Calculating Forgiveness of Your PPP Loan
You’ve received a Paycheck Protection Program (PPP) loan to help your business address the economic fallout of the COVID-19 pandemic. Now you have eight weeks from receipt to correctly use those funds on specifically identified purposes.
As you spend those PPP funds, remember that payroll expenses, including hourly wages, cash tips, employee vacation, group health insurance premiums, and paid parental, family, medical and sick leave (excluding credits for qualified sick and family leave wages allowed under the Families First Coronavirus Response Act) must make up at least 75 percent of the total PPP loan amount you wish to be forgiven. The balance of the forgiven amount may be used for rent, utility payments, and mortgage obligations as defined in the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act.
Loan Forgiveness Factors
Two factors may reduce your total PPP loan forgiveness – reduced employee headcount and reduced salaries and wages, calculated as follows:
To determine the impact of headcount changes on PPP loan forgiveness, use this formula:
- Multiply the total dollars used for specific expenses identified in the CARES Act incurred and spent during the eight weeks following receipt of your PPP loan by the average number of full-time equivalent (FTE) employees per month during the eight-week period. (Calculate average FTEs by averaging the number of FTE employees for each pay period within a month).
- Divide that product by the average number of FTEs per month from February 15, 2019, to June 30, 2019.
Alternatively, the borrower may elect to use this formula:
- As above, multiply the total dollars used for specific expenses identified in the CARES Act incurred and spent during the eight weeks following receipt of your PPP loan by the average number of full-time equivalent (FTE) employees per month during the eight-week period.
- Divide that figure by the average number of FTEs per month from January 1, 2020, to February 29, 2020.
For seasonal employers, use the average number of FTEs per month for the period beginning February 15, 2019, and ending June 30, 2019.
Workers who refuse to be rehired will not affect a borrower’s loan forgiveness. Recent guidance has clarified that a borrower’s loan forgiveness will not be reduced if an employee who has been laid off refuses the borrower’s offer to rehire at the same wage or salary and weekly hours of employment. To qualify for this exemption, the borrower “must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower.”
Although the guidance does not explicitly state that the “documentation” of the rejection must be in writing, we absolutely recommend that borrowers do so, noting the circumstances of the rejection and how the employee delivered rejection. Obviously, if the employee rejected the offer in writing, it is imperative the borrower retains that writing as evidence of the rejection. If the employee rejects the offer verbally, the borrower should note the date, time, means, and any reasons for the rejection.
The guidance further notes that employers and employees should be aware that a rejected offer of re-employment may make the employee ineligible for continued unemployment compensation.
Salaries and Wages Calculation
The PPP loan forgiveness amount will be decreased by any reduction in total salary or wages of any employee during the eight-week period that exceeds 25% of the total salary or wages of that employee during the most recent full quarter you employed the worker before the eight-week PPP loan period.
Note that the reduction is for salary and wages and not payroll; payroll includes a much broader range of compensation.
This calculation does not include any reduction of salary or wages for one or more employees whose wages exceed $100,000. For example, for an employee whose wages or salary is reduced from $160,000 to $110,000, although the $50,000 decrease is greater than 25%, it will not impact the forgiveness calculation.
The “Backstop” Exemption for Rehired Workers or Restored Wages
Although we are waiting for guidance, the CARES Act appears to provide (although the language is not entirely clear) that neither a reduction in the number of employees nor a 25 percent or greater reduction in salary for one or more employees will affect your PPP loan forgiveness in these circumstances:
- If your business laid off or furloughed workers between February 15, 2020, and April 26, 2020, you fail to eliminate the layoffs or furloughs during the eight-week period of your PPP loan, but you restore your FTE workforce count to your February 15, 2020 level not later than June 30, 2020, or
- If your business reduced the salary and wages of one or more employees between February 15, 2020, and April 26, 2020, you fail to eliminate the salary or wage reductions during the eight-week period of your PPP loan, but by June 30, 2020, you restore those salaries and wages to the same amounts the employees received prior to February 15, 2020.
- You both lay off or furlough workers and reduce wages during the February 15, 2020, to April 26, 2020 time period and fail to cure those layoffs and reduced wages during the eight-week period of your PPP loan, but by not later than June 30, 2020, you both rehire workers and restore salaries and wages to levels existing on February 15, 2020.
These are not “all-or-nothing” thresholds. For example, if your business can only rehire 15 of 20 laid-off employees, you may still be entitled to a proportionate foregiveness of your PPP loan as discussed under the Loan Forgiveness Factors section of this article above.
To maximize your opportunity for loan forgiveness, you must spend the PPP loan proceeds on Allowable Uses in the eight-week period immediately following receipt of the loan proceeds, and you must:
- Maintain FTEs and not reduce wages by more than 25 percent for any employee (compared to the most recent full quarter prior to receipt of the PPP loan) during the eight weeks following your receipt of the PPP loan; or
- Eliminate FTE and/or wage reductions by June 30, 2020.
Keep in mind that regardless of the exceptions for rehired FTEs or restored wages, the maximum amount that may be forgiven is still the amount incurred or spent on Allowable Uses within the eight-week period. Also, the 75% minimum payroll expenditure (up to 25% non-payroll) rule applies universally.
This article is not legal advice, but merely summarizes some very complex provisions in the CARES Act. If you received PPP funds, work with your CPA and attorney to make sure you satisfy the detailed loan forgiveness requirements of the Cares Act.
Kreis Enderle is closely monitoring state and local coronavirus relief measures, and our attorneys are ready to assist you with your PPP loan questions and other legal needs.