May 7, 2020
If you received a PPP loan, you have eight weeks from the date you received the funds to make sure you qualify for forgiveness. I encourage you to do the math now to make sure that you will have satisfied the rules for loan forgiveness at the end of eight weeks. As of now, we lack detailed guidance from the government. However, set forth below are the basic steps you should be looking at now.
Before you calculate the forgiveness below, you start with the eligible amount that can be forgiven – the sum of the following costs listed in Section 1106(b) of the CARES ACT –(i) payroll, (ii) interest on a mortgage, (iii)rent and (iv)utilities. This calculation is the maximum loan forgiveness or the amount of the PPP loan if it is less.
1. Number of Employee Test.
You have eight weeks from the date you receive the PPP Loan to satisfy this test. You multiply the loan by a fraction equal to the average of full-time employees (FTEs”) per month divided the average of FTEs for one of two periods – February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020. You determine the averages by calculating the average number of FTEs for each pay period falling within a month. Until guidance is released, the consensus is that a FTE means someone working at least 30 hours per week and a part time employee would be a fraction of that. For example, if you had two employees at 15 hours a week, they would be the equivalent of one FTE. If 2 you have reduced the number of employees, you should do the math and see whether you should hire back some employees or even increase your total FTEs to bring your average FTEs up for the 8 week period to the same level you had last year or at the beginning of this year. Based upon the numbers, it may be less expensive to add staff back. It appears that there is no requirement in the law that you rehire the same person. Also, the new employee can be at a lower salary. Also, Question 40 of the SBA notice indicates that your loan forgiveness will not be reduced if you make a written offer to a terminated employee for reemployment at the same salary and hours and the former employee rejects such offer. (That rejection must be documented)
2. Payroll Reduction Test.
Also, the loan forgiveness is reduced by the amount of the reduction in total salary or wages of any employee earning not more than $100,000 compared to the salary or wages for the most recent quarter before the 8-week period started. Although not clear from the statute, presumably that means the hourly pay rate of the employee and not the total compensation received during the eight-week testing period.
3. June 30, 2020 Exception.
If during the period from February 15, 2020 through April 26,2020 (i) you have a reduction in FTEs compared to February 15, 2020 and/or (ii) you have a salary or wage reduction as described above and you correct that reduction in FTEs or salary/wage reduction by June 30, 2020, the reduction in the loan forgiveness will not occur.
If you have any questions or comments about this article, please contact Michael L. Solomon, Esq.