New Clarity Around Preparing for PPP Loan Forgiveness
On May 15th, the U.S. Department of the Treasury issued a press release that the Small Business Administration, in consultation with the Department of the Treasury, released the Paycheck Protection Program (“PPP”) Loan Forgiveness Application along with detailed instructions and clarifications around the loan forgiveness process.
Read about the updated loan forgiveness program created by the Act passed by Congress on June 3, 2020.
Here is a summary of the highlights and changes brought by the press release and the official forgiveness application.
Alternate 8-Week Covered Period
There is now an alternative covered period in which to disburse funds from the PPP for companies with payroll frequencies of biweekly or longer. These companies may begin their covered period beginning the first pay period after receiving the PPP loan funds. This simplifies the determination of the amount of payroll costs incurred against the loan by creating a clean cut-off.
The SBA provides the example that if a borrower “received its PPP loan proceeds on Monday, April 20, and the first day of its 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, June 20.”
We recommend using the Alternate 8-Week Covered Period, if possible, for your business.
Flexibility in Basis of Accounting for Forgiveness
Previous interpretations of the CARES Act allowed only for expenses that were incurred AND paid to be considered in the calculation of loan forgiveness. This criterion has been loosened and allows companies to consider costs that are incurred OR paid (for payroll and other costs), as long as incurred expenses are paid by the next normal payroll or billing date.
The Full-time Equivalent (FTE) Calculation has been Defined
The new guidance instructs borrowers to calculate FTEs by entering the average number of hours paid per week per employee, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. This is contrary to previous interpretations of the CARES Act which assumed a 30-hour work week as contemplated by the Affordable Care Act. This is an important calculation as any reduction of FTEs during the eight-week covered period that is below the lower of the average weekly FTEs during the period of EITHER February 15, 2019 through June 30, 2019 OR January 1, 2020 through February 29, 2020, results in a reduction of loan forgiveness. A safe harbor exception to this rule applies as long as you restore your FTEs before June 30, 2020.
Further exceptions to this FTE rule have been added which allow that for a) any positions for which the borrower made a good-faith written offer to rehire an employee during the covered period which was rejected by the employee; and b) any employees who were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction of their hours during the covered period, no reduction of forgiveness will apply.
Allowable Wage Reductions
Wage reductions are allowable under the PPP and will not impact forgiveness unless wages (calculated on a per employee basis) are reduced below 25%. The calculation compares the average ANNUALIZED salary or hourly wage by employee during the eight-week covered period and compares it to the average ANNUALIZED salary or hourly wage during the period from January 1, 2020 through March 31, 2020. If the average during the eight-week period is less than 75% of the average during the previous quarter, a reduction of the forgivable amount of the loan applies, ONLY if the wages are not increased to less than a 25% reduction by June 30, 2020 (safe harbor rule).
How Marshall Jones Can Help
We have had many requests to help businesses and nonprofits navigate the complexities and hurdles of the PPP Loan. The AICPA has empowered firms like us with special guidance, tools, and calculators to help make sure we can be effective at providing the guidance and assurance you need. If you have concerns about your PPP loan and the forgiveness calculation, please do not hesitate to reach out to us!