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PPP Loan Forgiveness Update

| May 19, 2020

On March 15th the SBA announced further guidance to borrowers regarding information needed in order to have their Paycheck Protection Program loans forgiven. The form borrowers must use is SBA Form 3508, which can be found here:

The guidance provided on forgivable costs covers four categories: (1) payroll costs, (2) business mortgage interest payments, (3) business rent or lease payments, and (4) business utility payments. This synopsis will focus mainly on payroll costs because as long as at least 75% of the loan amount is attributable to payroll costs then forgiveness is generally available across all four categories.1

For Self-Employed / Freelancers / Independent Contractors

Those who are self-employed with no employees have a faster track to complete the forgiveness application. Here is a detailed article outlining the process: 

For Business Owners with Employees

For those employers with employees, the process can be a bit more complicated if you have employees who were terminated or experienced reduced hours.

The standard forgiveness period or "covered period" is the eight-week time frame beginning when borrowers received the PPP funds. However, under the SBA's guidance the forgiveness period for payroll costs can be flexed so the eight-week period starts the first day of their first payroll period following receipt of the PPP funds, known as the "alternative payroll covered period".The standard covered period must still be used for other "non-payroll" expenses.

Payroll costs are broken down into cash and non-cash compensation. The amount of cash compensation (or salary) that is eligible for forgiveness is subject to the same $100,000 annual salary cap as outlined on the initial loan application, or $15,385. 

Non-cash compensation, which includes benefits related payroll costs such as healthcare costs or retirement contributions paid directly by the employer are not subject to the $15,385 limit.1 As a result, safe harbor and discretionary profit sharing contributions made during the covered period are considered toward the 75% forgiveness threshold. Employer paid state and local taxes on employee compensation (e.g. state unemployment insurance tax) also falls under non-cash compensation. 

Forgiveness relief will be limited where employers have a reduction in Full-Time Equivalency (FTE), or the number of full-time employees, between January 1, 2020 and the end of the covered period. The reduction calculation compares a past reference period to the covered period. The past reference period is either February 15, 2019 to June 30, 2019; January 1, 2020 to February 29, 2020; or for seasonal employees either of the previous options or a 12-week consecutive period between May 1, 2019 and September 15, 2019.

If any of the following exceptions occurred, there will not be a reduction in the FTE calculation:

  1. Any position for which the borrower made a written offer to rehire an employee which was rejected by an employee
  2. Any employees who were fired for cause, voluntarily resigned or voluntarily requested and received a reduction in hours during the covered or alternative payroll covered period

Some good news is a safe harbor exemption exists! Borrowers are exempt from an FTE reduction if both of the following are met.3

  1. The Borrower reduced its FTE employee levels in the period beginning February 15, 2020 and ending April 26, 2020; and
  2. The Borrower restored its FTE employee levels by no later than June 30, 2020 to its FTE levels in the pay period that included February 15, 2020

Salary reductions can also limit loan forgiveness to the extent they exceed 25% for an employee during the covered period or alternative payroll covered period as compared to the period of January 1, 2020 through March 31, 2020.

If you are rehiring employees or have staff returning from furlough, you should obtain written confirmation of their intent to return. Paychex has a good template which you can find here:

Eligible non-payroll costs (limited to 25% of the loan amount) must be paid during the covered period or incurred during the covered period and paid on or before the next billing date. These  include:

  • Business mortgage interest payments (excludes principal prepayment) on a mortgage incurred before February 15, 2020
  • Business rent or lease payments in force before February 15, 2020
  • Business utility payments: electricity, gas, water, transportation, telephone, or internet access for which service began prior to February 15, 2020

I encourage you to work with your tax advisor as soon as possible to ensure you're making decisions to maximize your PPP loan forgiveness.