Congratulations - You’ve Received Your Paycheck Protection Program Loan…Now What?

Many of you have received your Paycheck Protection Program loan and you are now wondering what to pay with the proceeds and how best to prepare for the forgiveness process.  Although much clarification is yet to come, there are some key items you should be aware of to maximize forgiveness and minimize uncertainty.

Paycheck Protection Program Forgiveness Facts:

• It is important to note that the intent of the program is to keep people employed and paid at pre-COVID 19 levels.  Not adhering to this general principal will likely impact the amount of debt forgiveness a business receives.

• Eligible expenses used for the forgiveness calculation must be both incurred and paid during the eight week “Covered Period” which begins on the date of the receipt of the loan funds.

• All payments for eligible expenses will need support when requesting forgiveness.  Payroll costs, calculated in the same manner as for the PPP loan (gross payroll not to exceed $100,000 for an individual, employer paid benefits and retirement contributions, and state taxes such as unemployment) must make up at least 75% of the forgiveness amount (and the total amount).  Other eligible expenses (utilities under service agreements prior to February 15,2020, rent payments on leases dated before February 15, 2020, and interest on mortgage obligations incurred before February 15, 2020) may make up the remainder but not greater than 25%.  Also, related to rent, there is no specific guidance stating that self-rental payments are excluded, as long as there was a lease in place prior to February 15, 2020.

• Loan amounts were based on slightly more than 10 weeks of payroll from 2019 (in many cases a very successful year for businesses) and the forgiveness “Covered Period” is only 8 weeks of 2020.  Because of this and the fact that payroll is the largest expense for most businesses, it is possible many loans will not be 100% forgiven.

• In cases where the tracking of expenditures may be burdensome, it may be advantageous to place funds received into a separate bank account to assist in determining amounts for the forgiveness calculation.  However, there is no specific requirement to do so.

• Based on forgiveness guidance thus far, it is likely most amounts used for the calculation will be on a cash basis meaning some planning will be necessary for many businesses.  For instance, the date of the final payroll may need to be earlier to ensure it is included in the covered period.  Additionally, owners on payroll may want to pay others first to allow flexibility at the time of planning so as not to exceed the annualized salary of $100,000.

• Any amounts not forgiven will convert to a 1% fixed rate loan with a two-year term beginning 6 months after the initial disbursement of loan proceeds.  Interest accrued throughout the deferral period.

• There are two additional calculations that must be performed when determining the amount of loan forgiveness besides the 75%/25% calculation of payroll versus other expenditures.  They relate to headcount (FTE’s) and wages or salary reduction.

• Headcount: If a business reduces its full-time employees during the “covered period”, the forgiveness amount is reduced by a ratio defined as:

• The average number of FTEs during the covered period (numerator) divided by the average number of FTEs during the base period described below (denominator).
• There are three different options to determine the base period, and borrowers can select the one most favorable to them:
  • Using 2019 Information –the average number of FTEs per month from February 15, 2019, through June 30, 2019
  • Using 2020 Information –the average number of FTEs per month from January 1, 2020, to February 29, 2020
  • Seasonal Businesses –the average number of FTEs per month from February 15, 2019, through June 30, 2019

• Wage or Salary Reduction:

• Total reduction in salary/wages of each employee included in payroll costs making less than $100,000, whose annualized compensation for the 8-week post-loan period is less than 75% of that employee's annualized compensation for most recent quarter that employee was employed.  At this point we are not sure the mechanics of this calculation as it compares a quarter to an eight-week period.

• For both the headcount and wage or salary reduction, the business has until June 30, 2020 to restore full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020, and thus eliminate the potential reduction in loan forgiveness. But it is currently unclear mechanically how you would employ the correction.

• Recent guidance has been provided by the SBA that indicates a business will not be penalized for reductions in head count for individuals who are offered their former positions but decline to return.  Because of this, it is important to provide written offers to employees and to document their refusal to return and their reason for doing so.

• Self-employed individuals:  Forgiveness for self-employed individuals follows the guidance of other businesses with a few notable exceptions:

• Maximum owner profit deduction is equal to 8/52 of the profit on the individuals 2019 Schedule C.  This could cause many sole proprietors to have loan amounts that will not be forgiven in total especially if they have no payroll or other eligible expenses as the maximum loan amounts were calculated at approximately 10.7/52 (example: a loan based on the maximum $100,000 of Schedule C profit = $20,833; forgiveness amount = $15,385 for a difference of $5,448.

• The loan can only be used to pay expenses that were included on the individuals 2019 Schedule C.  For example, if there was no rent, interest or utilities on 2019, the individual cannot pay these expenses in 2020 for purposes of forgiveness.  There is no provision in the guidance for business use of home.

• There is likely to be more guidance from the SBA in the weeks to come regarding the forgiveness calculations.

• In cases where loans were applied for before April 24, 2020 based on the borrower’s certification that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant” and later determined that the loan was not needed,  borrowers may return the proceeds by May 14, 2020 and the SBA will deem them to have made the required certifications in good faith.  Employers that return the loan are still eligible for the Employee Retention Credit if they qualify.

• Key Items to Take Away from this Discussion:

• Spend proceeds on eligible expenses, especially payroll which needs to be at least 75% of the proceeds.

• Be sure to prioritize payroll costs and hiring back employees as soon as possible.

• Be aware of the wage reduction and headcount calculations that reduce the forgiveness amount as these can be significant if employees are not hired back or hired back at reduced wage or salary rates.

• It is important to formally document the process to attempt to hire back employees.  Offers should be in writing and responses from employees not returning if not received writing should be documented on the offer letter.  This is to ensure a proper paper trail for the relief expected to be given with regards to the headcount calculation for individual who choose not to return.

• Maintain good documentation for expenditures.

• Be aware of when your covered period ends.  The current guidance seems to indicate that only eligible expenses incurred and paid during the covered period can be used for the forgiveness calculation.

• Guidance is still forthcoming related to the forgiveness calculations.

We will continue to provide updates as more guidance becomes available.  We also understand that this information may result in more questions than answers it provided.  Please feel free to contact us with questions or for assistance in projecting loan forgiveness.