Paycheck Protection Program Loan Forgiveness
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted to expeditiously aid small businesses in the wake of the Coronavirus pandemic, including $349 billion in funding to the Small Business Administration (“SBA”) for Paycheck Protection Program (“PPP”) loans. One of the central questions still surrounding the PPP loans is the issue of forgiveness.While some guidance has been provided on forgiveness, it is anticipated that the U.S. Department of Treasury will release further clarification over the coming weeks.However, despite the limited guidance, there are ways you can help to enhance the benefit of your PPP loans and qualify for forgiveness:
How does a business qualify for loan forgiveness? In general, the Small Business Administration (SBA) will provide loan forgiveness to businesses that use at least 75% of the PPP loan proceeds for documented payroll costs, and not more than 25% of the PPP loan proceeds for allowable rent, mortgage interest payments, and utilities (the “Covered Costs”).These covered costs must be paid out within eight (8) weeks from the loan origination date (the “Covered Period”).
What are Covered Costs for loan forgiveness? Payroll costs for purposes of Covered Costs consist of payments made to US resident employees for salary, wage, commission, or similar compensation (capped at $100,000 on an annualized basis); payment of cash tip or equivalent; payment for vacation, parental, family, medical, or sick leave; allowance for dismissal or separation; payment required for the provisions of group health care benefits, including insurance premiums; payment of any retirement benefit; or payment of State or local tax assessed on the compensation of employees.For a sole-proprietor or independent contractor, wages, commissions, income or net earnings, capped at $100,000 on an annualized basis.Additionally, Covered Costs include payments for rent on a lease in force before February 15, 2020, utilities, including electricity, phone and internet access, for services that began prior to February 15, 2020, and mortgage interest on liability incurred prior to February 15, 2020.
What are the exclusions to Covered Costs? Exclusions include payment for compensation to employees above an annualized salary of $100,000.00 and payment of compensation for qualified sick leave under the Families First Coronavirus Response Act Sections 7001 and 7003.
Can the PPP loan forgiveness amount be reduced? Yes. First, the PPP loan forgiveness will be reduced if you decrease your full-time equivalent employee headcount (“FTE”).In determining whether headcount has decreased, the SBA will compare FTE during the Covered Period to, at the election of the Borrower, either (a) the average number of FTE per month employed by the Borrower during the period beginning February 15, 2019, and ending June 30, 2019 or (b) the average number of FTE per month employed by the Borrower during the period beginning January 1, 2020, and ending February 29, 2020.From a formula standpoint, this would look like:
PPP Loan Amount x FTE / (FTEa or FTEb)
Second, the PPP loan forgiveness will be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.In determining whether compensation levels have decreased, the SBA will look at the following formula:
- Identify all employees, who did not receive during a single pay period in 2019, wages or salary at an annualized rate of pay of more than $100,000 (a “Covered Employee”).
- Compare each Covered Employee’s wages or salary during the Covered Period to his or her wage or salary during the first quarter of 2020.
- For any Covered Employee whose wages or salary during the Covered Period decreased by more than 25%:
- Multiply the first quarter wage or salary by .75
- Subtract the product from the Covered Period wages or salary
- Add all amounts computed in Step 3 above to determine PPP loan forgiveness reduction amount.
What if I reduced full-time employment or reduced salaries before the PPP loan? A borrower 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.In other words, for example, if an employer furloughed some employees between February 15, 2020 and April 26, 2020 but rehired them by June 30, 2020, such employees would be counted as part of the FTE during the Covered Period.
How do I request loan forgiveness?You can submit a request to the lender that is servicing the loan.The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payment on eligible mortgage, lease, and utility obligations.You must certify that the documents are true and correct and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent and utility payments.The lender must make a decision on the forgiveness within sixty (60) days.
What steps should I take to ensure forgiveness?You should have a firm understanding on the dates and numbers in order to identify the parameters you will have to work within for loan forgiveness.This includes knowing the specific dates of your Covered Period (the 8-week period in which businesses must use loan proceeds).Know your start date and calculate your end date. Documents submitted to the lender for forgiveness will be during the Covered Period.You should also know and understand your fill-time employment headcount during the Covered Period and the previous period used to compare employment levels.Finally, the loan forgiveness can be affected if you laid off or furloughed employees, or decrease salary and wages.If the borrower has restored employment numbers and compensations levels by June 30, 2020, the loan amount forgiveness will not be affected due to headcount or compensation level decreased.
What documents should I have ready for forgiveness determination?While there is still uncertainly as to the exact documents necessary, the following is a good summary of documents you should have ready to submit to your lender when you apply for forgiveness:
- Payroll tax filing reported to the IRS;
- Payroll summary reports reflecting FTE headcount numbers and individual salary and wages during the Covered Period;
- Payroll summary reports reflecting FTE headcount numbers and individual salary and wages during the previous period, as chosen by Borrower (as discussed above);
- State income, payroll, and unemployment insurance filings; and
- Payment receipts, cancelled checks, bank statements, or other documents verifying payment on covered mortgage interest, lease, or utility payments.
What else should I know?The purpose of the PPP program is to help employers keep as many employees employed as possible during the COVID-19 crisis.However, there will be circumstances where employers simply cannot maintain employment.This may lead to difficulty to spending the entire PPP loan amount on Covered Costs during the Covered Period.Importantly, the loan forgiveness is not all or nothing.If you have not met all the requirements for loan forgiveness, it is still possible a portion of the loan will be forgiven, with the remainder to turn into a two-year loan at a fixed rate of 1.0%.In some situations, it may be beneficial to implement different strategies, for example operating with a reduced workforce and convert a portion of the PPP loan into a two-year, low interest loan, or immediately repay any unforgiven portion of the PPP loan without penalty.In other situations, it could be better to push more payroll-related expenses, such as employer 401(k) contributions or bonuses, into the Covered Period to meet the 75% payroll cost requirement. Employers should work with their professional to determine what best suits the particular employer.
Who should I contact with questions?
As always, CLG is ready to assist you in any way we can and will answer any questions you may have for your small business needs. If you do not know of an SBA-approved lender, please contact us today and we will work with you to locate an SBA-approved lender. Additionally, should you have any questions on qualification for the Paycheck Protection Program, or other programs available from the Small Business Administration, please contact us via telephone at 405-232-2020 or e-mail with any of your business needs.
About the Author
Jon M. Miles, J.D. is a Director at Christensen Law Group, PLLC. He is an expert in litigation, banking, business transactions, agriculture, oil and gas, and bankruptcy. You can read more about him and his legal experience here.