PPP Loan Forgiveness

• Decreases Payroll Cost

             - From 75% to 60%

• Increased Non-Payroll Cost

             - From 25% to 40%

• Extends the Period or Deadline

             - Qualifying Expenses from 8 to 24 weeks

             - Borrowers can restore previous staffing or salary levels and still qualify for loan forgiveness from June 30, 2020 to December 31, 2020

             - Repayment amount of a PPP loan that is not forgiven from 2 to 5 years

             - Defer principal and interest payments on loan proceeds after the covered period.

• Provides Exemptions

             - To the reduction to PPP loan forgiveness based on employee staffing levels

• Removes

             - The CARES Act restriction that made borrowers with forgiven PPP loan proceeds ineligible to defer payroll tax payments

1. Submit the PPP Loan Forgiveness Application to Lender with supporting documentation (we are not accepting applications at this time).

2. Lender has 60 days from receipt of a complete application to issue a decision to SBA

           - Lender must request payment from SBA

3. SBA will remit the appropriate forgiveness amount to the lender within 90 days

           - If applicable, SBA will deduct EIDL Advance Amounts from the forgiveness amount

           - SBA will determine in the course of its review that the borrower is eligible for forgiveness

4. Lender is responsible for notifying the borrower of the forgiveness amount

            - If only a portion of the loan is forgiven, or if the forgiveness request is denied, any remaining balance due on the loan must be repaid by the borrower on or                    before the five-year maturity of the loan

The general loan forgiveness process described above applies only to loan forgiveness applications that are not reviewed by SBA prior to the lender’s decision on the forgiveness application. In a separate interim final rule on SBA Loan Review Procedures and Related Borrower and Lender Responsibilities, SBA will describe its procedures for reviewing PPP loan applications and loan forgiveness applications

• Non-Payroll Cost

             - Mortgage interest on real or personal property

             - Leasing agreement for real or personal property

             - Covered utility payment (Electricity, gas, water, transportation, telephone or internet access)

             - PPE expenses

• Alternate Payroll Covered Period

Covered Period:The Covered Period is either: (1) the 24-week (168-day) period beginning on the PPP loan Disbursement Date, or (2) if the borrower received it’s PPP loan before June 5, 2020, the Borrower may elect to use an eight-week (56-day) Covered Period. For example, if the borrower is using a 24-week Covered Period and received its’ PPP loan proceeds on Monday, April 20, the first day of the Covered Period is April 20 and the last day of the Covered Period is Sunday, October 4. In no event may the Covered Period extend beyond December 31, 2020.

Alternative Payroll Covered Period: For administrative convenience, Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the 24-week (168-day) period of for loans received before June 5, 2020 at the election of the borrower, the eight-week (56-day) period that begins on the first day of their first pay period following their PPP loan Disbursement Date. For example, if the Borrower is using a 24-week Alternative Payroll Covered Period and received its PPP loan proceeds on Monday, April 20, and the first day of it’s first pay period following its PPP loan disbursement is Sunday, April 26 the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday is, October 10. Borrowers that elect to use the Alternative Payroll Covered Period must apply the Alternative Payroll Covered Period wherever there is a reference in this application to “the Covered Period or the Alternative Payroll Covered Period.” However, Borrowers must apply the Covered Period (not the Alternative Payroll Covered Period) wherever there is a reference in this application to “the Covered Period” only. In no Event may the Alternative Payroll Covered Period extend beyond December 31, 2020.

*From Interim Final Rule on Revisions to the Third and Sixth Interim Final Rules 6/17/2020

The amount of  loan forgiveness can be up to the full principal amount of the loan plus accrued interest. The actual amount of loan forgiveness will depend in part, on the total amount spent over the 24-week period beginning on the date your PPP loan is disbursed (“covered period”) on:

1. Payroll costs including salary, wages and tips up to $100,000 of annualized pay per employee (for 24 weeks, a maximum of $46,154 per individual, or for eight weeks, a maximum of $15,385 per individual), as well as  covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums).
2. Owners compensation replacement, calculated based on 2019 net profits, with forgiveness of such amounts limited to eight (8) weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an eight-week covered period or 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period, but excluding any qualified sick leave equivalent amount for which a credit is claimed under section 7002 of the Families first Coronavirus Response Act (FFCRA) or qualified family leave equivalent amount for which a credit is claimed under section 7004 or FFCRA.
3. Payments of interest on mortgage obligations on real or personal property incurred before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business mortgage payments)
4. Rent payments on lease agreements in force before February 15, 2020, to the extent they are deductible on Form 1040 Schedule C (business rent payments); and
5. Utility payments under service agreements dated before February 15, 2020 to the extent they are deductible on Form 1040 Schedule C (business utility payments).

Forgiveness has been limited for owner compensation for individuals with self-employment income who file a Schedule C or F to either eight (8) weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an eight-week covered period or 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period per owner in total across all businesses.

This approach is consistent with the CARES Act and its focus on keeping workers paid.

EXAMPLE:

A borrower with one other employee would receive a maximum loan amount equal to five months or payroll (2.5 months of payroll for the owner plus 2.5 months of payroll for the employee). If the owner laid off the employee and availed itself of the safe harbor in the Flexibility Act from reductions in loan forgiveness for a borrower that is unable to return to the same level of business activity the business was operating at before February 15, 2020, the owner could treat the entire amount of the PPP loan as payroll, with the entire loan being forgiven. This would not only result in a windfall for the owner, by providing the owner five months of payroll instead of 2.5 months, but also defeats the purpose of the CARES ACT of protecting the paycheck employee. *For borrowers with no employees, this limitation will have no effect, because the maximum loan amount for such borrowers already includes only 2.5 months of payroll.

Identify each employee — But, do not include Independent Contractor, Self-Employed Individuals, or Owner Employees or Partners.

Why?

• Independent Contractor: Payments to independent contractors are not eligible for forgiveness
• Self-Employed Individuals: Payroll costs is purely mechanical and is based on 24/52* of Line 31 of the individual’s 2019 Schedule C, rather than any amounts paid or incurred in 2020. You do not need to include their earnings on the Worksheet
• Owner Employees or Partners: Amounts are “pulled” – with no real additional guidance – into Schedule A and included as costs eligible for forgiveness. Stay tuned for more guidance in this area.

The CARES Act provides that the amounts spent on “payroll costs” during the 24*-week covered period are eligible for forgiveness. Cash Compensation costs include:

• Salary, wage, commission, or similar compensation;
• Payment of cash tip or equivalent;
• Payment for vacation, parental, family, medical, or sick leave; or
• Allowance for dismissal or separation
• Payment for the provision of employee benefits group health care coverage, including insurance premiums and retirement
• Payment of state and local taxes assessed on compensation of employees

*S-Corps will not incur benefits

Compensation does not include:

• The compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period. As a result, in no situation should you enter more than $46,154 for any employee.
• Any compensation of an employee whose principal place or residence is outside of the United States.
• Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116-127); or
• Qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act (Public Law 116-127).

• The total amount of loan forgiveness will eventually be reduced by the amount of any reduction in total ANNUAL salary or AVERAGE wages of any employee during the covered 8-week period who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay of more than $100,000.
• The reduction in forgiveness amount is required if the reduction in wages over the 24-week period is in excess of 25% of the total salary or wages of the employee during the period from January 1, 2020 through March 31, 2020.

A borrower is using a 24-week covered period. This borrower reduced a full-time employees weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period, with FTE of 1.0. In this case, the first $250 (25% of $1000) is exempted from the loan forgiveness reduction. The borrower seeking forgiveness would list $1,200 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by 24 weeks). If the borrower applies for forgiveness before the end of the covered period, it must account for the salary reduction for the full 24-week covered period (totaling $1,200).

(FTE = Employees that work 40 hours or more on average per week)

• To determine the average full-time equivalent employees (FTEs) for the 24*-week covered period (or the alternative payroll covered period, if elected),
• For each qualifying employee, determine the average number of hours worked per week and divide by 40, before rounding to the nearest tenth.
• The maximum amount for each employee is 1.0. Alternatively, you can skip the math and use 1.0 for every employee who worked 40 hours per week and 0.5 for every employee who didn’t meet that standard.

Example:

ABC Co. borrowed a $100,000 PPP loan on April 10, 2020. ABC Co. incurred $100,000 of costs eligible for forgiveness over the next 24 weeks.

For the 24-week period beginning April 20, ABC Co. Had the following employees:

                  A: who averaged 45 hours per week during the period,

                  B: who averaged 40 hours per week during the period,

                  C: who averaged 28 hours per week, and

                  D and E: who averaged 20 hours per week.

For the 24-week covered period, ABC Co. had 3.7 FTEs:

                 A: 45/40 capped at 1.0

                 B: 40/40 = 1.0

                 C: 28/40 = 0.7

                 D and E: 20/40 = 0.5 each (multiply by 2 employees)

If ABC Co. chose instead to use the simplified method, it would have 3.5 FTEs:

                 A: 45/40 capped at 1.0

                 B: 40/40 = 1.0

                 C: 28/40 = 0.5

                 D and E: 20/40 = 0.5 each (multiply by 2 employees)

• The 24-week period election may negatively affect the forgiveness amount. If a staff reduction occurs during the 24-week period, average FTE will be reduced relative to employment levels prior to February 15th, 2020 and may reduce the forgiveness amount. Individual businesses should consider how potential future reductions in employee pay and staffing levels will affect the amount eligible for forgiveness.
• The original safe harbor of reduction in FTEs that will not result in a reduction of the forgiveness amount by offering a written employment to an employee who declines to return to work appears to have been removed with the addition of two other safe harbors.
• Early PPP Forgiveness application submission, prior to the end of the borrower’s covered period, by a borrower will have to take into the consideration any reduction in salary more than 25% for the entirety of the covered period, i.e. if a borrower applies for forgiveness in week 12 and has reduced salaries for employees at the time of forgiveness application, a borrower will have to assume that the reduction will be in place for the entirety of the 24-week covered period.

The SBA will ignore a reduction in salary during the covered period relative to the 1st quarter of 2020, but ONLY IF that salary is restored to what it was on February 15, 2020 by December 31, 2020.

FTE Reduction Safe Harbor

The amount of loan forgiveness may ALSO be reduced if the borrower reduces headcount  during the covered period. Just as we saw with the reduction resulting from reduced salary,  however, the reduction may be ignored if a safe harbor is satisfied.

Your forgiveness is reduced if your average number of full-time equivalent employees (FTEs)  during the covered period is less than the average number of FTEs for any of the following  periods, at your election:

• The period beginning on February 15, 2019 and ending on June 30, 2019;
• The period beginning on January 1, 2020 and ending on February 29, 2020, or
• For a seasonal employer, as determined by the SBA, either of the two previous periods, or any 12-week period between May 1, 2019 and September 15, 2019.

A borrower may ignore the required reduction if a safe harbor is met. To satisfy the safe harbor, the borrower must first use the methodology described above to determine FTEs for two additional periods:

• The period from February 15, 2020 through April 26, 2020, and
• For the pay period that includes February 15, 2020,

If the average FTEs for the first period is less than the FTEs for the second period, the borrower must then compare the average FTEs for the second period to the total FTEs as of December 31, 2020. If the FTEs on December 31, 2020 are greater than the FTEs on February 15, 2020 the safe harbor is met and no reduction is required.

SBA and Treasury are adopting a regulatory exemption to the reduction rules for borrowers who have offered to rehire employees or restore employee hours, even if the employees have not accepted.

The borrower’s loan forgiveness amount will not be reduced if the borrower laid-off or reduced the hours of an employee, then offered to rehire the same employee for the same salary and same number of hours, or restore the reduction in hours, but the employee declined the offer.

A borrower may exclude any reduction in full-time equivalent employee headcount that is attributable to an individual employee if:

• The borrower made a good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or the alternative payroll covered period;
• The offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;
• The offer was rejected by such employee;
• The borrower has maintained records documenting the offer and its rejection; and
• The borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.

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