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PPP Loan Forgiveness


By now, it is clear that the Paycheck Protection Program (PPP) has been challenging for businesses applying for loans, the financial institutions responsible for managing the application process, and for the business advisors who are helping clients navigate the process. Generally speaking, when a Federal law is passed there is ample time to review instructive guidance prior to implementation. However, due to this historic crisis and the underlying urgency of the government and financial institutions to respond, that has not been the case with the PPP loan program. We recognize that many, if not most, companies that have applied for PPP loans are still awaiting their funding. However, now is the time to look ahead and begin planning for next steps once those funds are received.

The CARES Act determines the amount of the PPP funds that can be forgiven and how much needs to be repaid. There are still many questions as to what best practices for compliance will look like. Here is what we know now.

What is the Forgiveness Period and why does it matter?

The CARES Act considers four groups of specific expenses that are paid during a “Covered Period” (the 8-week period immediately after the borrower receives the loan proceeds). Funds spent outside of this period or on non-specified expenses are not forgiven and will need to be paid back within two years.

The SBA has issued guidance that the interest rate on the loans will be 1% and the first six months of payments are deferred on the amount owed. Interest will accrue during this six-month period. Typically, loan forgiveness is taxable. However, the CARES Act states that forgiveness of debt under the PPP will not be taxable to the borrower.

What are the four groups of costs that qualify in the 8-week period?

At least 75% of the loan forgiveness amount must be Payroll

  1. Payroll Costs – There has been a lack of clarity regarding the PPP application process in terms of what should be included in the payroll calculation and, thereby, maximum loan proceeds. There are still similar questions around this forgiveness, but the SBA has clarified that at least 75% of the loan forgiveness amount must be attributed to payroll costs. The SBA also clarified that payroll costs include salaries and wages of employees up to a cap of $100,000 per year, employer paid health insurance, retirement benefits, and state and local taxes on payroll. Payroll costs do not include an employer’s portion of Federal payroll taxes.

Up to 25% of the loan forgiveness can be Rent Obligations, Utilities and Interest

  1. Rent – This includes payments to related or third-parties under a lease agreement in force before February 15, 2020. Although no definitive guidance has been released, most experts believe this is intended for leases of real property.
  2. Utilities – Utilities are defined as electricity, gas, water, transportation, telephone, or internet service beginning before February 15, 2020.
  3. Interest – The CARES Act uses the term “covered mortgage obligation” to describe which interest payments applicable loans are subject to forgiveness. Interest payments can be related to any debt obligation that is a liability of the borrower incurred before February 15, 2020. It does not include any payments on principal. The Act states that the underlying debt must be a “mortgage on real or personal property.” This would include debt on real property that is secured by a traditional mortgage lien as well as working capital lines of credit and other indebtedness where a UCC-1 is filed on the borrower’s personal property. Accordingly, unsecured debt does not appear to be covered.

The Two Calculations of the Maximum Amount Forgiven 

It is important when performing this calculation to remember that the intent of the CARES Act is to keep employees working at wages comparable to pre COVID-19 levels. Accordingly, if the company experiences a reduction of its workforce or a reduction of salaries and wages during the Covered Period, the amount of the loan forgiveness is reduced.

The first calculation relates to a company’s number of full-time equivalents (FTEs) while the second is a measurement of salary expense.

Workforce Reduction Calculation

  • The amount of the loan forgiveness is reduced by the quotient of the following: Monthly average full-time equivalent (FTE) employees during the Covered Period divided by the monthly average FTE employees of either of the following periods: February 15, 2019 – June 30, 2019 or January 1, 2020 – February 29, 2020.
  • For seasonal employers, the measurement period is February 15, 2019 – June 30, 2019.
  • The current thinking is that one FTE equals one employee that worked at least 30 hours per week-although it is not certain at this point.

Example: XYZ Company receives a $1,000,000 loan which it spends on qualifying expenses during the covered period. However, its average number of FTEs from February 15, 2019 to June 30, 2019 is 100 and the average number of employees during the Covered Period is 75. The forgiveness portion would be 75% (75/100) of $1,000,000 or $750,000.The remaining portion would need to be repaid.

Wage Reduction Calculation

As previously noted, the intent of the CARES Act is to ensure that companies hire back employees at comparable wages. Accordingly, the amount of loan forgiveness is decreased by any reduction in salary or wages of specified employees that is in excess of 25% of their total salary during the most recent full quarter they were employed. Only employees earning less than an annualized rate of $100,000 during 2019 are included in this calculation.

Example: XYZ Company receives a PPP loan. After the Covered Period, XYZ Company performs a workforce reduction calculation and determines that its potential loan forgiveness amount is $750,000. Employee A worked for XYZ Company last year. Employee A has a salary of $80,000. During the first quarter of 2020, Employee A is paid $20,000. If XYZ Company reduces Employee A’s salary by more than $5,000 a quarter (more than 25% based on most recent full quarter salary calculated), the amount in excess of $5,000 must reduce the loan forgiveness.

We acknowledge that these calculations may be confusing. However, we are hopeful that additional regulations will be issued providing further guidance and examples of how the salary and workforce reduction rules will apply.

Potential Relief of Reductions of Forgiveness

The CARES Act allows businesses to remedy any reduction in the forgiveness amount by June 30, 2020. While it is difficult to determine potential remedies based on the current guidance, Berntson Porter is closely monitoring any new guidance that is issued.

Please Note:

The loan forgiveness process will be administered by your bank’s PPP lender and we expect that they will have certain requirements and request supporting documentation to validate your conclusions and calculations. Once a loan is received it is important to be thinking about how to bring employees back, how to spend the funds and how to achieve the maximum loan forgiveness.

When the PPP funds are received, it is paramount for companies to work closely with their bank to understand the best practices for tracking the funds. Some banks are instructing companies to open a separate bank account, while others are funding to an existing account. Whether an existing or separate bank account is used for the funds, it is imperative to keep the accounting records as clean as possible, maintaining contemporaneous records as to the use of funds on qualified expenses. This could include setting up separate general ledger accounts for posting and keeping copies of payroll records, rent or mortgage interest payments and utility bills in a separate folder.

Berntson Porter is here to help you navigate these unprecedented times. Visit our online Resource Center for up-to-date information about COVID-19 legislation that impacts you and your business.