Over the last six weeks, PPP loan borrowers understandably had a multitude of questions about the loan forgiveness process.
After all, without forgiveness, the PPP loan is nothing more than just another business debt obligation, at a time when most businesses do not need another debt obligation. If a business does not obtain forgiveness of all or a vast majority of the loan, the repayment requirements may cause a struggling business to never recover. In fact, it is for this very reason that we developed the Forgiveness Maximizer™ program.
With the forgiveness application issued on May 15 and an interim final rule regarding loan forgiveness issued May 22, 2020, the SBA clarifies several of the forgiveness issues we and most borrowers were struggling with. We will review some of the answers in this article and discuss how they might impact what steps a borrower might take as it prepares for completing the forgiveness application. A later article will address some of the more significant questions left unanswered by the application and the interim final rule.
Full-Time Equivalents (FTEs)
The application and the Interim Final Rule defines a full-time equivalent employee as an individual who works 40 hours or more each week. Employees who work 40 hours or more each week are limited to an FTE quotient of 1.0. For employees who work less than 40 hours per week, the borrower may calculate the average number of hours paid per week divided by 40, or the borrower may use an FTE equivalency of 0.5 for each employee. The chosen method must be applied consistently to all employees in all relevant periods.
One of the more frequently asked questions pertains in some manner to pay cycles. Based on the lack of early guidance, borrowers were left wondering if they would need to issue an interim paycheck to employees as they approached the end of their 56-day covered period. To some extent, the application and the interim final rule address this issue. Both create an alternate method for determining when the eight-week period starts for businesses with biweekly or more frequent pay cycles. These borrowers can elect an alternative payroll covered period, which is the eight-week period starting the first day of the first pay period after they received the funds. Previously, the only starting date allowed was the day the lender disbursed funds to the borrower. It should be noted that while there has been some alignment, it is not universal. The day the lender first disbursed funds to the borrower remains the only starting date option for all businesses with pay periods less frequent than biweekly. If your funding date did not fall at the beginning of a pay period and your business has a biweekly (every other week) or more frequent pay period, in most situations you will elect the alternative payroll covered period. For all borrowers, if payroll costs are incurred during the eight-week covered period or the eight-week alternative payroll covered period, but paid after the end of the applicable covered period, such payroll costs will be eligible for forgiveness if they are paid no later than the first regular payroll date thereafter.
Caps on Loan Forgiveness for Owner-Employees
A prior interim final rule limited compensation to self-employed individuals to the lesser of $100,000 per year on an annualized basis or 8/52 of 2019 compensation. The application seems to apply this same rule to owner-employees but did so without any explanation. The May 22, 2020, interim final rule on loan forgiveness requirements confirms this expansion by stating that owner-employees are capped by the lesser of $15,385 or 8/52 of their 2019 employee cash compensation, retirement, and health care contributions. Self-employed individuals filing Schedule C are capped in accordance with the prior interim final rule. General partners are limited to their 2019 net earnings from self-employment, reduced by section 179 deductions, unreimbursed partnership expenses, and depletion from oil and gas properties, multiplied by 0.9235. Further, self-employed individuals, including general partners, may not receive forgiveness for retirement or health insurance contributions.
This clarification is not unexpected, but it is important for owner-employees to be cognizant of this provision. If you, as an owner, did not receive employee compensation in 2019 but decided to start paying yourself as an employee with PPP loan funds, these amounts will not be forgiven.
Bonuses and Hazard Pay
Not too much of a surprise, but the interim final rule clarifies that the payment of bonuses and hazard pay to employees are eligible for loan forgiveness. Total compensation, including bonuses and hazard pay, cannot exceed $15,385 per employee. The use of bonuses may be an excellent way for business owners to meet the PPP payroll requirements, while also recognizing those employees who worked through, and continue to work through, very challenging circumstances.
The interim final rule confirms the prior guidance that non-payroll costs are eligible for forgiveness if (i) paid during the covered period; or (ii) incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period.
Advance payments of interest on a covered mortgage obligation are not eligible for forgiveness.
Employees Declining to Return to Work
The interim final rule reiterates earlier guidance that an individual who declined a good faith, written offer to return would not be counted against a borrower's FTE calculation. However, one requirement of note is that the borrower must inform the applicable state unemployment insurance office of an employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.
Elimination of Salary Reduction of FTEs by June 30 or Earlier
The application and the interim rule clarifies that if a borrower experienced reductions in FTEs or salary reductions in excess of 25 percent from February 15 through April 26, 2020, and restores those reductions in FTEs or salary reductions, or both by June 30 or earlier, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in FTE employees or salary reductions. Again, this is what we expected, but it does lead to some interesting results. Read literally, a borrower that restores FTEs and salary for a single pay period by June 30 or earlier will receive the full benefit of this safe harbor, without regard to what the borrower does after meeting the safe harbor requirements.
The interim rule provides much needed clarity to a number of aspects of the PPP loan forgiveness process. Additionally, working through the loan forgiveness application is an excellent way to develop anticipated forgiveness scenarios. If you want to know how much of your PPP loan your business will be required to re-pay but are not inclined or have no desire to manually run multiple scenarios related to potential FTE gaps or salary reductions, consider requesting our Forgiveness Maximizer™ report. Remember – any amount that is not forgiven must be re-paid.
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This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.