On March 27, 2020, the United States Congress approved a coronavirus relief bill called the CARES Act that created the Paycheck Protection Program (PPP) to provide forgivable loans to small businesses so they could pay their employees during the pandemic. PPP loans are intended to provide 8 weeks of cash to cover payroll, rent, utilities, and mortgage interest.
If your business receives a loan from the Paycheck Protection Program, you will not have to pay the loan back if certain requirements are met. To get your PPP loan forgiven, you must spend at least 75% of the loan on payroll for employees (salary/wages, health insurance, retirement, paid leave, and unemployment taxes) and no more than 25% of the loan on rent, utilities (including phone and internet bills), and mortgage interest. To determine the amount of loan forgiveness, your bank will look at the 8-week period starting the day you get the loan and add up what you paid in payroll to employees (including benefits), rent, utilities, and interest on mortgages during those 8 weeks. That amount is what is eligible for forgiveness. Any amount of your PPP loan that is not forgiven will be converted to a 2-year loan with a 1% interest rate.
Because the forgiveness rules are strict, Congress is currently considering the Paycheck Protection Flexibility Act, which would change the forgiveness rules to make it easier for small businesses to get their PPP loans forgiven. The bill would allow forgiveness for expenses beyond the 8-week loan period; eliminate the requirement that 75% of the PPP loan be spent on payroll; extend the deadline for employers to rehire employees; allow businesses with PPP loan to defer some payroll taxes; and extend the PPP loan term beyond 2 years. As of the date of this e-alert, this bill has not become law, so these changes are not effective.
Until these changes are approved, businesses looking to get their PPP loan forgiven must follow the current rules from Small Business Administration (SBA) which were released on May 15, 2020. The SBA’s loan forgiveness application and instructions can be found here. More details and examples can be found in the SBA’s rules on forgiveness here.
While the forgiveness application is complicated, it does provide some important clarifications for businesses:
- You can start your 8-week period on the first day of the pay period after getting the loan if your payroll schedule is biweekly or more frequently.
Because the date you get your PPP loan may not line up with the date you pay payroll to your employees, you can choose to start your 8-week period on the first day of the first payroll cycle after you get the loan instead of starting your 8-week period on the day you get the PPP loan. This option is only available to businesses whose payroll schedule is biweekly (every 2 weeks for 26 paychecks per year) or more frequently. If your payroll cycle is semi-monthly (i.e., on the 15th and last day of each month for 24 paychecks per year), you are not eligible for this alternative 8-week period.
Example: You get your PPP loan on June 1st, making your 8-week period June 1 through July 26. The first day of your next payroll cycle after getting your loan is June 7th. You can choose to start your 8-week period on June 7 rather than June 1 and have it end 8 weeks later on August 1st. Any payroll paid or incurred during this new 8-week period is eligible for forgiveness (see below for an explanation of incurred payroll).
- Expenses incurred but not paid until after the 8-week period are eligible for forgiveness.
Payroll expenses: You can apply for forgiveness not just on payroll paid during the 8-week period, but also any payroll incurred during your 8-week period. In general, payroll costs are incurred on the day the employee’s pay is earned (i.e., the day the employee worked). So, any payroll costs paid or incurred during your 8-week period are eligible for forgiveness. This is true whether you are starting your 8-week period on the day you get your PPP loan or you are using the alternative 8-week period described above. For example, if your business incurs payroll costs towards the end of your 8-week period but it’s not time to cut paychecks before the 8 weeks are up, the payroll incurred by your employees at the end of your 8-week period is eligible for forgiveness if you pay the employees on the next regularly-scheduled payroll date (even though payroll was paid after the 8-week period).
Other expenses (rent, utilities including phone and internet, and mortgage interest): Like payroll, if your business incurs these expenses during the 8-week period but does not pay them until after the 8-week period, they are eligible for forgiveness. For example, if your 8-week period is from June 1 to July 26, and you pay your May and June utility bill using the PPP loan during the 8 weeks, you can also use your PPP loan to pay your July utility bill because it was incurred during the 8-week period.
- Forgiveness amounts can be reduced two ways.
Reduction in the number of employees: If you reduced the number of FTE employees (full-time equivalents) during the 8-week loan period as compared to a prior period before you got the loan, your loan forgiveness can be reduced. For this purpose, an FTE is an employee working 40 hours or more per week. For employees working less than 40 hours a week, you have a choice: you can either count all of them as .5 FTE regardless of how many hours they work a week or you can use the average number of hours they work a week. If an employee was paid for 30 hours of work per week, that employee is an FTE of .75. An employee who only works 10 hours per week would be an FTE of .25.
First you choose a comparison period: You can either select 2/15/19 – 6/30/19 or 1/1/20 – 2/29/20. You add up the number of FTEs your business had during this comparison period and compare that number to the number of FTEs you have in your 8-week loan period. If the number of FTEs is less in the 8-week loan period, your forgiveness is reduced by the percentage reduction in your FTEs. You determine the forgiveness reduction percentage by dividing your number of FTEs during the 8-week loan period by the number of FTEs in the comparison period. For example, if you had 10 FTEs during the comparison period (either 2/15/19 – 6/30/19 OR 1/1/20 –2/29/20) and only 8 FTEs during your 8-week loan period, your FTEs were reduced by 20% so your forgiveness amount will be reduced by 20% (i.e., only 80% of your expenses will be eligible for forgiveness).
Reduction in the salary/wages of employees: Your forgiveness will be reduced for every employee whose wages/salary were reduced by more than 25% during the 8-week period as compared to the comparison period described above. Any amount of salary reduction over 25% for an employee reduces your forgiveness dollar for dollar. For example: You paid an employee $1,000 a week during the comparison period and reduced their pay to $700 a week during the 8-week loan period. This is a total reduction of $300 a week, but the first 25% of the reduction does not count against you, so you are not penalized for the first $250 of the reduction. That leaves $50 remaining, and you multiply this by 8 weeks (for the 8 weeks of the PPP loan) for a total of $400. Your loan forgiveness will be reduced by $400 for this employee. And then you do the same calculation for all other employees’ wages/salaries to determine the total amount of reduction in your loan forgiveness.
- You won’t be penalized for reducing your employees if you have made a good faith written offer to rehire a laid-off employee who refuses to return to work.
If you hire furloughed employees back or restore their pre-coronavirus salaries, your forgiveness will not be penalized. Also, if you make a written offer to re-hire a furloughed employee and the employee refuses to come back to work, this will not count against you. Your forgiveness amount will not be reduced for employees who were fired for cause, voluntarily resigned, or voluntarily requested a reduction in their hours. Make sure to make your rehire offer in writing (email is fine) and document the employee’s response so that you can prove you tried to rehire them but they refused.
The formulas to determine the amount of your loan forgiveness and any applicable reduction to forgiveness are complicated, but the forgiveness application provides a worksheet that explains in detail how these calculations should be made.
If you have questions about your PPP loan or forgiveness, you can ask our staff and we will assist you. Email us at email@example.com or call us at 800-262-4483. FUBA’s coronavirus resources page for small businesses is constantly updated and can be found here.