Back to top

Jones & Company Blog

Click here to go back

Paycheck Protection Program Forgiveness Criteria

Posted by Traci A. Malik Posted on Apr 23 2020

Paycheck Protection Program Forgiveness Criteria

Expenses allowed to be used on:

  1. Payroll costs (salary, wages, commissions up to $100,000, vacation pay, and SUTA taxes)
  2. Mortgage interest
  3. Rent
  4. Utilities
  5. Employee benefits – employer paid health insurance and employer paid retirements matching contributions
  6. Payroll costs are capped at $100,000 per employee

This does not cover the employer portion of matched Social Security and Medicare taxes. 

If the borrower knowingly uses the PPP funds for unauthorized purposes, the borrower will be subject to additional liability charges for fraud.

No more than 25% of the forgiven amount can be used for non-payroll costs.

You will owe money when the loan is due if you use the loan amount for anything other than items listed above over the 8 weeks after getting the loan.

You will owe money if you do not maintain your staff and payroll.

  1. Number of staff – your loan forgiveness will be reduced if you decrease your full-time employee headcount.
  2. Level of payroll – your loan forgiveness will be reduced if you decrease salaries and wages by more than 25% for any employee that made less the $100,000 annualized in 2019.
  3. Re-hiring – you have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.

To request loan forgiveness:

  1. Submit a request to the lender that is servicing the loan.
  2. The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations.
  3. You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments.
  4. The lender must make a decision on the forgiveness within 60 days.

Interest rate if funds not forgiven is 1% fixed rate.

No prepayment penalties.

Payments begin 6 months after funds received. Loan due in 2 years.

Forgiveness of the PPP funds is non-taxable.

Headcount Analysis:

If a business reduces its full-time employees during the “covered period” (defined as the 8-week period after the company receives its first disbursement of PPP funds), the forgiveness amount is reduced by a ratio defined as:

o    The average number of FTEs during the covered period (numerator) divided by the average number of FTEs during the base period described below (denominator).
For the purposes of the calculation, the current thinking is that one FTE equals one employee that worked at least 30 hours in a week.

There are three different options to determine the base period, and borrowers can select the one most favorable to them:

o    Using 2019 Information –the average number of FTEs per month from February 15, 2019, through June 30, 2019

o    Using 2020 Information –the average number of FTEs per month from January 1, 2020, to February 29, 2020

o    Seasonal Businesses –the average number of FTEs per month from February 15, 2019, through June 30, 2019

Here is an example:

Facts:
• Loan amount: $500,000, (assuming you spent all of the funds on qualifying expenses)
• Average number of FTEs from February 15, 2019 to June 30, 2019: 75
• Average FTEs during “covered period” following your first loan disbursement: 55

PPP Calculation: 55/75= 73%
Maximum loan forgiveness: $500,000 * 73% = $365,000
This tells us that the company will need to repay $135,000 of the loan.

There is no requirement that the borrower rehire the same employees.

 

Wage Analysis:

They introduced a lever that penalized companies who reduced wages per employee by more than 25% compared to the most recent quarter before the PPP loan was made.

For purposes of this calculation, however, businesses only need to consider employees who makes $100,000 or less per year. Removing employees that made over $100,000 from this calculation will help employers “manage” higher payroll without being penalized and, at the same time, incentivize them to fully restore the wages of those making $100,000 or less.

Here is an example:
Loan issue date: April 1, 2020
Employee’s salary in Q1 2020: $20,000
Employee’s salary during eight-week covered period: $13,000
Amount of forgiveness reduction: ($20,000 – $13,000) – ($20,000 X 25%) = $2,000

How can you “correct” reductions of forgiveness?

You have until June 30, 2020 to restore your 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. We recommend looking for further clarifying guidance.

What about employee bonuses and raises?

The CARES Act and current SBA guidance remain unclear regarding employee bonuses and raises that would increase payroll costs that are not in the ordinary course of the business. If any borrower wants to use PPP proceeds on such payments, it should have and document a sound reason as to why such expenditures are “necessary to support the ongoing operations” of the business. Borrowers should also remain aware of the rules concerning the $100,000 annualized basis limiting payments.