Finally, PPP Forgiveness Rules

After waiting 49 days, the big moment has arrived!

I'm not talking about my 6-year-old twin's birthday, although that's been important too. While they counted the days until gifts and birthday cake, I silently wondered how many days until PPP forgiveness rules.

Bring out the balloons, the wait is over. PPP presents have arrived!

Quick, let's open them:

What pay periods qualify for forgiveness?

The day you receive your PPP loan is the first day of the 56-day (8-week) forgiveness period. This is referred to as the "Covered Period". Payroll costs paid or incurred during those 56 days generally qualify for forgiveness.

If that exact 56-day period doesn't line up with your payroll cycle, you are generally allowed to start counting at the beginning of the first payroll cycle after receiving your loan.

For example, let's say you received your PPP loan on, Monday, April 20. Your next 2-week payroll period starts Monday, April 27. You can elect to use the 56 days (8 weeks) of payroll from Monday, April 27 to Sunday, June 21.

What is the definition of payroll costs?

For forgiveness purposes, payroll costs are gross cash wages earned by any American employee during the 56 days described above. The maximum forgive-able amount is $15,385 per employee for the 8-week period. In addition, you can add the following costs:

1. Group health insurance costs, excluding any part paid by the employee.
2. Employer contributions to employee retirement plans.
3. Employer-paid state and local taxes (basically state unemployment taxes).

The instructions simply say these costs must be "incurred or paid" during the Covered Period, which still leaves us with questions. For example, if you pay Jan/Feb/Mar state unemployment tax during the 56-day forgiveness period, will that expense be forgiven? It seems the answer might be yes, but further guidance is still needed.

What is the definition of an FTE (Full-Time Equivalent) employee?

Nothing complicated. An FTE is a salaried full-time employee, or an hourly employee who works at least 40 hours. Hourly employees who work less than 40 hours per week are a fractional FTE (to the nearest tenth). An employee who works 36 hours per week is a 0.9 FTE. Alternatively, you can count all part-time employees as 0.5 FTEs.

How does the FTE Reduction Safe Harbor work?

If you've been following PPP rules, you know if you reduce your FTEs, your forgiveness is reduced. That point remains true. If your average FTEs from February 15, 2020, to April 26, 2020 are less than the FTEs you had on February 15, your forgiveness is reduced proportionally.

For example, if you had 10 FTEs on February 15, but your average from February 15 to April 26 was 8 FTEs, that is a 20% decrease, and your payroll forgiveness is reduced accordingly.

HOWEVER, if on June 30, 2020 you restore your FTE count to February 15th FTE levels, the reduction goes away. The SBA doesn't say you have to maintain those levels after June 30 - they simply must be restored on June 30. Also, employees who refuse to come back to work or took other jobs can be added to your FTE count on June 30 (although you can't double dip if you filled the position with a new employee).

How does the Wage Reduction Safe Harbor work?

Similar to FTEs, if you reduce the amount of wages paid to individual employees, forgiveness related to that employee's wages is reduced.

To figure that, calculate the employee's average hourly wage (or salary) from January 1, 2020, to March 31, 2020. Next, compare that average to their average rate during the 56-day forgiveness period. If the average decreased by more than 25%, you cannot claim full forgiveness on that employee's wages. The exact reduction is beyond the scope of this short blog, but just know hourly wage and salary rates matter for forgiveness.

HOWEVER, as in the case of FTEs, as long as you restore wage and salary rates to Q1 levels on June 30, 2020, there is no reduction in forgiveness.

Are prepayments of utilities, rent, and interest allowed?

This question comes from companies who are struggling to use their PPP loan proceeds during the 56-day period and wondering if they can pay a couple months extra on non-payroll expenses.

A couple points:

1. Non-payroll expenses can only comprise 25% of PPP loan forgiveness. It won't do any good to use 35% of the PPP loan on prepaid utilities, because the cap is 25%.
2. Further, if your payroll forgiveness is reduced, it proportionally reduces your non-payroll forgiveness. Let's say you received a $100,000 PPP loan but can only come up with $45,000 of payroll costs during the forgiveness period. In that example, your total forgiveness can only be $60,000 ($45,000 divided by .75). That leaves $15,000 for non-payroll costs, not $25,000 (25% of $100,000) as you might have originally hoped.
3. Interest. No prepayment of interest is allowed. There doesn't appear to be anything stopping you from making an interest payment on the last day of your forgiveness period to catch up unpaid interest, but certainly no prepayments are allowed.
4. Utilities and rent. We need more guidance. The Loan Forgiveness Application seems to allow forgiveness for amounts "paid" or "incurred" during the forgiveness period. If the final regulations uphold the "paid" language, it would appear some level of prepayment of these specific expenses would be allowed. Stay tuned.

What else is new?

Small PPP loans (<$2,000,000) are automatically deemed necessary.

In an earlier post I indicated the SBA was pressuring companies to return their PPP loans if they didn't actually need them. Since then, the SBA has essentially said "Hey, if it's under $2,000,000, you're considered small enough we won't pressure you to prove you were in need." That is good news for many companies.

Documentation requirements

The Loan Forgiveness Application lists the documents necessary to claim forgiveness. There is nothing too surprising - bank statements, canceled checks, payroll forms, etc. Critically, for rent, utility, and interest payments, you'll need to prove you were paying these since February 15, 2020. Rent payments must be supported by an agreement.

Schedules must be kept supporting the FTE and average wage calculations described above. If an employee refused to be re-hired and was therefore legitimately included in the FTE count on June 30, you must document the refusal. These side documents must be kept for six years.

High-Level Takeaways

More guidance is needed, but in general I'm glad to see the SBA has tried to interpret the law as simply as possible. I'm not saying the FTE or average wage calculation are easy, but they could have been much worse.

As a business owner you might be wondering: Should I hire someone to help maximize forgiveness? That is a tough question. If the expert you hire successfully increases forgiveness through careful tracking and planning, the ROI could be quite staggering. However, like most decisions, you can't know the end result upfront, so you have to make a judgment call. At least now there's more to go on!