PPP Application Submitted, Loan Approved, Money Received – now what do I do to make sure the money will be forgiven tax free?

In a year that is full of twists and turns, we now turn our attention to the next stage of funding from the Government – Calculation of Forgiveness of the PPP Loan.  The SBA has not issued final guidelines on many issues relating to the forgiveness calculation, but based on the information currently available, we tackle this issue in this article for you.

FIRST and FOREMOST – Calculate your maximum forgiveness available.

The SBA put in place two major limitations on the amount of PPP loan that can be forgiven.  As you will see from these limitations, the PPP is truly a program that is meant to keep your staffing at pre-quarantine/stay at home levels and to keep your pay rate at close to the same level.

Limitation #1 – Your ratio of Full Time Equivalents (FTE’s) must not be less than ratios to the same time last year or prior to February 29, 2020.

The CARE Act states that your FTE’s during the 8 week period after receiving the PPP loan cannot be less than your number of FTE’s prior to the virus invading the country.  To the extent that your number of FTE’s decreases, your amount of loan forgiveness will be decreased by the same ratio.  The calculation for reduction in job loss is as follows:

  • First, take your total PPP loan.
  • Second, multiply that loan by the following ratio:
    • Numerator is average number of FTE’s during the “covered period” which is the 8 weeks period after receiving the PPP loan
    • Denominator is the lesser of average number of FTE’s per month from:
      • February 15, 2019 – June 30, 2019 (use this if you are a seasonal employer), OR
      • January 1, 2020 – February 20, 2020

To the extent that this ratio is less than 1, that portion cannot be forgiven.  Even if you do not qualify for full forgiveness under the calculation, a get out of jail free card does exist.  If your employee headcount is increased by June 30, 2020 to the levels of the denominator in limitation #1 then the full amount is available to be forgiven.

Limitation #2 – Your pay rate per employee during the 8 week period after receiving the PPP money cannot decrease by more than 20% compared to their pay rate beforehand.

The government’s second hurdle to potential full forgiveness wants to ensure that each employee is still getting paid at a reasonable rate compared to what they were making before the 8 week period.  This calculation is done on a per employee basis as well.  Only employees with wages $100,000 or less are included in this calculation.  For any employee that was making greater than $100,000 prior to the 8 week period, they are not included in this calculation. 

According to the CARE Act, a qualifying employee’s pay rate during the 8 week period after receiving the PPP loan cannot be 25% less than their pay rate during the last full 3 months that the employee worked prior to the 8 week period.  To the extent that the amount of pay decreased, the amount of loan forgiveness is decreased dollar for dollar.

This limitation also has a get out of jail free card.  If one of the employees is not sufficiently paid, the employer has until June 30, 2020 to adjust the employee’s salary to at least 75% of the required amount.

SECOND – now that I know my Forgiveness limitation, how can I use my PPP money?

After you know how much you will have to spend, the biggest issue becomes spending the PPP money.  As we stated at the beginning of the article, the government wants you to use this money on payroll.  Of the forgiveness amount, 75% must be used on payroll costs.  The rest can be used on non-payroll costs as listed below if you want the PPP loan forgiven.  Please note the amount allocated to payroll costs is as follows:

  • Payroll Costs:  Payroll costs include the gross pay of the employees during the 8 week period capped at $15,385 per employee.  Anything paid to an employee in excess of the $15,385 during the 8 week period does not count in the loan forgiveness.  Gross pay included salary, wages, tips in addition to gross pay, the following are considered payroll costs:
    • Benefits for employees (non-owners) including – health care expenses, retirement contributions
    • Leave pay for vacation, parental, medical or sick leave.  Please note that any leave pay in which you are receiving a credit under the Families First Coronavirus Response Act does not qualify.
    • State unemployment taxes
  • Sole Proprietor:  For a sole proprietor, the amount of Payroll costs for the owner is equal to 8/52 of the amount listed on the 2019 schedule C that was submitted with the application.

The other non-payroll costs that can be included in the forgiveness calculation include the following.  These costs cannot exceed 25% of the amount allowed to be forgiven.

  • Rent Expenses:  This includes all payments during the 8 week period for rent on real or personal property where the lease agreement was in place as of February 15, 2020
  • Mortgage Interest expense:  Interest that is paid on loan agreements in place as of February 15, 2020, for loans secured by real or personal property
  • Utilities:  This includes Natural gas, propane, electric, internet, telephone, and transportation fuel.  The service agreement for these costs must have been in place by February 15, 2020 to qualify.  Currently the SBA guidance is conflicted on whether normal gas costs for fueling cars is included as utilities.  Most interpretations to date only include fuel costs as utility costs if you have a fuel agreement to store gasoline and use on your vehicles.

Please note that the SBA has not issued final guidance on the usage of the funds and the calculation of loan forgiveness.  We anticipate that they will issue further guidance in the next few weeks.  Please stay tuned to our site for further clarification as the government and banks release more guidance. 

In addition to the about rules, many of you may have received the EIDL (Economic Injury Disaster Loan) grant as well as PPP money.  If you have any questions for anything relating to these programs or would like assistance in maintaining these calculations, we are willing to assist.  During this troubling time, we will reduce our rates by 10% to help answer questions and assist in the calculation and submission of the support to the banks.  Remember, stay safe and stay well!