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!

PPP Loan Forgiveness Application Here

Preparing for Paycheck Protection Loan Forgiveness

It has been a long road for many of you who have already received your Paycheck Protection Program loan funds, and certainly for those of you who are still waiting for your funds to arrive.  Unfortunately, this is only the first step in the process under the CARES Act and the economic relief it is intended to bring.

To help you navigate this road, we at Marshall Jones want to be sure to continue to be there for you during the next phase, which is to help you use the funds in a way that prepares you for forgiveness.

PPP Loan Forgiveness Maximization

Much like the confusion that existed initially around applying for the PPP loan, there is a great deal of ambiguity around the precise forgiveness calculations that will be required.  While clarity will come with time, we believe there are some practical steps and safe interpretations of the forgiveness clauses of the CARES Act which will put you in the best position to receive total loan forgiveness.

We want to emphasize the areas we think are the most important considerations for you to make during the eight-week covered period after you receive your loan funds.  Doing your best to use the funds in a way that aligns with the intent of Congress will give you the best chance at maximum loan forgiveness.

Know Your Timeline

The clock to spend your PPP funds starts the day your funds are deposited into your bank account.  You will have eight weeks from this time to spend your loan funds on covered charges if you want to receive 100% forgiveness on your loan.

Track and Document Your Covered Expenses

There are many ways to do this, but some are more practical than others.  Some advisors are recommending opening up new bank accounts, changing payroll frequencies, or disbursing money in specific amounts to prove the use of funds.  We believe that a good accounting system is all you really need.

Ultimately, we believe that you will simply need a list of paid and incurred transactions covered by the CARES Act that the PPP funds were used for during the eight-week period after receiving your loan funds.  This list of expenses can be tracked simply in a spreadsheet or clever use of debits and credits in your account system.

Covered PPP Fund Expenses Include:

  • Gross wages, tips, vacation, FMLA
  • Employer portion of Health care benefits
  • Employer portion of retirement benefits
  • Employer portion of state and local taxes on compensation
  • Rent for real and personal property
  • Electricity
  • Water
  • Phone
  • Internet
  • Fuel
  • Interest on loans secured by real or personal property

Expenses Not Covered by the PPP Fund:

  • Employer portion of payroll taxes
  • Wages for the eight weeks that are more than $15,385 for a single employee (effectively excluding wages that are over $100k for a single employee)

ALL of these transactions should be supported by documentation.  We recommend that all this documentation be accumulated at least weekly, kept electronically, and ready to provide to the bank when asked for during the forgiveness process.

Maintain Your Payroll at Pre-Pandemic Levels

Forgiveness will be reduced if you do not retain an average number of employees during the eight-week period that is greater than that which existed at pre-pandemic levels (the lessor of the average number of FTEs from 2/15/19 – 6/30/19 or 1/1/20 – 2/29/20).

Forgiveness will also be reduced if you reduce employee salaries by more than 25% of their salary at pre-pandemic levels.

Forgiveness will be reduced if more than 25% of the loan funds are used on non-payroll costs.  Based on the calculation of the maximum loan amount, this should only be possible if you do not maintain your pre-pandemic payroll levels.

Remember the spirit of the CARES Act and the namesake of the loan program.  The Paycheck Protection Program was designed to let people keep their jobs and their salaries.  If you want the best chance at maximum loan forgiveness, maintain your payroll at pre-pandemic levels, which may include rehiring individuals who have been laid off or furloughed.  Doing this should keep you safely within the bounds of loan forgiveness interpretations that are to come.

Stay informed & Talk with Your Bank or a Professional at Marshall Jones

More information on loan forgiveness will be available in the coming weeks.  Please check with us or your bank to stay aware of the latest news and be prepared to adjust course if necessary.

There will be many nuances to the PPP loan forgiveness process, so if you want a more detailed analysis of your specific situation, we would be happy to have these discussions with you.  Please do not hesitate to reach out to us online or by phone at (404) 231-2001.