The “Next Six Questions” to Ensure PPP Loan Forgiveness
In discussing the Payroll Protection Program loan with business owners, the current topic is “how do I make sure all of the loan is forgiven?” In that light, and recognizing that the answer is determined by each businesses situation, I decided to come up with the “next six questions” business owners should ask to help reach full forgiveness. Some recent good news, on June 5, 2020 the Paycheck Protection Program Flexibility Act of 2020 was drafted and signed into law. While this certainly eases the ability to have your PPP loan forgiven, you’ll need to ask yourself the 6 questions below to achieve full forgiveness.
First, the highlights of the PPP Flexibility Act.
The act extends the time to spend the money from 8 weeks to 24 weeks.
The act also lowers the required threshold of funds to be spent on payroll (as opposed to mortgage interest, Rent, and utilities) from 75% to 60%.
It also extends the period of time to restore your Full time equivalents from June 30th to December 31st.
There are a few other changes that could affect some business, so be sure to check out the new law if you have a PPP loan.
Now, for the 6 questions you should ask yourself in the pursuit of full loan forgiveness. We will start with the easier questions and save the problematic questions for the end.
Did you get an Economic Injury Disaster Loan Emergency Advance (EIDL)?
If you did, that amount comes off the total amount that can be forgiven, without any additional calculation needed. So unfortunately, that amount is going to need to be repaid.
Was your total payroll over the 24 weeks greater than 60% of the total loan amount?
If not, the amount of Mortgage Interest, Rent, and Utilities that count towards forgiveness will be limited, resulting in some amount of money needing to be repaid.
Was your total Payroll, Mortgage Interest, Rent, and Utilities greater than the total Loan?
This may be the lowest hanging fruit of them all, but if you do not spend at least the total loan on qualified expenses, then a portion will not be forgiven and will need to be repaid.
Now onto the meaty questions,
Did you have a reduction in total hours worked, and thus total Full Time Equivalent (FTE) employees?
If your number of FTEs drops, then the percentage drop will limit the total amount of the loan forgivable by the same percentage. The good news is that there are a number of time periods to compare in order to show the best ratio of FTEs, and there is still time to adjust the number of FTEs and get forgiveness. If you had a decrease in hours start working through the calculation now so you have time to adjust as necessary
Did any employees who make less than $100,000 per year have a reduction in pay?
If any employee has their wages reduced to less than 75%, there will be a reduction in the amount of their payroll that counts towards forgiveness. Again, there are a number of periods to choose from in this comparison, and time to make adjustments to reinstate a higher wage and reduce the limitation of loan forgiveness.
Two items to note on this. First, this is an employee by employee calculation. Second, if you decreased an employee's hours and wages, you could get hit with the 75% of wage decrease as well as the FTEs decrease.
Did you keep the exact same employees throughout the crisis?
This may be the most detailed calculation if the answer is no and it plays off the limitation in the point above. Let's say for instance you had an employee work for you until May 1st, at which point they left employment and never returned. Perhaps they took another job of their own accord, perhaps you had to let them go and they decided not to return. Even if you replaced them with a new employee at full salary and full hours, it appears there would be a limitation based on the employee by employee piece of the calculation described above.
There are a few potential ways around this limitation, but if you had someone work past the funding of your PPP loan, leave employment, and you do not anticipate they will return, you should dig deeper to determine what your loan payback liability will be as a result.
As with everything in PPP land, things are changing almost daily and could yet change further. I wanted to share information and pass along things to think about, in an effort to ultimately have all of you reach full loan forgiveness. I am not an expert on the loan forgiveness process (is anyone an expert since no one has applied for forgiveness and rules are still changing?) but I am committed to helping navigate the process with you. So if any of the questions above returned problematic answers (or only created more questions) I’d be happy to work through it together.