AccuPay has been immersed in the Paycheck Protection Program concepts, processes and procedures since the PPP loan program was initiated as part of the CARES Act, enacted into law on March 27, 2020. To some extent we have “lived and breathed it” since so much of the PPP loan application and forgiveness procedures revolve around “payroll costs” and payroll information needed for both the initial PPP loan application as well as the SBA loan forgiveness applications. We have studied the PPP law, rulings and rule changes, and read numerous articles about PPP concepts. Our goal has been to be a resource to our clients as to helping answer questions, while simultaneously encouraging our clients to seek advice from their CPA and their SBA lender. We will continue to help clients of AccuPay with information as to how to optimize the value of the PPP loans which our clients have applied for and received. The PURPOSE of this PayDay is to condense all the PPP laws, interim final rulings, accumulating FAQ’s, and related matters as they pertain to loan forgiveness. The vast majority of PPP loan recipients should be able to attain 100% loan forgiveness based on increasingly positive rulings from the Treasury Department on PPP loan forgiveness (and also the PPP Flexibility Act initiated into law on June 5, 2020.)
STILL PPP MONEY LEFT—-BUT TIME IS RUNNING OUT!
As most of you are aware, the final due date for applying for PPP loan funds was June 30th, BUT the final due date was extended to August 8th (or could end when allocated funds run out). For those who have not applied, the existing PPP loan forgiveness rules are much easier to comply with, so applying for needed PPP funds should be considered. Your business bank is the place to start, BUT if your bank has no interest or is not currently accepting new loan applications, they can likely recommend a SBA lender. You may also wish to check out some of the online lenders/brokers such as FundBox and Kabbage, since we have heard good things about their PPP loan efficiencies. But, TIME is of the essence if you are going to apply!!
GREAT NEWS FOR LOAN FORGIVENESS OCCURRED ON JUNE 5, 2020
Congress passed the PPP Flexibility Act on June 5, 2020, which dramatically helped all employers’ ability to attain 100% forgiveness of their PPP loans. The most important amendment to the PPP loan forgiveness process was the change in the “covered/spending period” from the original 8 week period to 24 weeks. Many employers were struggling with spending their PPP loan proceeds on payroll and other eligible costs within 8 weeks from loan receipt, BUT can easily spend 2 1/2 months of payroll costs (the original calculation of the PPP loan amount) on payroll costs, rent, utilities and mortgage interest in a 24 week period. The 24 week “covered period” is automatic for all PPP loans received from June 5th on, and also becomes the covered period for all PPP loan recipients. Employers who received PPP loans prior to June 5th can still apply for loan forgiveness based on their original 8 week covered period, if they so choose. A recent ruling by Treasury indicates that employers do not need to wait 24 weeks to apply for loan forgiveness, but instead can apply for loan forgiveness at any time after they have spent 100% of their PPP loan proceeds. The KEY is to apply for loan forgiveness once the employer has met all the requirements for complete loan forgiveness, not before. Loan forgiveness revolves around an employer spending all of their PPP loan proceeds on “eligible costs” (payroll, rent, utilities and mortgage interest), AND making sure that any reductions in “headcount/hours worked” by employees (so called “full-time equivalents”/FTE’s) OR payrate reductions of employees in excess of 25% do not decrease the total spending on eligible costs to an amount which is less than the PPP loan amount. It is OK to have the spending totals on eligible PPP costs reduced by a FTE percentage reduction and/or a payrate reduction as long as the reduced spending amounts still exceed the PPP loan amount—–our interpretation (to include “doing the math” on the SBA 3508 forgiveness application forms) is that FTE percentage reductions and payrate reductions do not automatically reduce the amount of your loan forgiveness, they instead reduce the amount of your spending on eligible PPP costs, which is then compared to your PPP loan amount. With up to 24 weeks in which to “count eligible costs” spent for payroll, rent, utilities and interest, the spending total will likely become very large as compared to the PPP loan amount—-so some reductions in the spending amounts based on FTE and payrates will likely still permit total PPP loan forgiveness.
The PPP Flex amendment of June 5th also changed the requirement that 75% of the eligible costs be spent on “payroll costs” to 60% be spent on payroll—–this could help some employers who are more capital intensive than labor intensive, with a good example being an automatic car wash (lots of mortgage interest on facility/equipment, water/utilities as compared to payroll costs)—-the extension of the covered period from 8 to up to 24 weeks will also help employers meet the 60% “spent on payroll costs” requirement for complete PPP loan forgiveness.
CONFUSED—–HERE IS AN EXAMPLE—–CONTINUE YOUR SPENDING/COVERED PERIOD UNTIL YOU HAVE ATTAINED 100% LOAN FORGIVENESS!!
A restaurant averaged $40,000 per month in 2019 on “payroll costs” (gross wages plus reported tips plus SUTA tax—did not pay any share of medical insurance or retirement plan benefits which would also be included in “payroll costs.”) The restaurant applied for and received a PPP loan equal to 2 1/2 X the monthly average for payroll from 2019, or $100,000—the PPP loan was deposited to the restaurant’s bank account on April 15th. The restaurant’s 8 week “covered period” is the 56 day period beginning on April 15 and ending 55 days later on June 9th. The restaurant could only sell carryout for several weeks and as such they reduced their employee headcount during the timeframe Feb 15-April 26th—-their FTE’s during their 8 week covered period which ended June 9th were 20% less than their FTE’s pre pandemic. During the 8 week covered period, the restaurant spent $70,000 on payroll costs actually paid during the 56 day period and they also had incurred/accrued additional payroll costs as of June 9th (day 56) of another $5,000—so total payroll costs paid and incurred of $75,000. They also spent $12,000 on other eligible costs for rent of their building, interest on an equipment loan and utilities during the 56 day period. At the end of 56 days, the restaurant had spent $87,000 on PPP costs eligible for forgiveness. The restaurant reduced the salary of a manager by greater than 25% during the 8 week period as compared to the first quarter salary, resulting in a $500 payrate reduction. Due to decreased business activity during the 8 week period as compared to pre-pandemic levels of sales/activity, the restaurant spent less than normal on payroll costs during their 8 week covered period. Here is a calculation of their PPP loan forgiveness if they apply based on the original 8 week covered period which ended June 9th:
Total amount spent on payroll, rent, utilities and equipment loan interest during the 8 week covered period: $87,000
Less reduction in loan forgiveness based on the greater than 25% manager’s salary rate for 8 weeks: ($500)
Subtotal: $86,500
FTE percentage reduction of 20%—less FTE’s during 8 week period than pre pandemic levels–20% reduction in costs: ($17,300)
Total spending on eligible costs in 8 week period as reduced by FTE and payrate reductions: $69,200—-PPP loan forgiveness amount
Amount of $100K PPP loan not forgiven and needs to be repaid as an ongoing loan–$100,000 less $69,200 forgiven= $30,800— Amount of PPP loan to repay
The restaurant does not apply for loan forgiveness based on its original 8 week covered period, and instead continues to operate, rehires some employees (but still 10% less than pre pandemic levels) and restores the manager’s salary to the pre-pandemic amount. During the next 4 weeks after the initial 8 week period, the restaurant spends an additional $35,000 in payroll costs plus $6,000 for another month of rent, utilities and interest. The restaurant recalculates its average employee FTE count for the 12 week period and determines it still has a 10% FTE reduction compared to pre- pandemic employee/hours FTE count. The restaurant has restored the manager’s salary to pre-pandemic levels so no payrate reduction is in force after 12 weeks. Here is how this PPP loan forgiveness calculation looks:
Total amount spent during the 12 week covered period April 15-July 7, 2020 (a 84 day covered period): $128,000
FTE percentage reduction of 10% during the 12 week period—-more employees hired since opening—10% reduction: ($12,800)
Total spending on eligible costs during the 12 week period as reduced by a 10% FTE reduction: $115,200—-Potential PPP loan forgiveness amount–PPP loan of 100K
Lesser of amount spent on costs eligible for PPP loan forgiveness, as reduced by FTE counts, or PPP loan amount: $100,000—TOTAL PPP LOAN FORGIVENESS—NO REPAYMENT
By “eyeballing” the above calculations, the restaurant may have qualified for complete loan forgiveness at the end of 11 weeks, but likely not 10 weeks. IF the restaurant did not spend enough, net of FTE and payrate reductions after 12 weeks, they could have continued spending money for up to 24 weeks in order to attain 100% loan forgiveness.
CONCLUSION—-Keep going and do not apply for loan forgiveness until you have attained your goal of 100% loan forgiveness with nothing to repay!! An employer can use a covered/spending period of up to 24 weeks, and can apply, with hindsight and calculations, after the end of a covered period (measured as to “weeks”), when their spending on eligible costs less any FTE/payrate reductions exceeds their PPP loan amount AND at least 60% of the loan forgiveness amount is represented by “payroll costs” (which after 24 weeks will be very likely!!)
BUT I WANT TO GET THE LOAN OFF MY BOOKS—-PLUS THE RULES MAY CHANGE!!
Many employers wish to apply for forgiveness as quickly as they can, with many of them wanting to use their original 8 week covered period. We agree with that IF they attain 100% loan forgiveness based on the original 8 week spending period—-if they do not reach 100% loan forgiveness, why not go an extra payroll or 2 to get there—or for that matter, an entire 24 weeks worth of spending if that is what it takes for total forgiveness. In response to “but I would like to get the loan off my books”, my question is “what happens to your business if you have the loan on your books for another month?”—–Do you lose money? The “accounting” does not change by keeping the loan “on the books”, it simply stays in a PPP liability account until it is forgiven. As to “what if the rules change”, that is a more legitimate concern in my opinion. However, time has continued to favor PPP loan recipients who “wait” as opposed to being on the “cutting edge.” Employers who got “round 2 PPP money” had the benefit of knowing they had 24 weeks (or at least a strong hint until the Flex law enacted on June 5th) with which to spend the loan proceeds, instead of the early recipients who spent money based on the original 8 week spending period for loan forgiveness. It seems that virtually every law change, new interim final rule and clarifying FAQ’s issued by Treasury have been in favor of employers attaining forgiveness—-the Treasury Secretary has recently been promoting the idea of simply “declaring” PPP loan forgiveness for PPP loans below $150,000—-indicating that the time to prepare them and review them is cumbersome for smaller employers—-so “stay tuned” on a possible ruling that employers who received PPP loans below $150K will not even need to make any calculations to apply for forgiveness—perhaps simply a one page form of certifications that the employer met the requirements for PPP loan forgiveness.
The reality seems to be—–borrowers have worked hard to attain PPP loan forgiveness, SBA lenders do not wish to carry 1% loans in their loan portfolio and the Treasury seems to indicate they want total forgiveness by making the process much easier, extending the due date to apply for the PPP loans, discussing possible “second PPP loans for some fact patterns” and with considerable discussion about permitting PPP loan recipients of below $150,000 loans of not even proving how they spent the money—-I AM NOT AWARE OF ANYBODY WHO DOES NOT WANT TOTAL PPP LOAN FORGIVENESS——SO, USE AS MANY WEEKS AS IT TAKES TO ATTAIN TOTAL LOAN FORGIVENESS!!—-If you can attain total forgiveness with your original 8 week period, do it—if 12 weeks, apply after that——keep running application figures and “doing the math” until the front page of the SBA loan application reports total forgiveness!!
HOW TO APPLY—WHEN—DEADLINES
An employer has 10 months after the end of their selected covered period of 8 weeks up to 24 weeks to apply for PPP loan forgiveness with their SBA lender—the same place you got the loan. The SBA lender then has 60 days to review the loan forgiveness application and submit it to the SBA. The SBA has 90 days in which to make a final determination of the PPP loan forgiveness amount. If at any point an SBA lender or the SBA itself calculates any amount other than what the borrower applied for, the borrower must be notified and provided an opportunity to submit further information. The PPP loan will not be legally forgiven until the SBA completes its “review” and reaches a determination in conjunction with the SBA lender.
The SBA originally issued an 11 page Form 3508 loan forgiveness application—it was a bit daunting as originally released, and after a few weeks the SBA revised the original 11 page form to 5 pages and simultaneously also released a “short form version” of Form 3508, called SBA Form 3508EZ (essentially an easy 1 page summary of funds spent on costs eligible for PPP loan forgiveness, along with some certifications by the employer). Employers who qualify for the “easy” Form 3508EZ are self-employed individuals with no employees, 1 owner-employee S corporations AND very importantly, all employers who “check a box” to affirm that they did not reduce their employee count or employee hours after January 1, 2020 through the covered period and also did not reduce the payrate of any employee by greater than 25% as compared to the first quarter of 2020. Employers who retained all their employees (or rehired to same levels) during their covered period (whether 8 weeks or up to 24 weeks) can apply for loan forgiveness on the easier Form 3508EZ. Employers who did reduce their employee counts/hours, or who reduced any employee’s payrate by greater than 25%, must apply on SBA Form 3508, the 5 page version of the form. The “long version” does require a lot of “employee by employee” wage amounts, FTE calculations, and “more math” in order to end up with figures on the front page of Form 3508 to attain total PPP loan forgiveness. The long version of Form 3508 will likely require some consultation with your CPA or help from your SBA lender, with the “short-form” 3508EZ likely being simple enough for most employers to prepare themselves.
Most SBA lenders/banks will transform the SBA forms into their own form of online loan forgiveness portals, with each lender likely being just a bit different from others as to format, style, etc. All will contain similar data fields and calculations as the paper SBA 3508 forms. I am not yet aware of bank online portals being open yet, but have heard they plan on opening in the next few weeks—–they may wait until the Treasury determines if they will automatically forgive loans below $150,000, based on a single page of certifications, since that would eliminate the need for the 3508 forms in their current format. Many banks have told their PPP loan customers that they will email them when their online portal is open for forgiveness applications.
Most SBA lenders will require payroll reports covering the covered period (8 weeks up to 24 weeks, based on the period you select), along with IRS 941 quarterly returns and possible state unemployment employee wage listings which cover the selected period. Employers will need to upload that payroll information along with proof of expenses for other eligible costs—rents, utilities, and mortgage interest. As with the original PPP loan application process, we expect that banks will each have their own lists of documents they want to review for PPP loan forgiveness.
SPECIAL COMPENSATION CAPS FOR BOTH OWNER-EMPLOYEES AND OTHER EMPLOYEES
The PPP program has been somewhat consistent in applying loan forgiveness for employees who earn less than $100,000 in annual compensation (and excluding wage amounts in excess of the 100K per annum cap) and also limiting the forgiveness amounts for “owner-employees” so that an employer who increases the compensation levels of owner-employees to “use up” their PPP loan proceeds do not attain total forgiveness of their PPP loan by simply raising their compensation amounts during the covered/spending period. These “wage caps” for loan forgiveness vary based on the number of weeks the employer selects for their covered period. If the employer selects the original 8 week period for loan forgiveness, they can not count over $15,385 in wages for any employee for 8 weeks (8/52 of $100K), or $46,154 for 24 weeks (24/52 of $100K). As to owner-employees, an employer can only count up to $15,385 for 8 weeks or $20,833 for 10 or more weeks for an owner-employee, BUT not to exceed 8/52 of the owner-employee’s 2019 W-2 (or Schedule C net profit). You need to review these “wage caps” when completing your calculations and SBA loan forgiveness forms. Both SBA 3508 forms have separate line amounts for “owner-employees” to place limits on the amount of owners’ wages/net income which is eligible for loan forgiveness.
FTE AND PAYRATE SAFE HARBORS BASED ON RESTORATION OF FTE’S AND PAYRATES TO PREVIOUS LEVELS
As our example illustrates, “time” included for spending purposes will “trump” the potential negative impact from FTE and payrate reductions—–FTE forgiveness of costs spent during the initial 8 weeks may result in reduced loan forgiveness, but adding additional weeks to your covered period will mitigate/eliminate the adverse impact of those “reductions”—-a percentage reduction of 24 weeks of eligible spending costs will generally not result in loss of loan forgiveness, whereas it could have a significant adverse impact based on 8 to 10 weeks of spending. Both FTE and payrate reductions also have “safe harbor” exceptions and exemptions, all of which favor the employer from otherwise adverse impacts from these “reductions”—–If you terminate an employee “for cause,” this does not count against you as to FTE reductions. If an employee quits and you can not find a replacement, that also does not count against you as to FTE reductions. If you offer a person a job and they turn it down, an FTE exemption applies which does not “count against you.” The measurements and “math” of FTE reductions, complete with numerous measurement periods and safe harbors and exemptions is the most complex part of PPP loan forgiveness, and we simply encourage you to become knowledgeable about FTE calculations so that you can plan to not be adversely impacted by them—-unless you experience a huge reduction in employee counts and payroll costs, selection of up to a 24 week covered period should help you to not be negatively impacted by FTE or payrate reductions in PPP loan forgiveness.
BEWARE OF ONLINE PPP LOAN FORGIVENESS REPORTS
Accuracy of cool looking PPP loan forgiveness reports hinges on a few elements—–the programming of many complex laws/rules being totally accurate, the payroll (and perhaps insurance and retirement plan funding of employer shares of those costs) being available in the system for both 2019 and 2020, and various options being correctly entered by the employer into the “options” portion of the PPP loan forgiveness reports. All reports will “crunch numbers” but all will come with disclaimers about the accuracy of the data, and that you should not rely on them as legal advice. We do view them as “useful tools” to provide you with some data to review as to accuracy. Options available to the employer as to PPP loan forgiveness include, most importantly, the selection of the covered period, but also whether an employer chooses the “alternative payroll period”, a choice of FTE counting methods between a 40 hour version and a “simplified” method, the choice of the FTE “reference period” between a period in 2019 and Jan-Feb of 2020, so forth and so on. If you have not consistently entered “hours worked/paid” for your employees during 2019 and YTD 2020, your FTE counts could be off significantly. AccuPay continues to “test” the accuracy of our FTE loan forgiveness reports included in both our Kronos and Isolved HCM software platforms, but we have continually seen updates to both reporting platforms based on both rule changes and gliches in programming.
If you use a software produced FTE loan forgiveness report, we recommend that you also perform your own calculations based on “raw payroll to payroll details” of both wages and hours worked, to also include wage caps for higher earning employees and owner-employees.
A FEW ONLINE RESOURCES WE FIND USEFUL
The SBA loan forgiveness forms—both the “long form” 3508 and the EZ form can be found by going to www.treasury.gov and clicking on the “red banner” at the top of the page. Clicking on the COVID 19 red banner will take you to a lot of useful PPP information, to include downloadable SBA 3508 and 3508EZ forms. We encourage you to “rough draft” the appropriate SBA form before you apply for loan forgiveness based on your SBA lenders’ online platform—-the results of your draft SBA 3508 form should carry over to the online bank portal version of the SBA form.
We also stumbled into an excellent “line by line” online taped webinar of “how to complete the SBA 3508 forms,” with a lot of detail, at bankwithpioneer.com. This taped webinar was produced by a community bank in Minnesota, and we believe the presentation was excellent as to how to complete the SBA loan forgiveness forms “line by line.”
PPP RESOURCES AT OUR WEBSITE
AccuPay has written many PayDay’s about the PPP process, from application, to rule changes, to loan forgiveness. You can access all of our custom written articles here. Rereading some of these previous PayDay’s will refresh your knowledge about the entire PPP program concepts and processes.
We encourage you to consult with your accountant and/or your SBA lender as to help with PPP loan forgiveness. We are happy to tackle any questions you have, as we have done during the past 3 1/2 months, by emailing larry@accupay.com
A FINAL WORD FOR EMPLOYERS WHO DID NOT GET PPP LOANS
If you know of employers who did not receive a PPP loan, please tell them to check into “employee retention tax credits,” which can be substantial in amount. An employer qualifies for these payroll tax credits IF they were shut-down by government order OR had a decline in Q2 2020 gross receipts greater than 50% as compared to Q2 of 2019—–Our website blog also has some information about the ERC tax credits and the IRS has very detailed FAQ’s about employee retention tax credits at their online COVID information site—AccuPay has already claimed some of these employee retention tax credits for non PPP recipient employers and they are substantial in amount.