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Understanding the Paycheck Protection Program Loan Forgiveness

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Earlier this month, attorney Susan J. Markey took part in our COVID-19 webinar series to share the latest guidance on the PPP forgiveness process, below is a summary of her presentation. Guidance around PPP is constantly changing, the information contained herein is for general guidance purposes only and does not constitute legal advice.  The content is provided “as is;” no representations are made that this content is error-free.  You can watch the on-demand recordings of Susan’s presentations here.

 

The SBA released a sample Paycheck Protection Plan (“PPP”) loan forgiveness application on May 16, 2020 (the “Application”).

The Application clarified several key issues, including the calculation of: the 8-week period; owner compensation; FTE calculation; and Loan Forgiveness. On June 3, 2020 Congress made PPP loans more flexible for borrowers by extending the PPP loan covered period from eight weeks to 24 weeks (or until December 31, 2020, which ever is earlier).

8-Week Period:

The CARES Act indicates that costs “incurred and paid” during the 8-week covered period were eligible for forgiveness. This created confusion about which expenses were eligible, particularly related to payroll calculations, as most businesses pay payroll in arrears.

The Application indicates that two different periods may be used for calculating payroll expenses. All Applicants may use the “Covered Period”, which is the 56-day period beginning on the loan disbursement date.

Applicants who use a biweekly or more frequent payroll schedule may choose to begin the 56-day period on the first day of the first period following the loan disbursement date.

The Application clarifies that payroll costs are deemed to be paid on the date that paychecks are distributed or the day the Applicant initiates an ACH credit transaction. Payroll costs are deemed to be incurred on the day that the Employee’s pay is earned.

Finally, payroll costs incurred but not paid during the last pay period are eligible for forgiveness if they are paid on or prior to the next regular pay date.  All other payroll costs must be paid during the 8-week period.

24-Week Period:

The Flexibility Act, passed on June 3, extends the PPP loan covered period from eight weeks to 24 weeks. Borrowers that already received a PPP loan before enactment of the Act can elect an eight-week covered period, which helps PPP borrowers that are approaching the end of their original covered period and have spent the majority of funds.

Borrowers have up to 10 months from the date of their covered period ends to apply for loan forgiveness.

Owner Compensation:

The Application clarifies that amounts paid to owner-employees, self-employed individuals, or general partners during the period is limited to the lesser of i) $15,385 for individuals earning $100,000 or more, or ii) 8-weeks of their 2019 compensation.

Nonpayroll Costs:

All eligible expenses other than payroll must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is not within the Covered Period. Eligible nonpayroll costs cannot exceed 25% of the total amount eligible for forgiveness (i.e. the expenditure on eligible expenses during the 8-week period).

Forgiveness Reduction:

Forgiveness is subject to limitation where the Applicant either reduces its number of full-time equivalent employees (“FTE”) or if pay to an employee earning less than $100,000 on an annualized basis is reduced by more than 25% for any employee during the 8-week period in comparison to the reference period. The reference period for a non-seasonal applicant is either at the Applicant’s election, i) February 15, 2019 – June 30, 2019; or ii) January 1, 2020 – February 29, 2020. The reference period for a seasonal employer is either of the previous periods or any consecutive 12-week period between May 1, 2019 – September 15, 2019.

This reduction is waived if the business brings its FTEs to the same number of FTEs during the reference period or increases salaries to the amount paid during the reference period by June 30, 2020.

FTE Calculation:

The Application clarifies that there are two ways to calculate FTEs.  One method is use the average hours paid per week for each employee, divide by forty, and round the total to the nearest tenth, using a maximum of 1 per employee.  The other method is to use 1 for each employee working forty hours or more per week and .5 for employees working fewer hours.

The Application also clarifies forgiveness is not reduced for reduction in FTEs during the 8-week period if: i) the Applicant made a good-faith, written offer to rehire an employee during the 8-week period; ii) an employee was fired for cause; iii) an employee voluntarily resigned; or iv) an employee voluntarily requested and received a reduction of their hours.

Loan Forgiveness Amount:

Finally, the Application gave the formula for calculating the total amount of loan forgiveness. The loan forgiveness amount is limited to smaller of:

  1. Total Payroll costs plus eligible Nonpayroll Costs, minus Reductions in FTEs or Salary;
  2. PPP Loan amount; or
  3. Payroll costs divided by .75

Download the Sessions Q&A’s

CARES Act Paycheck Protection Program: SBA Regulations and New Legislation – Session Q&A

Paycheck Protection Program Forgiveness Guidance – Session Q&A

What is the FFCRA and How Does it Impact Your Business – Session Q&A

CARES Act Update Regarding the Additional PPP Funding – Session Q&A

CARES Act Deep Dive – Session Q&A

COVID-19: Resources, Regulations and the Road Ahead – Session Q&A

 

 

Disclaimer: These comments are not intended to and do not constitute legal advice; instead, all information, content, and slides are provided for general informational purposes only.  This information may not constitute the most up-to-date legal or other information.

Sage customers should contact their attorney to obtain advice with respect to any particular legal matter.  No user should act or refrain from acting on the basis of these comments without first seeking legal advice from counsel in the relevant jurisdiction.  Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation.  Reviewing these materials does not create an attorney-client relationship between the user and author, and their respective employers. 

The views expressed at, are those of the individual author writing in her individual capacities only – not those of her employer.  All liability with respect to actions taken or not taken based on the contents are hereby expressly disclaimed.  The content is provided “as is;” no representations are made that this content is error-free.

 

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Comments (21)

  • On Owner Compensation: Can an owner-partner (S Corp) include both 1/12th of their K-1 2019 distribution and their W-2 income from 2019 as total compensation or just the W-2 earnings?

  • Did not the forgiveness program change after June 4, 2020?

    • https://www.sage.com/en-us/blog/wp-content/themes/sage/dist/images/avatars/custom-avatar.png

      Hi Mark, we have updated the post.

  • Wondering what to do if we hired part time workers during the 56 day time period? If they are working 20 hours a week, would they be considered .5 under the FTE? Since there is no box to check to indicate they are new hires or only part time workers, it seems the .5 rating is misleading. Am I missing something on the form, or if they are always part time, should they not be included?

  • Question. The non-payroll category includes “utilities”. What types of expenses are included in this group?

    • https://www.sage.com/en-us/blog/wp-content/themes/sage/dist/images/avatars/custom-avatar.png

      Hi George,

      The only guidance is that “proceeds used to pay for electricity, gas, water, transportation, telephone, or internet access” are covered. The only guidance on the other utilities is that “proceeds used to pay for electricity, gas, water, transportation, telephone, or internet access” are covered.

      Thanks,
      Lauren

      The information contained herein is for general guidance purposes only and does not constitute legal advice. You should consult your attorney, CPA or the SBA with respect to any legal or financial matter.

  • You may want to update this information to reflect the Flex Act changes.

  • If using the 8 week period, do all transfers from the COVID-19 funds have to be made prior to the 56 days? That is for payroll, rent, utilities and health insurance premiums?

  • Due to a lack of work, we will be using the actual 8-week period, which will end on 6/25/20. Can we reduce our FTE on 6/26/20?

  • For the forgiveness calculation, can a borrower us a “mixed” approach in its calculation:

    1) For FTE count, use the count in the actual 8-week period following the receipt of the loan amount but,
    2) For the payroll cost incurred – use the amount counting from the 1st disbursement after the receipt of the loan amount?

    Thanks.

    Alice

    • https://www.sage.com/en-us/blog/wp-content/themes/sage/dist/images/avatars/custom-avatar.png

      Hi Alice,

      This depends on whether you select the covered period or the alternative covered period. The covered period begins on the day the loan proceeds are received. The alternative covered period begins on the first day of the first payroll period following the receipt of the loan funds.

      Thank you,
      Lauren

      The information contained herein is for general guidance purposes only and does not constitute legal advice. You should consult your attorney, CPA or the SBA with respect to any legal or financial matter.

  • Of course this is now old news and the time for using the funds is now extended up to 24 weeks, not just 8 weeks.
    This article is misleading and needs to updated.

    “The U.S. Senate passed the House version of Paycheck Protection Program (PPP) legislation Wednesday night (06/03) , tripling the time allotted for small businesses and other PPP loan recipients to spend the funds and still qualify for forgiveness of the loans. PPP borrowers can choose to extend the eight-week period to 24 weeks, or they can keep the original eight-week period. This flexibility is designed to make it easier for more borrowers to reach full, or almost full, forgiveness.”

  • I WAS WONDERING WE BOUGHT A BUSINESS APRIL 1 2020 AND IT SEEMS THERE IS NO HELP FOR US AS A BUSINESS BUT I AM ASKING YOU TO MAKE SURE WE ARE NOT OVERLOOKING SOMETHING BECAUSE WE COULD SURE USE THE HELP . THANK YOU

    • https://www.sage.com/en-us/blog/wp-content/themes/sage/dist/images/avatars/custom-avatar.png

      Hi Tina,

      While you are not eligible for a PPP Loan, you may be eligible for an Economic Injury Disaster Loan or a loan under the Main Street Loan Program. We suggest you contact your lender to see what options you may have.

      Thanks,
      Lauren

      The information contained herein is for general guidance purposes only and does not constitute legal advice. You should consult your attorney, CPA or the SBA with respect to any legal or financial matter.