A Matter of Forgiveness – of a PPP Loan That Is
So, you're in business and received one of the potentially forgivable Paycheck Protection Program (PPP) loans created by the CARES in an effort to help keep people employed and businesses weather the Covid-19 storm. Now you are wondering, just what exactly am I supposed to do, and how do I go about getting this thing forgiven?
The dilemma is that while the PPP was long on promises, it was short on details. In fact, the CARES Act gave the SBA thirty days from passage to issue guidance and regulations explaining how the forgiveness would work. That was March 27. As of this writing, which is usually about two weeks prior to publication, it still has not happened. Check SBA.gov for any updates that may have occurred in the interim.
There are some things, however, that you can know and do now.
The first thing is to understand what are the qualifying uses for getting the loan (or a portion thereof) forgiven. A borrower is eligible for loan forgiveness equal to the amount spent on the following items during the 8-week period beginning on the origination date of the loan:
- Payroll costs, such as salary, wages, commissions, vacation, parental, family, medical, or sick leave, state unemployment taxes, and health care and retirement benefits
- Interest on mortgage obligations incurred in the ordinary course of business before February 15, 2020
- Rent paid on lease agreements in effect before February 15, 2020
- Utilities, so long as the service began before February 15, 2020
All expenses that fall under these categories are eligible for forgiveness.
Sounds simple doesn't it? Just add up all of the above paid during the 8-week period and it's forgiven, right? Not so much. There are a few hurdles to jump over before arriving at your destination.
One of the biggest stumbling blocks is an SBA rule that businesses must allocate 75% of the loan money to cover payroll costs, with only 25 percent allowed for rent, utilities and other overhead. This has become more difficult as the economic crisis from the virus drags on and as some businesses face a prolonged period of depressed sales, even once they reopen.
Another hurdle is that no matter how much you spend on the above, forgiveness will be lowered if you reduce the number of your employees or if their pay is reduced by more than 25%.
The reduction based on the number of employees is determined by comparing the average number of "full-time equivalent" (FTEs) employees per month for the eight weeks being measured (the numerator) to the average number of FTEs per month for either the period 1/1/20 to 2/29/20 or 2/15/19 to 6/30/19, whichever is lower (the denominator). The resulting fraction times the payroll costs incurred is the amount that can be forgiven.
Side note – I won't even begin to explain how you calculate an FTE at this point. It can be very different depending on the underlying assumptions, and as already stated, the SBA has yet to tell us what their assumptions and methodology will be. Stayed tuned.
For a situation where pay is cut more than 25% for any employee, the forgiven amount is the incurred payroll costs minus the amount of any reduction in wages that is greater than 25% compared to the most recent full quarter for any employee who did not during any pay period in 2019 earn more than $100,000 on an annualized basis.
Confused yet? Yeah, so are a lot of people, including many whose job it is to deal with this stuff.
On a positive note, if employees are rehired and/or wages restored by June 30, 2020, forgiveness will not be reduced. Also, additional special rules apply to those that are self-employed and to partners in partnerships. If you fit into one of those categories, you would be advised to seek professional guidance.
Here's a logical question – with so little guidance yet available, what should I be doing now?
The main thing is to keep track of how much you are spending on the different items of forgivable expenditures AND gather the information that ultimately will be needed to request forgiveness.
Information you can be gathering now includes:
- Payroll information, including hours worked and amounts paid by employee (including part-time employees) for each pay period in the 8-week forgiveness period, as well as the two periods of time mentioned above in the discussion of FTEs
- Employee payroll journals and reports for the most recent full quarter prior to the loan
- Documents proving debt obligations that existed before February 15, 2020, along with proof of interest paid on same
- Copies of lease agreements in effect before February 15, 2020, along with proof of rent paid
- Proof of utilities expenses paid as well as documentation that service began before February 15, 2020
- If you are self-employed, you will likely need a copy of your 2019 Schedule C, E or F from your tax return
- Partnerships will likely need to produce all Schedule K-1s from their 2019 tax returns.
A final word of advice – talk to your banker. After all, in the end, they are the ones who, at least as of now, it seems must make the final decision. Getting guidance from them up front could be a wise, money saving move.