may elect to calculate eligible payroll costs using the eight-week period that begins on the first day of their first pay period following the loan disbursement date (the “Alternative Payroll Covered Period”).
Treatment of Expenses Paid or Incurred
According to the instruction, 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). The instructions emphasize that costs can be taken into account only once: either when paid or accrued.
The instructions adopt a similar rule for non-payroll costs, providing that eligible non-payroll costs 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.
In addition to the PPP Loan Forgiveness Calculation Form and Schedule A, the borrower must submit with its application the following documentation:
Payroll costs: Documentation verifying eligible cash compensation and non-cash benefit payments for the Covered Period or the Alternative Payroll Covered Period consisting of the following:
- Bank account statements or third-party payroll service providers reports documenting the amount of cash compensation
- Tax forms (or equivalent third-party payroll service provider reports for the periods that include the Covered Period or the Alternative Payroll Covered Period, including payroll tax filings reported (or that will be reported), to the Internal Revenue Service (IRS) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported (or that will be reported) to the relevant state
- Payment receipts, cancelled checks or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans
FTE: Documentation, which may include payroll tax filings and state quarterly business and individual employee wage reporting and unemployment insurance filings, showing (based on the Reference Period selected by the borrower as described above):
- The average number of FTE employees on payroll per month employed by the borrower between Feb. 15, 2019, and June 30, 2019
- The average number of FTE employees on payroll per month employed by the borrower between Jan. 1, 2020, and Feb. 29, 2020
- In the case of a seasonal employer, the average number of FTE employees on payroll per month employed by the borrower between Feb. 15, 2019, and June 30, 2019, or between Jan. 1, 2020, and Feb. 29, 2020, or any consecutive 12-week period between May 1, 2019, and Sept. 30, 2019
Non-payroll costs: documentation verifying the existence of obligations/services prior to Feb. 15, 2020, and eligible payments during the covered period for the following:
- Business mortgage interest payments, including lender amortization schedules and receipts, cancelled checks or account statements, 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 payments
- Business rent or lease payments, including copies of current lease agreements and receipts, cancelled checks or account statements, or lessor account statements from February 2020 and the months of the Covered Period through one month after the end of the covered period verifying payments
- Business utility payments, including copies of invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks or account statements verifying payments
Additionally, the borrower must maintain, but is not required to submit with its application, the PPP Schedule A Worksheet or its equivalent prepared by the borrower and documentation including the following:
- Documentation supporting the listing of all individual employees in Table 1 of the Worksheet, including the calculations of salary or hourly wage reductions
- Documentation supporting the listing of all individual employees in Table 2 of the Worksheet, including that the listed employees received during any single pay period during 2019 compensation at an annualized rate of more than $100,000
- Documentation regarding job offers and refusals, firings for cause, voluntary resignations, and written requests from employees for reductions in work schedule
- Documentation supporting the Average FTE Reduction Safe Harbor
- All records relating to the borrower’s PPP loans, including its PPP loan application and all documentation submitted with the loan application, documentation supporting the borrower’s certifications as to the necessity of the PPP loan and its eligibility for the PPP loan, documentation necessary to support the loan forgiveness application, and documentation demonstrating the borrower’s material compliance the PPP requirements
All documentation must be retained by the borrower for six years after the date the loan is forgiven or repaid in full.
Paylocity’s PPP Loan Forgiveness Report is expected to be released soon and available for use by Monday, May 25th. Clients are encouraged to review the applications and instructions and to start gathering the required documentation that will need to be submitted. Employers should also continue to watch for updated guidance related to the loan forgiveness process as additional guidance is expected.
Thank you for choosing Paylocity as your Payroll Tax and HCM partner.
This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor.