PPP Loan Forgiveness

Paycheck Protection Program (PPP) Funds are provided in the form of loans that may be fully forgiven when used for applicable expenses, such as: payroll costs, interest on mortgages, rent, and utilities (at least 60% of the forgiven amount must have been used for payroll). However, there are stipulations regarding how these funds must be used in order for them to be forgiven. Below we have highlighted the areas of focus, helpful calculators and links from trusted sources, so that you can educate yourself on this as you use these funds. 

The Basics

A borrower will be eligible for loan forgiveness equal to the amount spent by the borrower during loan forgiveness from 24 weeks after the loan disbursement, including benefits capped at $100,000 per employee, interest payment on any mortgage incurred prior to February 15, 2020, payment of rent on any lease in force prior to February 15, 2020, and payment on any utility for which service began before February 15, 2020.

Reduction Based on Number of Employees

The amount of loan forgiveness available to a business is reduced when a business does not maintain the average number of full-time equivalent employees per month when compared with:

• the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019; OR
• the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on January 1, 2020 and ending on February 29, 2020

Seasonal employers: loan forgiveness is determined by the average number of full-time equivalent employees per month employed by the recipient during the period beginning on February 15, 2019 and ending on June 30, 2019.

CALCULATE THAT: Reduction in the Number of Employees

Calculate the initial forgiveness amount by:  Loan Amount x (Post-PPP FTE / Pre-PPP FTE)

For example, a business receiving $100,000 in PPP Funds who reduces staff from 10 FTE (in the Pre-PPP period) down to 8 FTE (in the Post-PPP period) — the calculation would then be $100,000 x (8 / 10) or $80,000 in potential loan forgiveness.

• Post-PPP FTE = period borrower is reporting on, plus 8 weeks
• Pre-PPP FTE = February 15 – June 30, 2019  or  January 1 – February 29, 2020

There is currently conflicting advice regarding the “Pre-PPP FTE” calculation. Some have indicated that the selection of this number is at the borrower’s discretion as to which “Pre-PPP FTE” number to use in the calculation. However, some experts have noted that the Pre-PPP FTE count should be the LOWER of these two numbers. Please discuss this with your financial advisor or accountant.

FTE Reduction Exceptions

The application integrated recent guidance from the SBA which provided that reductions in FTE during the covered period will not result in loan forgiveness reduction if during the covered period, the employer made a good-faith, written offer to rehire an employee who was either terminated for cause or voluntarily resigned or requested reductions in hours during the covered period, which was rejected by the employee. But to be eligible for this, the employer must have documentation in their files about the offer and rejection.

In addition, the instructions guide employers through determining safe harbor from reductions in loan forgiveness based on reductions in full-time equivalent employees:

• for borrowers that are unable to return to the same level of business activity the business was operating at before February 15, 2020, due compliance with requirements or guidance issued between March 1, 2020 and December 31, 2020.
• to provide protections for borrowers that are both unable to rehire individuals who were employees of the borrower on February 15, 2020, and unable to hire similarly qualified employees for unfilled positions by December 31, 2020.

Average Full-Time Equivalents for Loan Forgiveness Reduction Formula

As we’ve noted from the beginning, the amount that can be forgiven will be reduced by the percentage reduction in the average full-time equivalent employees (FTE) that occurs during the 24-week covered period compared to other periods. The instructions provide a worksheet to guide the employer through the reduction formula.

One key question has been how the employer would determine this FTE calculation, and the approach that they’ve used is more restrictive than we hoped but provides some flexibility. For each employee, the employer can take the average number of hours paid per week, divide by 40, and round the total to the nearest tenth but with a maximum of 1.0. Employers may alternatively simply assign a 1.0 for employees who work 40 hours or more per week, and 0.5 for employees who work fewer hours per week.

The way that would work is the following:

• Employee 1 for the eight-week loan period (bi-weekly payroll)
  Payroll 1: 80 hours (40 each week)
  Payroll 2: 80 hours (40 each week)
  Payroll 3: 60 hours (40 one week, 20 the second week)
  Payroll 4: 50 hours (20 one week, 30 hours for second week)
  FTE: 0.84 FTE
• Employee 2 worked 40 hours every week of pay period
  FTE: 1.0 FTE

So generally the best rule will be to use the actual FTE calculation unless the employer’s overall average for non-full time employees is below 20 hours per week.

Use of the FTE during loan period vs. chosen reference period. To determine impact of FTE reduction on forgiveness, the reference period is, at the Borrower’s election, either (i) February 15, 2019 to June 30, 2019; (ii) January 1, 2020 to February 29, 2020; or (iii) in the case of seasonal employers, either of the preceding periods or a consecutive twelve-week period between May 1, 2019 and September 15, 2019. Note that it is important to look at the options and test each way to find the best one for your forgiveness application.

Eligible Non-Payroll Costs

The application states the following regarding eligible non-payroll cost:

• Eligible non-payroll costs must be paid or incurred during the covered period and paid on or before the next regular billing cycle, even if the billing date is after the covered period.
• Covered rent or lease payments are extended to include both real and personal property subject to a lease agreement in force before February 15, 2020.
• Non-payroll costs that were both paid and incurred during the covered period should only be counted once.
• One interesting side note: the instructions specifically prohibit pre-payment of mortgage interest toward these non-payroll costs but do not prohibit prepayment on rent and utility payments.

In addition, the SBA stuck by their rule that non-payroll costs cannot exceed 40% of the forgivable loan amount.

Reduction in Salary & Wages

Loan forgiveness is also reduced if an employer reduces wages by more than 25% during the Loan Period as compared to the period between January 1 and March 31, 2020. The instructions provide a detailed worksheet to assist employers in determining whether wages decreased by more than 25% during the covered period.

In addition, the CARES Act includes a safe harbor provision which provides that employers who reduce wages by more than 25% during the covered period can still receive full loan forgiveness if they restore wages by December 31, 2020. The worksheet guides employers through determining whether they meet the safe harbor provision.

Documentation

It is strongly recommended that you document all your transactions with regard to the funds used from your PPP Loan. Along with that, we would suggest that you take a moment now to document your ‘state-of-mind’ and rationale or reasons behind why you believe your certification regarding the need for a PPP Loan. This is best to do now, while the application process is fresh in your memory to include in your files should it be needed later.

Incurred vs Paid Expenses

One of the other major issues we ran into was earlier language from the SBA which suggested that only expenses incurred and paid during the loan period would count. The final instructions provided some great relief to this issue. Payroll costs are considered incurred the day the employee’s pay is earned, while the cost is paid the day checks are distributed or employees receive an ACH credit transaction. The instructions clarify that payroll costs that are incurred but not paid during the last pay period of the covered period are eligible for loan forgiveness so long as they are paid on or before the next regular payroll date. That means that incurred payroll expenses during the loan period could be paid after the end of the loan period and still counted toward forgiveness.

Flexibility of PPP Loan Period

The SBA’s Forgiveness Application and the attached instructions provided employers some options in terms of setting their loan period. There are two choices available:

1. From the Date of Your First Loan Payment
2. From the First day of your pay period following first payment.

For this choice, I’ll use the example that ABC Company had their PPP Loan amount deposited into their account and available on April 15, 2020. ABC Company paid their employees on April 17 for the bi-weekly payroll period that ran from March 30 (Monday) through April 12 (Sunday).

• Option 1: ABC Company’s Loan Period runs from April 15 through June 9, 2020 and covers expenses incurred or paid during that period.
• Option 2: ABC Company’s Loan Period runs from April 27 through June 22, 2020 and covers payroll expenses incurred or paid during that period. Other expenses would still be in the normal loan period.

Why April 27 and not April 13? Because April 27 is the first day of the payroll period that begins after the loan proceeds were deposited.

Who chooses? Per the SBA’s PPP Forgiveness Application Instructions, it is the employer’s choice about which method they use.

Other Important Notes

Here are a few additional points of information/advice that came as a result of the release of forgiveness information from SBA:

• The highest amount that can be reported as income for any employee during the loan period is the equivalent of $100,000 annualized. This prevents a borrower from paying a large amount to a high income key employee or owner to reach the 60% requirement for payroll costs.
• Remember that payroll costs include health care expenses – but you must deduct the amount paid by employees. Dental and vision are only included IF they are integrated with health benefits. If there is a separate insurance policy for dental and/or vision, or the employee can make a separate election (either during enrollment or for COBRA purposes), then dental and vision costs cannot be included.
• Covered Utilities were better defined as “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.” It remains unclear as to what “transportation” applies to so we hope for more guidance. There is also a question about whether or not the employer paying for internet access for employees working from home is eligible since they are expenses that were not in place as of February 15, 2020.
• Income paid to owners/partners should not be reported with other employees but on a separate line.
• Borrowers are required to retain documentation of 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 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.