24 Apr 2020 I Got My PPP Loan, Now What?
Though we just got word about the Senate approval of an additional $350 billion dollars in PPP Loan funding, the primary questions we are now being asked are about the calculation and amount of Forgiveness once loans are granted.
There are three things to understand from the outset. First, like when the PPP loan program was announced, there is very little guidance provided. Information related to rules, procedures, documentation and so on change almost daily. We expect the same for the Forgiveness aspect of the program. So far, no added guidance from the original CARES Act has been provided related to Forgiveness. We expect clarifications will begin soon.
Second, as with the original PPP Loan applications, the lenders will ultimately determine the amount of Forgiveness and the documentation and calculations they will require to support the Forgiveness amount. There were specific documentation requirements listed in the Act, but each individual bank can set their own final criteria.
Third, if an amount is not forgiven, it is a true loan with a 1% interest rate and two-year term that can be repaid without penalty at any time during the two-year period. No payment is due for six months, but interest does accrue.
Note: There is an error in the Act in how the Forgiveness reduction works which we anticipate will be resolved by a legislative fix. If one followed the calculation in the Act and kept the exact employees and the exact payroll counts, the reduction in Forgiveness would be 100% not 100% Forgiven. Obviously not the intent, just an error in drafting.
With those comments, lets address the CARES Act calculations as written and our interpretations. As we said, this could change at any time. If you need information as to how all of this applies to Self Employed’s please contact us.
As stated in a previous article, the Forgiveness calculation is broken into two parts.
Part I-Potential Forgiveness Amount
The first is the amount that can potentially be forgiven and is referred to in the Act as “expected Forgiveness amount”. A simple rule is that if it isn’t spent on Covered Expenses, it isn’t forgiven.
The amount that can potentially be forgiven is the amount of Covered Expenses that are incurred and paid during the eight week period beginning on the date of loan origination (eight week period). We believe the wording incurred and paid implies that only amounts that are applicable to the eight week period and also paid during the eight week period will be considered. This interpretation would eliminate any amounts accrued and/or prepaid that are not relevant to the eight week period. For example, an annual interest only loan that happened to come due during the eight week period would only be allowed for interest calculated only for the eight week period, not the entire year. Also, prepaying rent just before the end of the eight week period would also not be allowed.
Covered Expenses are those expenses that will be includible in the Forgiveness calculation and consist of:
- Payroll Costs based on the same definition used for the loan application. This must represent at least 75% of your Covered Expenses. The annualized $100,000 pay rules apply here as well. The ability to pay bonuses for past or future compensation during the eight week period and include in the Forgiveness calculations is unclear.
- Interest on any mortgage debt on any real or personal property incurred in the ordinary course of business and was incurred before February 15, 2020.
- Rent on leases in force before February 15, 2020. There is no guidance on whether this is just for real estate or whether it includes personal property like copiers, equipment, or servers, etc. Since it is not specified, we assume it includes both if it is subject to an appropriate lease agreement.
- Utility payments for electricity, gas, water, transportation, telephone or internet access where service began before February 15, 2020. No guidance on what transportation costs are for this purpose.
In cases where some or all of these expenses might be incurred but not paid within the eight week period, an employer might consider paying them in the eight week period. An example might be that a normal payroll period payment might fall outside the eight week period. Suppose the eight week period ends on June 14th but the normal payroll would be paid on June 15th. It may be prudent to get the portion of payroll through the 14th paid by the 14th. Additional clarity may be provided by the SBA or the Treasury as we progress.
Part II-Reductions in Amounts Forgiven
Once the amount that could be forgiven is calculated, there are potential reductions in the Forgiveness amount based on (a) reduction in the number of employees and/or (b) reductions in salary and wages.
Reduction in Number of Employees
If an employer has a reduction in employee count during particular measured periods, the amount of loan Forgiveness will be reduced based on a formula. The formula is a comparison of the average number of full-time equivalent employees per month employed during the eight week period divided by the average number of full-time equivalent employees per month during one of two periods. The employer has the ability to choose which of these two periods is most beneficial.
Period 1: the period beginning February 15, 2019 through June 30, 2019.
Period 2: the period beginning January 1, 2020 through February 29, 2020.
For example, if an employer has 30 calculated employees during the eight week period and had 50 employees during the period February 15, 2019 through June 30, 2019 period but had 40 employees during the period January 1, 2020 through February 29, 2020, the Forgiveness would be 75% of the loan amount. This would be calculated as 30 eight week period employees divided by the 40 January 1, 2020 through February 29, 2020 employees, since that would be the most beneficial choice.
As a note, seasonal employers must use the February 15, 2019 through June 30, 2019 time period.
For purposes of calculating the average number of full-time equivalent employees, here is what the Act says:
“the average number of full-time equivalent employees shall be determined by calculating the average number of full-time equivalent employees for each pay period falling within a month.”
No guidance has yet been provided on how many hours constitutes a full-time employee nor whether a month is a calendar month.
Reduction in Salary and Wages
This calculation is on a per employee basis, not necessarily on an overall salary and wages basis. The amount of Forgiveness shall be reduced by the amount of any reduction in total salary or wages of any employee during the eight week period that is in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the eight week period.
This calculation is a dollar for dollar reduction in Forgiveness on any reduction in salary or wages in excess of 25% of an employee.
It is important to note that under the provisions of the Act, employees that received more than an annualized rate of pay of $100,000 or more, in any single pay period in 2019 are excluded from this calculation. We are not sure the impact of the “any single pay period” was intended but will have to see if there is further guidance provided.
So, an employee who meets the $100,000 plus criteria whose salary was reduced by more than 25% or was terminated will not impact the loan Forgiveness under this calculation. It could however still impact the employee count calculation above.
Once again, no guidance has been provided on whether a quarter is the prior three months or if they are referring to a calendar quarter.
The Act provides for an exemption opportunity from the Employee Count and Salary Reduction penalties above. Since there have been a number of questions about this from clients, we are providing some detail on how this appears to work. We recognize that this exemption criteria is confusing and we are going to try and simplify it as much as possible.
The way the Act is worded, if you meet these specified criteria, the amount of the Loan Forgiveness will not be reduced by the reduction in number of employees above or will not be reduced as a result of a reduction in the salary or wages of one or more employees above if:
- during the period beginning on February 15, 2020 and April 26, 2020 there has been a reduction in the number of full-time equivalent employees compared to the number of full-time equivalent employees on February 15, 2020, and the employer eliminates that reduction of full-time equivalent employees not later than June 30, 2020 and/or
- during the period beginning on February 15, 2020 and April 26, 2020 there has been a reduction in the salary or wages of one or more employees and the employer eliminates that reduction not later than June 30, 2020.
In other words, if an employer looks at their full-time equivalent employees as of February 15, 2020 and compares them to their full-time equivalent employees between February 15, 2020 and April 26, 2020 and that comparison shows a reduction, the employer can bring their full-time equivalent employee count back up to the February 15, 2020 level by June 30, 2020 and there will be no reduction in the amount of Loan Forgiveness. It is believed that this exemption is an all or nothing exemption, meaning either the employee count is met by June 30, 2020, or it has not.
Also, if an employer looks at the wages paid to any employee as of February 15, 2020 and compares them to the wages paid to that employee between February 15, 2020 and April 26, 2020 and that comparison shows a reduction, the employer can bring the wages for that employee back up to the wage level at February 15, 2020 no later than June 30, 2020 and there will be no reduction in the amount of Loan Forgiveness for that employee.
Once again, there has been no guidance provided as to dealing with employees who have left, replacement employees, etc. It is believed that the salary reduction aspect of Forgiveness can be resolved by hiring a “comparable” or higher level employee in lieu of the original employee.
As stated earlier, ultimately the lenders will determine what documentation is required to support the Covered Expenses, Employee Counts and Salary and Wages requirements, but the Act did identify specific documents that could be required:
- Documentation verifying the number of full-time equivalent employees on payroll and pay rates for the periods described including:
- Payroll tax filings reported to the Internal Revenue Service
- State income, payroll and unemployment insurance filings
- Documentation including cancelled checks, payment receipts, transcripts of accounts or other documents verifying payments on covered mortgages, payments on covered leases, and covered utility payments
- Certification from the Employer that:
- The documentation presented is true and correct
- The amount of Forgiveness requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation or make covered utility payments
- Any other documentation the Administrator determines necessary
Other items likely to be needed are any health insurance and retirement plan contributions as they are part of payroll costs.
Forgiveness Approval from the Lender
The lender has 60 days after receiving the Forgiveness application to render a decision on the amount of Loan Forgiveness.
PPP loan and Deferred Payroll Tax Deposits
In a related note, it was originally believed that an employer was not allowed to defer the payment of certain payroll tax amounts if they received a PPP loan and were going to be forgiven for some or all of the loan. Recent IRS guidance indicated that there could be some deferral available. Here is the IRS Guidance:
Employers who have received a PPP loan may defer deposit and payment of the employer’s share of Social Security tax that otherwise would be required to be made beginning on March 27, 2020, through the date the lender issues a decision to forgive the loan in accordance with paragraph (g) of section 1106 of the CARES Act, without incurring failure to deposit and failure to pay penalties. Once an employer receives a decision from its lender that its PPP loan is forgiven, the employer is no longer eligible to defer deposit and payment of the employer’s share of Social Security tax due after that date. However, the amount of the deposit and payment of the employer’s share of Social Security tax that was deferred through the date that the PPP loan is forgiven continues to be deferred and will be due on the “applicable dates”
So, amounts deferred through the date of the decision on loan Forgiveness will be due at least 50% by December 31, 2021 and the remainder due by December 31, 2022 and no amounts incurred after the date of Forgiveness may be deferred at all.