Huge Update on PPP Loan Forgiveness!
Legislation passed Wednesday, April 3rd, significantly increases the likeliness of full loan forgiveness for many small business owners. Read on to find out the latest updates on PPP Forgiveness Guidelines.
Update as of June 4, 2020 1:00pm EST: This article has been updated to reflect the latest Senate vote revising PPP loan forgiveness parameters. Originally published May 29, 2020.
***Senate Passes PPP Forgiveness Reform Bill***
The Senate voted and passed the Paycheck Protection Program Flexibility Act yesterday, June 3rd, to relax some of the terms of the original program outline under the CARES Act.
Highlights of this new legislation:
- More time to use the funds. Allows for a borrower to elect a 24-week period to use the funds instead of the original 8-week period.
- Changes to the 75/25 rule. Instead of having to use 75% of the loan on payroll costs to be eligible for any loan forgiveness, this bill now changes that to a 60/40 split.
- Loan Repayment Period Extended. For any remaining loan balance that is not forgiven, borrowers now have 5 years (instead of the original 2 years) to repay the loan. The interest rate remains at 1%.
The quick vote by the Senate to approve the House-approved bill without any edits shows the bi-partisan support for small businesses across the country. These updates will nearly guarantee loan forgiveness for the majority of borrowers.
This is still subject to a Signature by the President but that is expected at any time.
Immediate FAQs for the new forgiveness guidelines:
- What if I was going to achieve 100% forgiveness in the initial 8 weeks?
- Borrowers are not being forced to use the 8 weeks, but it is there by choice and something that you can elect into through the banking institution. For those that used Club Capital’s banking partner, we are working with them on identifying this process.
- Our recommendation for those that would be able to maximize loan forgiveness in the initial 8 weeks is to continue with the forgiveness application at the 8 week period to move forward with forgiveness certification to gain the peace of mind that the loan will not need to be repaid.
- How do I elect to use the 24 week period instead of the 8 weeks?
- This is still unknown at this point and will likely be a communication with your lending insitution.
- Club Capital will send an update to all clients that went through our banking partner as to the process as soon as we know it.
- How does this affect the FTE reduction guidelines?
- The new legislation includes two new exceptions allowing borrowers to achieve full PPP loan forgiveness even if they don’t fully restore their workforce. Previous guidance already allowed borrowers to exclude from those calculation employees who turned down good faith offers to be rehired at the same hours and wages as before the pandemic. The new bill allows borrowers to adjust because they could not find qualified employees or were unable to restore business operation to February 15, 2020 levels due to COVID-19 related operating restrictions.
Want more help?
Takeaways on the PPP Loan Forgiveness Application
On May 15, 2020, the SBA published the Paycheck Protection Program Loan Forgiveness Application (SBA Form 3508). The application clears up several of the outstanding questions that borrowers have had with eligibility requirements but there are certainly questions left unaddressed.
Below are the biggest takeaways that our team saw from the application. If you have any questions on this and are a client of Club Capital please reach out to our team, your Account Manager, or directly to firstname.lastname@example.org. Gusto (our client’s payroll platform) also has a great PPP Forgiveness report that is custom to you, your loan amount, and your loan funding start date. Reach out to our team with any questions.
PPP Loan Forgivness Application Takeaways:
1. Alternative Payroll Covered Period
For borrowers with payroll schedules that are biweekly or more frequent, the application allows them to choose an eight-week (56-day) period that begins on the first day of the first pay period that begins after disbursement of PPP funds (the “alternative payroll covered period”).
But if a borrower chooses an alternative payroll covered period, they must apply this pay period to wherever there is a reference to “the covered period or the alternative payroll covered period” but must use the covered period where only the covered period is referenced.
2. Payroll Costs (paid versus incurred)
The application states that “borrowers are generally eligible for the payroll costs paid and payroll costs incurred ”during the appropriate period. Based on this language, it appears that the SBA will be allowing both payroll paid in the appropriate period for work performed just prior to the covered period and for payroll accrued within the eight weeks, even if paid after the covered period, provided that proof of payment is submitted.
This means that borrowers may be forgiven for more than the eight weeks of payroll originally anticipated, although individuals will still be capped at $15,385 based on an annualized $100,000.
3. Non-payroll costs (paid versus incurred)
The allowable non-payroll costs do not seem as clear at the payroll costs, but it can be read in a similar manner. The application states, “An eligible non-payroll cost must be paid during the covered period or incurred during the covered period and paid on or before the next regular billing cycle.”
4. Payroll Reduction Clarification
The baseline comparison period for evaluating whether there is more than a 25 percent reduction for each employee is Jan. 1, 2020, and March 31, 2020. Given that the baseline salary is 13 weeks and the covered period is eight weeks, the salaries need to be normalized. The application has provided some clarity on this issue. For hourly employees, it appears that the comparison is based on an hourly rate comparison. For salaried, the comparison is based on the annualized salary for each of the period as prorated for the covered period.
Club Capital Clients: Gusto calculates any payroll reduction for you in their PPP Forgiveness report!
5. Personal Property Included
There were many questions surrounding the initial meaning of “rent” with regards to approved uses of PPP funds. The application clears up that ambiguity. The application includes “lease agreements for real or personal property in force before Feb. 15, 2020.” This may open the door to include leases for personal property such as vehicles and office machinery.
6. Defining FTE
Many of the questions we received from borrowers revolved around the definition of a full-time equivalent. The application uses a 40-hour work week as the standard for an FTE and rounds to the nearest tenth. It also allows for a “simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.” Borrowers should calculate using both methods to see which is more advantageous.
7. Baseline FTE
There was an anticipation that the baseline FTE calculation would involve calculating the FTE for each pay period in the chosen baseline period and taking the average of all of the pay periods. The methodology outlined in the application appears to be easier. Here is the methodology for calculating the baseline FTE for forgiveness reduction purposes.
First, for each hourly employee, add up the number of hours worked in one of the chosen baseline time periods. Salaried full-time employees are one FTE. Borrowers can choose from the following options:
- Baseline 1: Feb. 15, 2019, through June 30, 2019
- Baseline 2: Jan. 1, 2020, through Feb. 29, 2020
- Baseline 3: For seasonal employers, any consecutive 12-week period between May 1, 2019, and Sept. 15, 2019.
Then, divide each employee’s hours by the following:
- Baseline 1: 768 hours (19 weeks + 1 day x 40 hours per week)
- Baseline 2: 344 hours (8 weeks + 3 days x 40 hours per week)
- Baseline 3: 480 hours (12 weeks x 40 hours per week)
Finally, average the calculated FTE across all employees. The maximum FTE per employee is 1.0. The simplified method described above can also be used.
Club Capital Clients: Gusto calculates all FTE concerns for you in their PPP Forgiveness report!
8. Potential Number of FTE Calculations
An interesting aspect of the application is the number of FTE calculations that may be required including the following:
- FTE for employees during the covered period making less than $100,000 during 2019
- FTE for employees during the covered period making more than $100,000 during 2019
- FTE for baseline FTE (one of three possible time periods)
- FTE at time of loan application
- FTE at time of forgiveness application
- FTE from Feb. 15, 2020, through April 26, 2020
- FTE at Feb. 15, 2020
- FTE at June 30, 2020
9. FTE Safe Harbor
There is a forgiveness reduction should the average number of FTEs in the covered period (or alternate) fall below the baseline average FTE. A borrower need not calculate the reduction if both the following safe harbor conditions are met:
- FTE for the period between Feb. 15, 2020, and April 26, 2020, is less than the total FTE in the borrower’s pay period that includes Feb. 15, 2020; and,
- The borrower’s FTE as of June 30, 2020, is greater than or equal the total FTE in the borrower’s pay period inclusive of Feb. 15, 2020.
Club Capital Clients: Gusto calculates all FTE concerns for you in their PPP Forgiveness report!
What’s to come for PPP Forgiveness? What isn’t answered here?
- Economic Injury Disaster Loan overlap: Currently, the amount of PPP forgiveness will be reduced by any EIDL advances received. But what if you received an EIDL? Can you pay down if you received the EIDL after application for the PPP? How does the EIDL paydown affect the 75 percent payroll requirement, especially when the loan proceeds included repayment of an EIDL?
Stay tuned for our take on the updates to PPP Loan Forgiveness.
Want help planning for loan forgiveness?
Talk to one of our team members now to see how we can help.