Maximizing Your PPP Loan Forgiveness
Businesses receiving loans from the Small Business Association’s (“SBA”) Paycheck Protection Program (“PPP”) need to be aware of the loan forgiveness available. At this early stage, much remains to be learned about the application of the forgiveness portion of the PPP. In general, businesses who receive PPP loans can utilize the loan money in specific ways, such as payroll costs, to maximize the forgivable amount. Update: The SBA issued the attached guidance on May 6: https://www.sba.gov/sites/default/files/2020-05/Paycheck-Protection-Program-Frequently-Asked-Questions_05%2006%2020.pdf
Payroll Costs
The SBA recently issued guidance on the PPP loan stipulating that borrowers must use 75% of the loan on payroll costs. Payroll costs, per the SBA guidelines consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation. Cash tips or the equivalent also qualify as a payroll cost and may be based on employer records of past tips or, a reasonable, good-faith employer estimate of such tips. Additionally, payment for vacation, various forms of leave, employee benefits, and state and local taxes assess on compensation for employees qualify as payroll costs. It is important to note that the compensation to an individual employee in excess of an annual salary of $100,000 is expressly excluded from the definition of payroll costs.
Maximizing Loan Forgiveness
Your PPP loan may be forgiven when businesses use the loan towards certain expenses incurred during the “covered period.” The covered period is the eight-week period following the date of the loan.
Two factors effect loan forgiveness. First, the percentage of the PPP loan put towards payroll costs. Second, the ratio of full-time employees employed at the beginning of the covered period versus at the end of the covered period. Loan forgiveness can be maximized by using as much of the PPP loan on payroll costs as possible, and by maintaining as many of your business’s full-time employees as possible.
The total amount of the loan available for forgiveness is reduced based on any reduction in payroll costs during the covered period that exceeds 25% of the total salary or wages of the employees. This reduction is direct, which means that for every dollar that an employee’s salary that is decreased past 25% of their total compensation, a dollar of the loan will not be forgiven.
Additionally, loan forgiveness is reduced based on the amount of full-time equivalent employee’s (“FTEE”) decreasing over the covered period. The ratio of FTEE at the beginning of the covered period in comparison to the end of the covered period determines the maximum amount of loan forgiveness. It is important to understand that FTEE is not defined by the CARES Act. However, the IRS provides a helpful definition. Per the IRS, a FTEE is an employee employed on average at least 30 hours per week, or 130 hours per month. Loan forgiveness is reduced in a ratio equal to the amount FTEE declines.
If you have questions about how your business’s circumstances apply to loan forgiveness, the lawyers at Beresford Booth remain available to assist you.