We understand the past couple weeks have created more questions than answers. The team at FRSCPA is committed to assist you in finding those answers, so please do not hesitate to reach out. The Paycheck Protection Program (PPP), while providing some much needed financial relief, has created a lot of these questions. One being, how can I ensure the loan is completely forgiven?
As you may recall, the PPP loan program is designed to protect payroll and maintain employment through this crisis. The PPP loans may be completely forgiven, provided you play by the SBA rules. The guidelines below are a few of the basic rules.
PPP Loan Basic Rules for Full Forgiveness
Rule #1: Only use loan for eligible costs
The PPP Loans are eligible for complete forgiveness, as long as the borrower uses the funds for the following covered costs:
- Payroll costs
- Mortgage interest on debt incurred before February 15, 2020
- Rent on leases in force before February 15, 2020
- Utility payments, including electric, gas, water, transportation, telephone or internet access, provided service started before February 15, 2020
Further, under the Treasury’s interim rules 75% of the loan must go towards payroll costs. Only 25% of the loan may be used for the other covered costs.
Rule #2: Retain your staff
The forgivable portion of the loan is reduced if your staffing level decreases. The reduction amount is based on an average number of full-time equivalent employees or “FTEs” during the 8 weeks after loan is originated versus the comparison period you select.
The reduction is calculated as follows:
Forgivable Portion =
Loan x (Avg. # Monthly FTEs during 8 weeks after loan origination) / (Avg Monthly FTEs (two periods to select from) )
Any reduction in your average FTEs will reduce the forgivable portion of the loan, if it falls below the average monthly FTEs from your selected comparison period.
Rule #3: Pay Staff at least 75% of what they made last quarter
The forgivable portion of the loan will also be reduced if any covered employee’s pay during the 8 weeks after loan origination is reduced by more than 25% when compared to the first quarter of 2020. While more guidance is needed on this calculation, this appears to be calculated on a per-employee basis. The reduction of forgivable portion of the loan will likely be reduced dollar-for-dollar for any reduction of a covered employee’s wages in excess of 25%. As these loans can be used for part-time employees, at this time, presume that a more than 25% reduction in hours may also result in a reduction under this PPP Loan rule.
Rule #4: Hire New Employees to eliminate FTE reduction and Restore Staff’s Pay, if reduced
Due to the current crisis, some of you may have already laid off staff or reduced an employee’s pay by more than 25%. Without some type of relief, your PPP Loan may not be eligible for complete forgiveness. The PPP Loan program thankfully provides you a route to full loan forgiveness. Rule #2 and #3 will not be applied, as long as you eliminate any reduction in FTEs or reduction in an employee’s pay, when compared to FTEs and pay as of February 15, 2020. In other words, if you already laid off workers from your staff levels at February 15, 2020, then you can hire new employees or re-hire those employees to eliminate that reduction. Further, if you cut any employee’s pay by more than 25%, then you can restore that employee’s pay to 100%. As long as both of those are accomplished by June 30, 2020 and you only pay the covered expenses, then you can achieve full loan forgiveness.
Best Bets for Your Organization
It is important to consider how to play by these rules within your own organization. Here are some Best Bets that you can focus on:
Best Bet #1: Consider Full Time Equivalents (FTEs) Now
Compare the number of FTE’s for the two periods below:
- Period A: February 15, 2019 through June 30, 2019 (19 weeks)
- Period B: January 1, 2020 through February 29, 2020 (8 Weeks)
You should select the date that results in a lower FTE. Although further guidance is needed for this calculation, the calculation will likely be similar to the FTE calculation for the Affordable Care Act. For each period, this FTE calculation requires the following steps:
First – Count the number of employees that work more than 30 hours per week during the period. These employees are considered full-time employees.
Second – Calculate the total hours worked by all other employees (i.e. part-time employees) during the period. Divide those total hours for the time period by the following:
- Period A: 570 (30 hours week for 19 weeks)
- Period B: 240 (30 hours week for 8 weeks)
This equals your full-time equivalent employees, from part-time workers
Third – Add the number of full-time employees and the number of full time equivalents to reach your average Monthly FTEs for the period.
The worksheet here may assist you in estimating your FTEs for each time period. Your payroll company should assist you in gathering the information you need for the calculations.
Best Bet #2: Plan Employees Schedule for 8 Week Period After Receiving Funding Now
Based on the FTEs calculated above, you now have a goal for the number FTEs you need for the 8 weeks after receiving the PPP loan. For example, if you have 25 FTE for your selected period, you want to maintain at least 25 FTEs for the 8 weeks after the loan. In order to maintain 25 FTEs, you would need to average at least 750 hours per week (30 hours x 25 FTEs) or at least a total of 6,000 hours for the entire 8 weeks (750 hours a week x 8 weeks). If all your employees are part-time, then you now know that you need to schedule your employees for at least 750 hours per week. Refer to the worksheet which can assist with this calculation.
Best Bet #3: Keep Records of Employee Absences
If you are struggling to keep your crew hours up, follow-up with crew to understand why they don’t need or want the hours (i.e. due to illness, work elsewhere, etc.) You may have a decline in overall employee hours due to factors outside your control. Any additional information regarding why the hours were reduced, may only help your case when the applications for loan forgiveness are being processed.
We are in this together. If you have any concerns or would like us to consult on the best bets in your specific organization, please reach out to us as soon as possible.