Loan Forgiveness Under the PPP

When a loan is received from the Paycheck Protection Program (PPP), obviously a key benefit is the loan forgiveness component. It is important to remember that for the loan to be forgiven, the funds must be properly used. It is useful to look at the name of the program “the Paycheck Protection Program” and understand that the government wants you to hire and pay your employees EVEN IF YOU DO NOT HAVE WORK FOR THEM at this time.

The first point is that at least 75% of the loan proceeds MUST be used for payroll costs to obtain full forgiveness. Payroll costs include wages/salary, but only up to $100,000 per year ($1,923.07 per week). Wages paid in excess of this amount do not count towards the 75%. It also includes the cost of medical insurance paid by the employer. It does not include any Qualified Sick Pay paid under FFCRA, where you are getting a 100% credit against your payroll taxes. The other 25% can be used for rent and mortgage interest (not principal) where the obligation existed prior to the act and for utilities. These funds must be spent (cash
basis) in the eight week period starting with the funding of the loan. You cannot prepay expenses.

The amount of the loan forgiveness can be reduced if the number of the number of Full Time Equivalent Employees (FTE’s) decreases from the average number of FTE’s employed for either the period of Feb. 15, 2019 to June 30, 2019 or the period Jan 1, 2020 to Feb. 29, 2020. (Special rules apply for seasonal employers). The key here is “head count”. You need to figure out how many “full time” employees you had before the pandemic and how many you have after the loan. If you have your full time employees working 40 hours a week and part time employees working 20 hours a week, then each part timer counts as .5 FTE. The amount of the loan forgiveness will also be reduced if any employee’s wages or salary (under $100,000 per annum) is reduced by more than 25% from the most recent full quarter during which the employee was employed before the covered period. However, there is an exemption to these two reductions if reductions to the employee’s salary/wages and the FTE’s that occurred from Feb 15, 2020 to April 26, 2020 are restored in full by June 30, 2020.

Don’t forget that you will need to provide documentation (and certify as to their truthfulness) to your lender to prove that you have met all of the requirements. They documents must prove your calculation of FTE and pay rate/salary in addition to documentation of payment for rent/mortgage and utilities. Obviously keeping current records and computations will be better and easier than trying to put everything together at the end, when it would be too late to correct any miscalculations. Changes to the rules are constantly happening and may modify some of what is stated above. Please listen and read for new developments.