The hottest topic among business owners and administrators right now is what are the rules, guidance, and steps to maximize PPP loan forgiveness. This blog post is Part Two of Checkright’s Three Part Series on PPP Loan Forgiveness. Since the Paycheck Protection Program was unveiled in late March, many gray areas have been debated in small business, accounting, and legal circles. There have now been a handful of guidance documents released by the SBA that clarify many of the original questions. There may still be further changes and some areas are still not 100% clear, but as of this writing, here are the things we have learned. As of the most recent edits to this document of May 25th, there is a bill about to be introduced in the Senate to extend the 8 week window to 16 weeks that has an excellent chance of passing. Stay on the lookout for more changes.
- Businesses don’t have to subtract federal taxes withheld from employee checks (income, social security, or medicare) when calculating “payroll costs.” There was confusion about this language when the act came out and several national payroll companies even put out calculation reports subtracting these costs. You still can’t include the employer side of federal payroll taxes in the calculation though.
- The forgiveness limits on high wage earners and owners have been defined more clearly. The maximum forgiveness for any single employee or owner is $15,384.62 for the 8 week forgiveness period ($100,000 annual limit divided by 52 weeks to obtain a weekly amount, then multiplied by 8 for the 8 week period.) You may add the employer portion of state payroll taxes, health insurance, and retirement match expense on top of the limit. In a new item from the application, owner wages are also capped at the 2019 owner compensation amount. That means if an employee/owner had a salary of $1000 per week in 2019, the maximum forgiveness allowed would be $8,000, not the $15,384.
- Businesses that received loans for less than 2 million dollars no longer have to prove that the loan was necessary. The SBA published enhanced guidance since the loan application that all businesses had to certify that the PPP loan was essential to the ongoing operation of the business, which made some business owners nervous. Some owners were uncertain if their revenue was off 10%, for example, was the PPP loan essential? The SBA then created a Safe Harbor that says if the loan was under $2 million, it is deemed essential.
- Payroll Costs include all cash compensation paid to employees, including bonus and hazard pay. The original act names many pay types as acceptable but doesn’t mention hazard pay, bonuses, or taxable allowances, just to name a few. Question 32 from the FAQ guidance allows all cash compensation types.
- Businesses don’t need to move up the date of their final payroll to move the date into the 8 week window. The Forgiveness Application makes it clear that a business can pay out its last pay date after the 8 week window closes as long as it’s paid on or before the next scheduled pay date.
- For companies with Weekly or Bi-weekly payrolls, the Application allows them to use an “Alternative Covered Payroll Period” that begins the 8 weeks, not on the funding date, but instead on the first day of the pay period following funding date. Most companies with Weekly and Bi-weekly (every two weeks) payrolls will choose to use this alternate period as it allows the 4 or 8 covered payrolls to align perfectly with the 8 week forgiveness window. Companies with a Semi-Monthly (twice a month) or Monthly pay frequency will still have to use funding date as day one of their covered period and perform accruals to count a percentage of the first and last payrolls in the covered period.
- Payroll and Non-payroll Costs eligible for forgiveness can either be paid OR incurred during the 8 week Covered Period. This clarification is important because now any payroll, utility, lease, or interest payment can be counted that has a paid date in the covered period, AND payments incurred during the period that are paid on or before a due date that falls after the covered period also may be counted. Companies may be able to count an extra payroll or a third rent payment as a result of this guidance.
- If a business moves it’s 8 week window for payroll costs to the Alternative Covered Period, the 8 weeks for non-payroll costs remains the first 56 days after funding of your loan (including funding date as day one.) Many businesses will be using differing 8 week periods to track payroll costs and non-payroll costs.
- The SBA clarified that a Full Time employee is anyone who works at least 40 hours a week, and a Part Time employee is anyone who works less than 40 hours a week, and also provided an alternative method of counting. Full Time employees can’t receive any more than a 1 in your count-an employee who works 60 hours in a week would not receive a 1.5, for example. Employees who work less than 40 hours will receive a count equal to their hours divided by 40. An employee who works 32 hours would receive a .8 for your employee count, for example. Alternatively, small businesses may use 1 for every employee who works 40 hours or more and .5 for any employee who works less than 40 hours in a week.
- The SBA will allow a Safe Harbor (an exception) for employees who refuse to come back to work when offered, and a full-employment-by June-30th Safe Harbor when calculating reductions in workforce. Forgiveness of PPP Loans can be reduced by the percentage of reduction in number of employees. The borrower does not have to count as reduced any employee who: was offered their job back in writing and refused to come back to work; were fired for cause; voluntarily resigned; or requested and received a reduction in hours. A second possibility, the June 30th Safe Harbor states that if the borrower reduced its FTE employees between February 15, and April 26th, and then restores that count to its February 15th level by not later than June 30th, then there will be no reduction in forgiveness for FTE count. Any employee who you will count that refuses to come back to work must be reported to your state unemployment office.
Helpful Links for PPP Loan Forgiveness:
PPP Loan Forgiveness Application: https://www.sba.gov/sites/default/files/2020-05/3245-0407%20SBA%20Form%203508%20PPP%20Forgiveness%20Application.pdf
PPP Frequently Asked Questions: https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf
PPP Final Interim Rule: https://home.treasury.gov/system/files/136/PPP-IFR-Loan-Forgiveness.pdf
Disclaimer: The subject matter in this article is subject to change and re-interpretation at any time by the SBA, Treasury, Executive Order, or Congress, and the author may or may not have a chance to update the material between when the changes were made and your reading. This article is meant to provide general guidance on PPP Loan Forgiveness, and the reader should seek specific advice for his or her situation from an attorney, CPA, or SBA representative. Neither the author nor Checkright make any representation or warranty as to the final accuracy or interpretation of the materials herein.
About the author: Arch Wallace is the President and founder of Checkright and has spent almost 20 years employed in the accounting and payroll industry. He can be reached at firstname.lastname@example.org.