UPDATED – What Small Businesses, Nonprofits and Self-Employed Need to Know about PPP Loan Forgiveness by Steve Nouss, CPA, CGMA
Posted on June 17, 2020
As of June 12, 2020, the Small Business Administration (SBA) had approved more than $512 billion in potentially forgivable Paycheck Protection Program (PPP) loans to small business, non-profits and self-employed taxpayers struggling to maintain operations and retain workers through the COVID-19 pandemic. However, since the CARES Act introduced the PPP in March, loan applicants have had to contend with a series of changes to the program’s rules and requirements, including those relating to loan forgiveness. Following is the latest update to the program, including new guidance issued after the June 5 enactment of the Paycheck Protection Program Flexibility Act of 2020.
Reductions to Loan Forgiveness
The most important point that borrowers should remember to maximize their chances of loan forgiveness is that they must spend at least 60 percent of loan proceeds on payroll costs over a 24-week covered period, which begins either on the date they receive those funds or the first day of their first pay period following loan disbursement from the lender. Under the law, payroll costs include:
- Salary, wages, commission, bonuses, tips or similar compensation of up to $100,000 a year paid to U.S.-based employees (excluding independent contractors),
- Vacation, parental, family, medical, or sick leave
- Allowance for dismissal or separation (e.g., severance payments)
- Continuation of group health care benefits, including insurance premiums
- Payments of any retirement benefit
- State or local taxes assessed based on compensation (e.g., unemployment insurance, etc.)
In general, the amount of loan forgiveness a borrower can receive will be based on the approved payroll costs they spend during the 24-week covered period, less the following:
- Reductions to full-time equivalent (FTE) employees, and
- Reductions to any employee’s total salary or wages that exceeds 25 percent of the total salary and wages paid during the full quarter prior to loan origination to employees whose annual salary is less than $100,000.
Reduction to Number of Employees
Because PPP loans are designed to help and encourage businesses to retain employees, the amount that may be forgiven will be reduced by the number of FTEs during the covered period compared to one of two prior reference periods.
More specifically, non-seasonal businesses that are operational year-round will need to divide FTEs during the eight-week covered period that begins on the date they receive loan proceeds by either of the following:
- Average number of FTEs between the look-back period of Feb. 15, 2019, and June 30, 2019, or
- Average number of FTEs between the look-back period of Jan. 1, 2020, and Feb. 29, 2020.
Essentially, borrowers are encouraged to have the same number of FTEs at the end of the 24-week covered period commencing after loan origination as they had during either historical look-back period.
FTEs are based on a 40-hour work week and calculated by taking each employee’s average number of hours paid per week, dividing that number by 40, and rounding the total to the nearest tenth. The maximum for each employee is capped at 1.0. Alternatively, borrowers may use a simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.
If the number of FTEs during the crisis period is 20 percent less than a look-back period, the amount of loan forgiveness will be reduced by that same 20 percent. Businesses that furloughed FTEs after Feb. 15, 2020, due to the impact of the coronavirus, may remedy these discrepancies by bringing those workers back by Dec. 31, 2020. Those borrowers who are having difficulties hiring back workers during the covered period for purposes of maximizing loan forgiveness may exclude any FTE reductions when they make good faith efforts to rehire employees who reject such offers, when an employee voluntarily resigns or requests a reduction to work hours, or when the employer fires the employee for cause.
Reductions to Payroll
The CARES Act calls for PPP loan forgiveness to be further reduced, dollar-for-dollar, when salary and wage reductions during the 24-week covered period exceeds 25 percent of the salary and wages borrowers paid to each respective employee compared to the average annual salary or hourly wage for the relevant period vs. during the full quarter prior to loan origination. This computation can be tricky and applies only to employees with annual salary of less than $100,000.
Under the PPP Flexibility Act, borrowers seeking loan forgiveness must use at least 60 percent of loan proceeds for payroll costs, which the SBA and the Treasury Department subsequently clarified as “a proportional limit on eligible nonpayroll costs as a share of the borrower’s loan forgiveness amount rather than as a threshold for receiving any loan forgiveness.” As a result, borrowers that use less than 60 percent of loan amounts on payroll costs will still be eligible for partial loan forgiveness.
Under these circumstances, it is important to remember that the interest on any unforgiven loan balances is just 1 percent, payable over five years. Complete loan forgiveness under the Paycheck Protection Program would apply to borrowers who:
- limit loan proceeds to cover payroll expenses, rent, mortgage & personal property interest, utilities, and interest on other debt obligations during one of two 24-week covered periods,
- allocate no less than 60 percent of loan proceeds to payroll costs,
- maintain at least 75 percent of the same payroll per employee compared to the average annual salary or hourly wage for the relevant period Vs the prior quarter, and
- Make a good faith effort to retain FTE headcount at the same level as in one of two prior reference periods.
Businesses and non-profit organizations that receive PPP loan approval must maintain meticulous records to demonstrate their compliance with the loan terms and verify the information they submit and self-certify is true and accurate. Working closely with lenders and accounting professionals can help to ensure accuracy when supporting claims and completing loan-forgiveness worksheets.
About the Author: Steve Nouss, CPA, CGMA, is a director with Berkowitz Pollack Brant’s Business Consulting Services practice, where he provides profit-enhancing CFO services, operational reviews, enterprise risk management, internal audit and anti-fraud services for businesses of all sizes. In addition, Nouss is a System and Organization Controls (SOC) specialist who holds AICPA certification in cybersecurity. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at firstname.lastname@example.org.