This topic and related workbook have been updated in a current post here as of 8/18/2020.
By Tommy Greer
Now that you’ve been approved for your loan under the Paycheck Protection Program (PPP) and funds are being disbursed, it is now time to transition from getting your PPP loan amount to maximizing PPP loan forgiveness. Currently, there has been little guidance issued on how the forgiveness provisions will work, but we do have the statute to give us some level of guidance. Here is a detailed workbook with the calculations, as best we know it today.
The “covered period” to determine how much will be forgiven starts the day funds are disbursed and runs for eight weeks. To be assured of maximum forgiveness, plan to spend 100% of those funds before the end of the eight week period. These funds must be spent on:
- “Payroll Costs” these are defined the same here as when calculating the loan amount and must be at least 75% of the forgiven amount. Keep in mind these do not include wages where credit was taken for Sick or Family Leave or wages in excess of $100,000 annualized. This is limited for both employees and owners to a maximum of $15,385 per individual for the 8 weeks (8/52 of $100,000). For owner’s compensation, this amount is additionally limited to eight weeks’ worth (8/52) of 2019 net profit. Employee portion of payroll taxes and withholding are NOT required to be subtracted from gross wages per the Frequently Asked Questions issued by the SBA as of April 13, 2020.
- Interest on Mortgage on real or personal property incurred before February 15, 2020
- Rent obligated under a leasing agreement in force before February 15, 2020
- Utilities payment for electricity, gas, water, transportation, telephone and internet access for which service began before February 15, 2020
- And these costs must be incurred and payments must be made during the eight week period. There is no guidance yet on whether there is any leeway on timing of these expenditures.
WHAT CAN REDUCE MY FORGIVENESS AMOUNT?
Reduction in FTEs. The amount forgiven will be reduced proportionally by any reduction in the number of full-time equivalents (FTEs) during the eight-week “covered period” as compared to either (1) January 1 to February 29, 2020 or (2) February 15 to June 30, 2019. You are allowed to choose the most favorable period of these two.
Are FTEs based on 30 hours a week or 40 hours a week? As of today, there is no specific guidance on this, but the vast majority of employment experts are confident that the SBA will use the ACA definition of full-time equivalent, which is based on 30 hours a week being full time. Also keep in mind FTE for any one employee cannot be greater than 1.
Salary/wage reduction. For any employee that earned less than $100,000 in 2019, if their pay is reduced more than 25% during the 8 week “covered period” as compared to the 1st quarter 2020, there is a dollar-for-dollar reduction in the forgiveness amount for the amount greater than the 25%.
Re-Hires exemptions for the above. The statute allows for an exemption from the above reductions if the shortfall in FTEs or salary levels are restored by June 30, 2020.
PLANNING CONSIDERATIONS
Take some time to plan how you will spend these funds once they arrive to assure you achieve maximum forgiveness.
- Since lenders are required to fund the loan within ten days after approval, this doesn’t give you much time to defer. Work with your lender to time the disbursement of funds to help you best maximize your ability to spend funds on payroll.
- We suggest you open a separate deposit account solely for the PPP funds and draw on it as needed and as accounted for in the workbook calculation template above.
- Determine your FTEs for the applicable test period, which is February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020, whichever gives you the greater benefit. Calculate now to properly plan for the eight week period.
- Consider staffing during the eight week period to maximize loan forgiveness. Calculate your average headcount per pay period along the way—at each pay period. Know that number and track whether you are ahead or behind. You can pay people, even if they are not working, to maximize loan forgiveness.
- Project gross wages for the eight week period based on the above and then add other allowable “payroll costs,” rents, utilities and mortgage interest.
- In regard to the Compensation Reduction, i.e. no less than 25% reduction rule – determine the total annualized salary or wages of each employee for the 1st quarter in 2020 and compare to the eight week period for further possible reductions in the forgiveness amount.
Accounting procedures must be implemented now, as you are going to need to prove all of this later for forgiveness. Doing this now will help streamline the application process for PPP loan forgiveness.
Remember, though, if you cannot spend the money in the eight week period, you have up to two years to repay the loan, at 1% interest, with a six-month payment deferral, with no collateral and no personal guarantee. The borrowers must keep accurate records, because they bear the burden of proving that both the loan amount and the usage of those funds are in accordance with the terms of the CARES Act.
The loan forgiveness features of the Paycheck Protection Program are complex and an ever-changing landscape with guidance being issued almost daily with the SBA’s or Treasury Department’s interpretations of it. Therefore continue to stay in contact with your professionals here at BCS, your lender and the SBA’s and US Treasury’s websites for updates on loan forgiveness and interim rules on how this will be calculated.
