Part 1: Navigating PPP Loan Forgiveness

While the first $349B of PPP funding was quickly drained, the second tranche of funding has been approved by the Senate and House and the President will likely sign off today. Given the long line of applications currently in the queue, lenders we’ve spoken to are hopeful these funds will be distributed quickly as the infrastructure is in place this time around.

With this in mind, Compass East looks to the next phase of the program, PPP Loan Forgiveness. Companies need to start thinking about what to do when they actually receive the funds. By establishing a process to track spend upfront, you will likely avoid major headaches two months from now. There is one major caveat, however, as the SBA still needs to issue additional guidance on forgiveness so calculations and criteria are still subject to change. 

Our goal is to help you establish accounting best practices with supporting documentation to maximize the level of forgiveness regardless of how the final rules shake out. In our two-part series, we will first analyze what we know today about PPP Forgiveness and what key questions still remain. In our second post on Monday, we will outline everything you need to do from an accounting perspective to prepare to track PPP spend and what documentation is needed to be prepared for everything.     

With this in mind, let’s first review what is currently known about forgiveness. 

• The entirety of the PPP Loan can be forgiven but only if the recipient spends proceeds on eligible expenses which include payroll costs, utilities, rent, and mortgage interest obligations over the 8-week period after the loan is made.
• 75% of the funds submitted for forgiveness must be used on payroll costs: Salary, wage, commissions, or similar compensations up to $100k annualized ($15,385 for 8 weeks). Included in payroll costs are cash tips, sick, vacation, medical or family leave, healthcare, and retirement benefits, severance, and state and local tax on employee compensation. If an employee makes over $100k, they are capped on the salary portion but healthcare benefits can be included above the $15,385 threshold.  
• Forgiveness will be reduced upon a reduction in employee headcount. What we know today is that there are two options for calculating the forgiveness portion:

• Essentially, loan forgiveness will be granted at 100% of the loan multiplied by one of these ratios (whichever is more beneficial to the borrower). 
• However, it is noted that if you rehire employees that were laid off and/or furloughed after Feb 15, 2020, by June 30, 2020, you may be eligible to restore 100% forgiveness eligibility. 
• Eligible non-payroll costs include rent, utilities, and interest on debt incurred prior to Feb 15, 2020 (not principal payments on those notes).

One major caveat here is that the SBA has not officially defined Full-Time Employees. We know a typical 40 hour per week employee will count as one but we are unclear on where the line officially is. While it is somewhat speculative until we know for sure, it is likely that the SBA will use the same guidelines as the Affordable Care Act where someone working 30 hours a week will count as an FTE. For hourly and part-time employees, initial feedback is that you would add up all the hours worked across all hourly employees for a month and then divide by 120 hours to calculate 1 FTE (there will be partial FTEs). Use this as a guideline for now, but be aware this can change.

There are also two very key dates for FTEs

1. Feb 15, 2020
2. June 30, 2020

There is potential that if you bring back employees in full by June 30, 2020 to the same level as Feb 15, 2020, then the forgiveness penalty will not apply and you could still receive 100% of the eligible forgiveness. In this hypothetical, however, you could run into issues hitting the payroll cost thresholds since you weren’t paying these employees during the time period, which would decrease your forgiveness anyways.  

This is what we know today. However, additional guidance is still expected for more specifics and clarification. Some of those questions that are still outstanding include:

• Will the non-forgivable portion of the loan be restricted to the same guidelines (75/25) for payroll and non-payroll costs?
• Will the business owner be able to use their loan principal funds on ineligible expenses required to continue the operations of their business? 
• Will the actions of a few large companies to obtain funds create additional oversight and scrutiny for small businesses with the creation of a new Federal Agency or audits? 
• How does the timing of payroll runs affect forgiveness eligibility? What if you are scheduled to run payroll a single day outside the eligible window, does this still count in full or partial? 
• How do you count FTEs in relation to PPP Loan Forgiveness? 
• What about bonuses? Could employers provide significant bonuses to their employees to hit thresholds?  
• We know the lender will determine forgiveness levels. Will that be consistent across the board? Or will there be different interpretations from different lenders?

In Part Two, we will talk about exactly what you can be doing today to establish a documentation process to ensure you maximize your forgiveness levels. Stay tuned!

John Lanahan
Director Of Financial Strategy
john.lanahan@compasseast.com