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Important Guidance on Calculating PPP Loan Forgiveness

April 15, 2020

Now that the PPP loan process has commenced, it’s time to turn our attention to the rules for loan forgiveness.  The information herein will focus on loan forgiveness as it relates to a corporation. A future post will address the loan forgiveness provisions for a self-employed individual.

It is worth mentioning that many important details of the loan forgiveness calculation are unknown at this time. We expect there will be additional guidance from the Treasury and SBA forthcoming that will give clear answers to many of the questions we have.  We suggest you check the Treasury Q&A site regularly for daily updates to questions regarding the PPP loan program, including updates to the forgiveness provisions. 

What is required to determine forgiveness?

Verification of qualifying expenses is required.  An eligible recipient seeking forgiveness of a PPP loan must verify that the amount for which forgiveness is requested was used to: 

  • Retain employees; 
  • Make qualified interest payments; 
  • Make qualified payments on lease obligations; or 
  • To make qualified utility payments.

Allowed Use of PPP funds

The goal of this program is to keep employees paid during the eight weeks beginning with the funding of your loan. Any reduction in the number of employees or the wages you paid affects the final forgiveness loan amount.  The final forgiven amount will be tied to the amount spent on qualified costs within 8 weeks of the date of your loan funding.  The Treasury’s borrower information sheet provides the following information:
1) What can I use these loans for? You should use the proceeds from these loans on your:

  • Payroll costs, including benefits;  
  • Interest on mortgage obligations, incurred before February 15, 2020;  
  • Rent, under lease agreements in force before February 15, 2020; and
  • Utilities, for which service began before February 15, 2020.

2) What counts as payroll costs? Payroll costs include:  

  • Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee);  
  • Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; 
  • Payments required for the provisions of group health care benefits including insurance premiums; 
  • Payment of retirement benefits;  
  • State and local taxes assessed on compensation; and
  • For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.

As mentioned above, we expect further clarification from the SBA on this list of qualified expenditures.

Factors in the loan forgiveness calculation:

There are two factors that could trigger a reduction in loan forgiveness.

1) Payroll
If you decrease salaries and wages by more than 25% for any employee who made less than $100,000 annualized in 2019, your loan forgiveness will be reduced.

2) Staff Headcount
If the number of Full Time Equivalent (“FTE”) employees decreases during the covered period (8 weeks), the forgiveness will be reduced by a ratio defined as:

The average number of FTE employees during the covered period divided by the average number of FTE employees during the base period.  According to the Act the borrower has the option to elect which base period to use. 

NOTE: Not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs (i.e., interest, rent or utilities). 

Corrective date for reductions of forgiveness?

The CARES Act provides a re-hire exemption that will not penalize employers for a reduction in FTE employees or salaries paid.  You have until June 30, 2020 to restore your FTEs and wage levels for any changes made between Feb. 15 and April 26, 2020. It is unclear from current SBA guidance how this provision of the CARES Act will be interpreted, so a business should proceed with caution in this area. We are awaiting further guidance on this provision.   

What happens if PPP Loan funds are misused?
Pursuant to the SBA Interim Final Rule, if PPP funds are used for unauthorized purposes, the SBA will direct you to repay these amounts. If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud. If a shareholder, member, or partner uses PPP funds for unauthorized purposes, the SBA will have recourse against these individuals for the unauthorized use.  Exercise caution in this area. We expect lenders will be looking for items that could be considered fraud in the loan forgiveness application.  Items that could be problematic are prepayment of rent, employee bonuses, pension contributions, or family members on the payroll who were not employed by the business prior to the PPP loan.  Essentially, any expense item incurred in the 8 week period that has not historically been a part of the business operations prior to the PPP can be a problem in the loan forgiveness process.   

As with many aspects of this new legislation, we are waiting for further guidance to help business owners make important decisions on the use of the PPP loan funds.  For those businesses who have laid off employees, the payroll provisions for loan forgiveness are particularly important and simply put there are gaps in the information currently available. As always, we will do our best to help with your questions in these areas based on the information that is available to us.  


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