Since the passage of the CARES Act, many companies have been submitting applications for loans under the Paycheck Protection Program (PPP). As companies begin to receive these funds, they are now focusing on the use of these proceeds and how much of these monies will be paid back or forgiven. We are expecting additional guidance on or before April 26, 2020 (the 30-day deadline outlined in the CARES ACT) from the Treasury/Small Business Administration (SBA) on the loan forgiveness calculation, but based on what we know today, here is an overview.
How can the loan proceeds be used?
Once you have received your PPP loan proceeds in your account, the specified eight-week time period begins. The CARES Act states that forgiveness is based on spending 100% of the funds within the eight-week period. It’s important to plan how you will allocate the PPP proceeds once they arrive and to keep records of what you are spending. We recommend opening a separate bank account solely for the PPP loan proceeds. Make disbursements out of this account to the extent you can without disrupting current direct deposit and withdrawals in place with your payroll company.
For qualifying payroll expenditures, you can pay these costs out of the existing account used for such costs and “reimburse” this account for qualifying expenditures from the new account. This will allow you to track how the money is being spent and on what qualifying expenses. You should also keep a folder containing all invoices or proof of the qualifying monies expended during this eight-week period. This documentation will be required when you apply for some or all of the proceeds to be forgiven. We expect Treasury/SBA to release the application for the loan forgiveness within a reasonable time of the forthcoming additional guidance.
Seventy-five percent (75%) of the loan proceeds must be spent on payroll costs. Payroll costs generally include wages and tips up to $100,000 per annum per employee; vacation and sick leave; separation allowance; group health insurance premiums; retirement benefits; and state and local payroll taxes. Please note that since the maximum loan amount is calculated in large part on the employee wages from 2019, any reduction in employees or their wages during the eight-week period as compared to the prior year will make it difficult to spend 75% of the loan proceeds on payroll costs and may impact the amount of the loan which could be forgiven. Treasury has been asked to reconsider the eight-week time frame and expand the time in which the proceeds can be spent on qualifying expenses and for qualifying for forgiveness. We do not know at this writing whether this will be considered.
The remaining twenty-five percent (25%) of the loan proceeds must be spent on other approved costs, including interest on any secured mortgage incurred before 2/15/20; rent for real or personal property on a lease in force (lease agreement) before 2/15/20; and utilities (electric, gas, water, internet, telephone or transportation utility fees) for which service began before 2/15/20.
What if you reduce employee hours worked before or during the 8-week period?
The reduction of employee hours worked is calculated based on Full-time Equivalents (FTEs). The Treasury/SBA has not yet provided guidance on how to define a FTE. If you reduce your FTEs, it may impact loan forgiveness. If you reduced the number of employee hours measured by the average number of full time equivalents (AFTEs) per month as a result of the Corona Virus economy (CVE), then you must measure the AFTEs during the eight-week period following the receipt of the loan proceeds against one of two separate time frames (either February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020). The resulting percentage is multiplied by the total payroll costs paid during the eight weeks qualifying for forgiveness. For example, if your total payroll costs during the eight week period were $100,000 and your AFTEs for this time period were 10, and the lesser amount of AFTE for the pre-CVE time period was 12, then $100,000 X 10/12 = $83,333.33 is the maximum amount of payroll costs which can be forgiven.
What if wages are reduced before or during the 8-week period?
After reducing the amount of debt forgiveness by the calculated amount from the decrease in workforce FTEs, you must also identify employee wage reductions that are more than 25% for any employee who was paid on an annualized basis $100,000 or less in 2019. You must compare an employee’s wages paid in the first quarter of 2020 to that employee’s average weekly wages paid during the eight-week period following the date you received the proceeds of your PPP loan. If you were to reduce this employee’s average weekly wages by less than 25%, this provision does not apply. This provision only applies to any excess wage reduction over the 25% threshold would reduce your debt forgiveness dollar for dollar.
Reductions in employment or wages that occur during the period beginning on February 15, 2020 and ending 30 days after the enactment of the CARES ACT (April 26, 2020) shall not reduce the amount of loan forgiveness if by June 30, 2020 the reduction in employee hours or reduction in wages in excess of 25% is restored to prior levels.
The loan forgiveness terms are meant to incentivize small businesses to retain as many of their employees as possible and to sustain their wage levels. However, the primary goal is for small businesses to remain in business. It is important to remember that even if your business does not qualify to have the entire loan forgiven, the PPP loan requires no collateral or personal guarantee, and it is a 1% loan with a two-year payback period, which are very favorable terms.
Loan forgiveness terms for PPP loans are complex, and we are still awaiting further guidance on significant portions of this provision from the Treasury/SBA. If you have questions, please don’t hesitate to reach out to your tonneson + co representative.