PPP Loan Forgiveness Overview

Business woman pondering the PPP Loan Forgiveness application

As of June 8, 2020
This overview has been updated to reflect the changes the amendment to Paycheck Protection Act signed into law on June 4, 2020 as well as the joint statement from U.S. Treasury Secretary Steven T. Mnuchin and Small Business Administrator Jovita Carranza on June 8, 2020.  
We anticipate further changes and clarification in the coming weeks.

  1. Potential limits on payroll forgiveness. There are 2 different limitations. The first limitation is a reduction in headcount. You have a choice of periods to use for the headcount reduction calculation. Choose the one most beneficial to you. That usually would be the period with the lowest FTE headcount. You may choose the period from either: (a) 2/15/19- 6/30/19 or (b) 1/1/20-2/29/2020.

    The FTE headcount from the period you pick will be compared against the FTE headcount for the covered period of payroll you pay from loan proceeds (8 to 24 weeks). The recently published application for forgiveness specifies the use of a 40- hour week for the FTE calculation. There are 2 alternative methods to calculate FTE for an employee paid less than 40 yours per week. You may use the actual fractional amount per employee or round all employees who work less than 40 hours to .5/employee.

    The second limitation is a reduction in salary amount.

    For the salary reduction calculation, you will be comparing the salary per employee paid during the covered period (8 to 24 weeks) to the period from 1/1/20 to 3/31/20. The calculation is done on an employee by employee basis.

    It is possible for both limitations to be cured if full headcount and full salary are restored by December 31, 2020.
  2. Forgiveness limitation for headcount reduction. This is a % reduction of the amount of your payroll costs that will be forgiven. The easiest way to illustrate how this works is with a basic example. Let’s assume that your total loan is $100,000. If you use at least $60,000 for payroll, you have cleared the first hurdle to forgiveness. 

    However, you must now calculate any reduction based on headcount. Let’s say you have chosen the base period from 1/1/20-2/29/20 and your headcount for that period is 10 FTE. If your FTE headcount for the covered period (8 to 24 weeks) is 5, you would reduce the amount that could be forgiven by 5/10 or 50%. You would now be at $30,000 that could be forgiven.

    The recently published forgiveness application provides relief where an employee has refused to return to work, has left voluntarily, been fired or asked for reduced hours. The recently amended Act also provides relief where an employer can document an inability to return to the same level of business at or before February 15, 2020 due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.
  3. Forgiveness limitation for salary reduction. Unlike the first limit for headcount, this is a dollar for dollar limit based on salary reduction. Using the example above, let’s assume that one of the employees made an average weekly salary of $1,000 during the first quarter of 2020. If you pay him/her $750 during the covered period (8 to 24 weeks) there is no reduction to your forgiveness amount (you are given a 25% cushion to reduce). However, if you reduce the salary to $500, then you must reduce the amount that can be forgiven by $250 for each week of your covered period (8 to 24 weeks). Now the total amount of the payroll portion of your loan that can be forgiven is $30,000 (reduced by headcount) minus $250/week (salary reduction) for the covered period (8 to 24 weeks) for that employee. To assure that borrowers are not doubly penalized, the salary/wage reduction applies only to the portion of the decline in employee wage and salary that is not attributable to the FTE reduction.
  4. Impact of $100,000 salary cap. There is an overall cap on prorated salaries to a yearly maximum of $100,000. For the application process you could claim only $8,333 as a monthly max for any employee who earned more than $100,000, or a total of $20,833 for that employee (2.5 times $8,333). For forgiveness, however, the formula is by the week, not the month. That means that the maximum for any employee who earns more than $100,000 is $1,924/ week. 
  5. The 40% portion for rent, utilities, etc.  While the portion of the proceeds spent on payroll are subject to the limits discussed above, there are no similar limits for the non-payroll costs as long as they are limited to 40% of the total allowable costs spent during the covered period. The FTE reduction, discussed above, however applies proportionately to total payroll and non-payroll eligible expenses.
  6. Limitations on Owner Payroll Costs. The recently published forgiveness application limits forgivable owner payroll costs to the lesser $15,385 or the eight- week equivalent of their applicable compensation in 2019, whichever is lower. (We expect this minimum to be increased to reflect the amount of owner payroll per week for 2019 of $1,924 multiplied by the number of weeks in the covered period of 8 to 24 weeks). The limit applies to self-employed, general partners and owner-employees. Owner-employee health and retirement payments from 2019 may be added to the calculation of their 2019 compensation as long as the total does not exceed $100,000.
  7. The 60% test is not all or nothing. You are required to spend at least 60% of total forgivable costs on payroll, not 60% of your total loan proceeds. If your total forgivable payroll costs are less than 60% of your total loan, the reduced amounts are nonetheless forgivable. Failing to meet the 60% of loan proceeds only results in a proportionate reduction in the forgiveness amount. 
This content is prepared solely to provide general information to our clients and community.
This content does not constitute accounting, tax, or legal advice, nor is it intended to convey a thorough treatment of the subject matter.

Contact RINA

Join Our Mailing List