At long last, we have some definitive guidance to decipher what PPP loan forgiveness will look like. There is a lot of information to deciper in the application, and even our brains hurt when we started reading it!!!
The good news:
- The application and guidance are pretty similar to what we thought it would look like.
- There are no big bombshells in the forgiveness guidelines.
The not-so-good news:
- There is a LOT of work, deciphering and document gathering ahead for everyone in order to secure free money.
- Some of the guidelines can be interpreted in different ways.
This blog post will be very lengthy – we apologize for that. However there is a lot of information to get out there. We have two solutions for you to stop reading right now if you’d like:
Keep reading for information overload.
PPP Forgiveness Assistance
Paper Trails will calculate forgiveness and prepare your application on your behalf.
- Consult with you on PPP guidelines and forgiveness
- Track all PPP related expenses to ensure expenses are qualified and guidelines are followed
- Calculate your full time equivalent (FTE) employee counts and any employee wage reductions to determine if there is a reduction in your forgiveness amount
- Compile all documentation required for forgiveness
- Assist you in completing the PPP forgiveness application to your bank
- Provide copies of all forgiveness documentation to your accountant for year-end tax preparation.
Preference on this service will be given to our existing clients. $350 for existing clients. We are more than happy to assist non-clients; The rate for non-clients begins at $525 and may increase based on the complexity of your payroll and the size of your business.
Webinar – Wednesday 5/20 @ 2pm
Chris will host a webinar detailing all of the information enclosed herein on Wednesday, May 20th at 2pm. This will also be an opportunity to get any specific questions answered you may have. Please contact us to get the zoom login for this webinar.
The Basics of PPP Forgiveness
Within the PPP Forgiveness Application, there are a few core pieces that are required. We’ll use these guidelines to help explain how forgiveness works.
- Determination of your 8-week PPP Period.
- Document covered expenses
- Determine your FTE (full-time equivalent) employee counts
- Calculate any reductions in wages that will reduce forgiveness
- Gather backup documentation for all of the above
Your PPP Covered Period
We were correct in our assumptions of what your 8-week PPP period included:
- Your PPP Period begins on the funding date of your loan (when the money was deposited into your account)
- Your PPP Period ends 56 days (8 weeks) after the funding date
- All expenses are tracked on a “cash basis” meaning they are effective when you wrote the check, not when expenses or payroll were earned. Example: your actual pay day (Friday of each week) is when the expense is recorded, the day you pay the CMP bill, the day your loan payment clears your account, etc.
SBA did introduce the concept of an “Alternative Payroll Covered Period” for “administrative convenience.
- Your PPP period would instead begin with the first day of your next pay period immediately following your funding date and extend 56 days.
- Be careful – some expenses fall under the “covered period” and others all for use of the “alternative period.”
Reminder: What can PPP Funds be used for?
PPP Funds may be used for:
- Payroll Expenses (must be at least 75% of total)
- Payroll expenses include all gross wages less than $100,000 annualized ($15,384 for the PPP period) paid to U.S. residents and local taxes (Maine unemployment).
- Employer share of GROUP health insurance premiums.
- Employer contribution to retirement programs.
- Interest on mortgage obligations on real or personal property (previously said just “debt”) incurred before February 15, 2020. No pre-payment is allowed.
- Rent or lease for “real or personal property” established before February 15.
- Utilities – specifically including: Electricity, Gas, Water, Transportation, Telephone and Internet.
What is my Full Time Equivalent (FTE) Count?
The full time equivalent (FTE) employee count is a fractional representation of calculating your employee count. Depending on how many average hours your employees work, they will either be 1 or a fraction of 1 full time equivalent employee.
To calculate your FTE count:
- Take each employee – divide their average hours by 40. Ex: 30 hours a week / 40 hours = 0.75 FTE
- You must do this on each employee for the following periods:
- February 15 to June 30, 2019
- January 1 to February 29, 2020
- Seasonal: a 12-week period between 5/1/19 & 9/15/19
- 8 week PPP period
Compare the FTE count during the PPP period to either the 2019 or 2020 periods to your 8-week PPP period. You can use the most advantageous (lowest) FTE count for comparison purposes.
Simplified FTE Calculation
The SBA is allowing you to perform a simplified FTE calculation using the same periods as follows:
- Assign 1 FTE to employees who work 40 hours or more
- Assign 0.5 FTE to employee who work fewer than 40 hours
FTE Reduction Exceptions
There are some exceptions that you can include in your FTE count. If one of the following scenarios applies, you may include these employees in your FTE count:
- You made a good-faith, written offer to rehire during the PPP period and it was rejected
- Employee was fired for cause
- Employee voluntarily resigned
- Employee requested a reduction in hours
Important: Be sure to have good documentation for all of these scenarios if you’re going to employ them.
FTE Reduction “Safe Harbor”
There is a safe harbor provision for the FTE count. If both of the following conditions are met, you are exempt from the loan forgiveness reduction based on FTE count. However – you must provide documentation of this exemption.
- Your FTE Count decreased between February 15 and April 26, 2020
- Your FTE Count was restored to February 15th levels no later than June 30th
As you can see, calculating your FTE count has many steps, and exceptions. Be sure you have a good grasp on your FTE count before applying for forgiveness.
Wage Reduction Rules
Within the PPP forgiveness application, you must prove that you did not reduce any employees hourly rates/salary amounts by more than 25%. If you did reduce hourly rates or salary amounts by more than 25%, your forgiveness can be reduced.
Examples on how to calculate if there was a wage reduction include:
- Find average annual salary from PPP period and compare to 1/1 to 3/31 annual salary (divide 1st by 2nd). Less than .75 = there was a reduction
- Compare hourly wage as of 2/15 to hourly wage between 2/15 to 4/26 (divide 1st by 2nd).
Less than .75 = there was a reduction
This calculation can be quite complicated. We recommend you review the guidance for specific steps to calculate the wage reduction.
Remember, we’re underwriting the loan in reverse. The bank will require a lot of documentation to review and approve your forgiveness application:
- Copies of all payroll reports for the PPP period
- Documentation for your FTE & Wage reduction amounts
- Copies of invoices for loans, health insurance, utilities, etc
- Retirement contribution statements
- Copy of your lease
- They may also request cancelled checks/check images & bank statements
The IRS has issued guidance on tax implications related to PPP Loans and forgiveness. You can read the full guidance here.
- Forgiven PPP Loan Funds are considered non-taxable income
- HOWEVER – All expenses paid for with PPP Funds (payroll, rent, utilities, etc) are no longer deductible
- For most, this will be a wash, and a “non-taxable” event.
- The money flows in and out without tax implications
- You cannot “double dip”
- Be sure to provide all documentation to your accountant
Now that your Ducks are in a Row – Apply for Forgiveness
- Download the PPP Loan Forgiveness Application from the SBA website
- Begin the application by completing Schedule A and work backwards. You will likely need substantial documentation to complete Schedule A.
- Go back to page 3, and complete the actual application
- Have your calculator and excel spreadsheets handy – you’re going to need them!!!