PPP Forgiveness Update

On June 3, 2020, the Senate passed the Paycheck Protection Program Flexibility Act of 2020 (H.R. 7010).

CLARIFICATIONS IN THE PPP FLEXIBILITY ACT OF 2020

While additional guidance is likely related to this new legislation, the Act does somewhat simplify the forgiveness terms for most borrowers. HR7010 will make it necessary that the SBA create a new Loan Forgiveness Form which will hopefully simplify much of the complexity and ambiguity in the current application. The Act specifically provides six changes or clarifications.

Extension of loan use period. The covered period (time you have to spend the loan amount) has been extended from eight (8) weeks to twenty-four (24) weeks. Borrowers with outstanding loans as of June 3, 2020 may elect to use the original eight week loan period of the new twenty-four week period. For those who have completed or near-completed their original eight week loan period and appropriately spent the loan proceeds in a manner to achieve majority forgiveness, the eight week loan period election may make sense. For everyone else, the new loan period is a huge relief.
75% becomes 60%. SBA’s arbitrary requirement that 75% of the loan proceeds be spent on payroll expenses has been reduced to 60%. The Act also specifically states that you must use 60% of the loan amount for payroll. Reduction in FTE
Workforce reduction penalty significantly eased. The original SBA guidance contained a penalty if you did not bring the number of FTE’s noted during your loan calculation period back to the number by average FTE during your loan period or by June 30, 2020. That date is now extended to December 31, 2020. The new workforce does not have to be the same employees you previously had nor do they have to be performing the same job function.
Additional rules regarding workforce reduction. In addition to the relaxed date at which you must bring your FTE number back to the loan calculation period, several situations allow you additional forgiveness. These exemptions should be clearly documented and would include: a) Could not find qualified employees. This includes the inability to rehire former employees AND an inability to replace them with similarly qualified individuals. b) Could not restore the business to a comparable level due to government-imposed restrictions on operations. Must establish you were unable to return your business to a “comparable level of activity” due to state or federal mandates regarding social distancing, schedule reductions, or other safety requirements for the period ending December 31, 2020. This is a very vague exemption and hopefully, more guidance will follow.
Repayment period extended. The original two year repayment period has been extended to five years, still at 1% interest. The new language is fuzzy on how long the loan payments may be deferred. While originally a set time frame of six months, the new language states “until the date which the SBA makes a determination of loan forgiveness of the applicable borrower”. While not sure what this legal mumbo-jumbo means, considering how slow the government works this is likely, not bad. More guidance is likely to follow.
Additional deferral of payroll taxes. Under this change, PPP borrowers will be allowed to defer payment of the employer’s share of Social Security Payroll taxes (6.2%) for two years. This is still a deferral and the taxes will have to be repaid, half in 2021 and the other half in 2022

DETAILS ON REDUCTION IN FTE

Once you have determined the total allowed expenses utilized during the PPP loan period, you then determine how much that amount may be reduced based on reduction in full-time equivalency (FTE) and/or reduction in wages paid to the employee. Safe Harbor exemptions provide the potential to eliminate the FTE and/or wage reduction amounts.

A. Start with your average FTE during the loan application process. This was already calculated when you applied for the PPP loan and should have represented FTE during the period February 15, 2019 to June 30, 2019, or January 1, 2020 to February 29, 2020. This has already been determined in the loan process and cannot be changed on the forgiveness calculation.

NOTE: Recent guidance provides clarification on how you calculate your FTE. This is based on the SBA definition of FTE for this program which is stated to be an employee working 40 hours a week. You have two options:
Option One – take the total number of paid employee hours for the calculation period and divide by the number of weeks in the calculation period. Divide that number by 40 (hours). Round that number up or down to the nearest tenth digit.
Option Two – count every employee you can document worked 40 hours each week of the calculation period at one (1) and every employee who worked less than 40 hours during the calculation period as one-half (0.5). Add together and round up or down to the nearest tenth digit.
For both calculation methods, a salaried employee counts as one (1) FTE.

B. Calculate the average FTE during the loan period in the same manner as you did for the loan amount. Certain employees may be exempt from these calculations. These include any employee who was asked to return to work during the loan period but declined, any employee fired for cause during the loan period, any employee who voluntarily resigned during the loan period and any employee who requested and received a reduction in their hours during the loan period.

Divide B by A. The amount of the percentage less than 1 will be used to reduction your total loan forgiveness.
FTE Reduction Safe Harbor. There is an exemption from the FTE penalty based on a stated Safe Harbor. You are exempt from the FTE reduction penalty if BOTH of the following conditions are met:
You reduced your FTE during the period February 15, 2020 to April 26, 2020 – AND –
By December 31, 2020 (or before) you restored your FTE to the same level as during the calculation period starting February 15, 2020.

Example One – No Penalty

FTE used during loan calculation process 20
Average FTE during the loan period 20
You have no penalty for a reduction in FTE

Example Two – FTE Penalty

FTE used during loan calculation process 20
Average FTE during the loan period 15
You do not meet a Safe Harbor exemption
Your total loan forgiveness amount will be reduced by 25%

Example Three – No FTE Penalty

FTE used during loan calculation process 20
Average FTE during the loan period 15
Adjustment: During the loan period, you ask three employees to come back to work, and they all decline. Additionally, two employees decide they do not want to work in health care anymore. You cannot find replacements for any of these employees. Your new calculation numbers are:
FTE used during loan calculation process 20
Average FTE during the loan period 20
You have no FTE reduction penalty

Example Four – Safe Harbor Exemption

FTE used during loan calculation process 20
Average FTE during the loan period 15
Your total loan forgiveness will be reduced by 15/20 or 25%
You laid off or reduced hours of employees on March 1, 2020. This creates a reduction in FTEs during the period February 15, 2020 to April 26, 2020 with a new FTE of 15. By the end of your loan period or by December 31, 2020, your calculated FTE is 16. You qualify for the FTE Safe Harbor Exemption and no FTE penalty will be imposed.

Example Five – No Safe Harbor Exemption

FTE used during loan calculation process 20
Average FTE during the loan period 15
Your total loan forgiveness will be reduced by 15/20 or 25%
You laid off or reduced hours of employees on May 1, 2020. This does not reduce the number of FTEs during the period February 15, 2020 to April 26, 2020 therefore you do not qualify for the FTE Safe Harbor Exemption and your total forgiveness amount will be reduced by 25%.
Your total loan forgiveness will be reduced by 15/20 or 25%

Example Six – No Safe Harbor Exemption

FTE used during loan calculation process 20
Average FTE during the loan period 10
Your total loan forgiveness will be reduced by 10/20 or 50%
You laid off half your employees on April 15, 2020 and never hired anyone back. This reduces your number of FTEs during the period February 15, 2020 to April 26, 2020 and on December 31, 2020 you still have only 10 FTEs. You do not qualify for the exemption and your total forgiveness amount will be reduced by 50%.

REDUCTION IN SALARY/WAGES

While the potential reduction in PPP loan forgiveness based on reduction in employee wages is clear, the calculation of amounts necessary to achieve the Safe Harbor provision are vague. The guidance is not clear in this area making the examples stated here to be an assumption of the intent of the ruling. More guidance is likely and lenders may apply their own methods for forgiveness calculation. HR 7010 did change the required payroll expenditure percentage to 60% but did nothing to clarify this already complex calculation. The percentage change will likely make this penalty a moot point.

In general, the amount of your loan will be reduced by the amount any employee’s wages were reduced by more than 60% during the loan period compared to their wages during the period January 1, 2020 to March 31, 2020. To calculate any potential reduction:

For each employee determine the prorated annual salary (annual salary / 52 weeks X 24 weeks – assuming you did not reduce an exempt employees salary during the period) or total hourly wages paid during the loan period and divide by the prorated annual salary average or hourly wages during the eleven-week period January 1, 2020 to March 31, 2020.
If this percentage is less than 60%, the prorated annual salary or average hourly wages reduced by more than 60% are not forgiven.
Wage Reduction Safe Harbor (again for each employee) – You may be exempt from this reduction if certain conditions are met. The intent of the Safe Harbor, as specified in the CARES Act was to shield the employer from any penalty incurred by a reduction in wages to individual employees as long as the employee’s wages as they were on February 15, 2020 are brought to or exist at the same level on June 30, 2020. There are two problems. First, the manner in which the calculation of wages within the Safe Harbor actually does not make any sense. Second, the arbitrary date of June 30, 2020 does not take into account anything related to the forgiveness period that ends on any date OTHER THAN June 30, 2020. The report from the Treasury Department states that the SBA will be releasing additional guidance and we can only hope it clarifies this issue. PCS will update this post as more information is forthcoming.

On May 15, the SBA released the Loan Forgiveness Application. The application changes some of the rules, adds some new ones and fails to clarify others. A few more issues to consider based on the new application.

Rent and interest on non-real estate assets that were in effect on February 15, 2020 may be counted as interest in loan forgiveness.
Interest, rent, and utilities that occurred during the loan period are counted and may be paid during the covered period or counted if the expense was incurred during the covered period and paid on the next regular billing date even if that is after the covered period ends.
Payroll expenses do not have to be both incurred AND paid within the loan period. This is a change from prior guidance which stated the expenses had to be paid within the loan period. Under the new ruling, the borrower has the option of choosing the regular covered period, which begins the day they receive their first PPP money, or choose what is referred to as an Alternate Payroll Covered Period. The borrower may choose an Alternative Payroll Covered Period (twenty-four week or 56-day period) that begins on the date that would coincide with the payroll schedule of the borrower. The Alternative Payroll Covered Period will begin on the first day of the borrower’s first pay period following the date they receive the PPP funds. Health insurance, retirement contributions and state and local taxes counted must coincide with the chosen period – either the standard covered period of the Alternative Payroll Covered Period. The borrower must use a weekly or bi-monthly pay period to qualify for this election so employers who pay monthly should consider adjusting their pay procedures during the loan period. With the extension of the loan period by HR 7010, this again will likely be a moot point.
There is further clarification on how the 60% use of PPP funds on payroll counts in forgiveness but additional work will have to be done on the Forgiveness Application to make sense out of how it actually works.
The new form appears to make it clear that independent contractors, sole proprietors, and partners in a partnership will not be able to use costs related to their own health insurance and retirement plans in the forgiveness calculation.

NEW APPLICATION FORMS

June 22, 2020 the SBA released new information and guidance when applying for PPP loan forgiveness. The full forgiveness application used by most borrowers has been updated – if you already submitted for forgiveness using the old application you do not need to do anything more.

A new forgiveness form is available for some borrowers. The EZ Forgiveness Application may be used by borrowers if the following apply:

You are self-employed and have no employees – OR
You did not reduce the salaries or wages of your employees by more than 25% and did not reduce their number of hours – OR
Experienced reductions in business activity as a result of operations directives related to COVID-19 (ex. mandatory closure or reduction in patient activity) and still did not reduce salaries or wages of your employees by more than 25%

CLARIFICATION ON SALARY REDUCTION PENALTY

Once again, the details on the salary wage reductions were less than clear. The following update clarifies this to some degree.

Any reduction in salary or wages attributable to a reduction in hours is not counted. Ex. You reduce the hours of all your staff by 50%. This obviously reduced their take-home wages but those reductions are not counted toward the salary reduction penalty as they were the result of decreased work hours.
The reduction in salary penalty applies ONLY to those wages reduced in excess of 25%. Ex. If you reduce the wages of an employee from $2,000 a month to $1,000 a month, the penalty amount is $500 a month (total reduction of $1,000 exceeds the 25% reduction of $2,000 by only $500).
The salary reduction penalty does not apply if you bring all employees back to their wage amount during the calculation period by June 30, 2020. Although it appears inconsistent with other recent changes, this date has NOT changed even with the extension of the loan period to 24 weeks.
The salary reduction penalty does not apply to any employee terminated with cause or voluntarily resigns

FORGIVENESS AMOUNT FOR SOLE PROPRIETORS, INDEPENDENT CONTRACTORS, PARTNERSHIPS.

New guidance did change forgiveness amounts for independent contractors, self-employed, and partnerships. The standard cap on forgiveness amount was increased to $20,833 which should make full or close to full forgiveness possible, especially with the extension of the covered period to 24 weeks.