The In’s and Out’s of PPP Loan Forgiveness

Many of you have recently received money through the PPP program. Unfortunately, many of you are experiencing confusion around the loan forgiveness metrics. I’m here to try to clear things up.

  1. The PPP loan money should be used for the following eligible expenses:

Payroll – wages, vacation, leave (parental, family, medical or sick) and employee benefits (group health, life, disability and employer retirement plan contributions).

Rent – as long as the agreement was signed before 2/15/2020.

Utilities – gas, water, electric, phone, internet, etc., as long as service began before 2/15/2020.

Mortgage Interest – if you own the property and the mortgage originated before 2/15/2020.

  1. The eligible expenses must be incurred/paid over an 8-week period starting from the date that your lender transferred the money into your account.

 

  1. The 75/25 Rule – this rule stipulates that at least 75% of the amount of the loan money used must be used for eligible payroll expenses.

Example 1:

Loan Amount: $100,000

Eligible Expenses Incurred/Paid: $80,000

Payroll Expenses Incurred/Paid: $65,000

Payroll Expenses as a % of Eligible Expenses: 81.25%

Here the full $80,000 of eligible expenses incurred/paid will be forgiven. The $20,000 of unused loan amount will need to be paid back.

Example 1:

Loan Amount: $100,000

Eligible Expenses Incurred/Paid: $100,000

Payroll Expenses Incurred/Paid: $65,000

Payroll Expenses as a % of Eligible Expenses: 65.00%

Here none of the loan amount will be forgiven. The $100,000 will need to be paid back.

  1. Headcount Rule – this rule stipulates that you must maintain the same number of full-time equivalent employees (FTE’s) on your payroll.

First (A) – determine the average number of FTE’s for your 8-week payroll period. An FTE will work 320 hours during a normal 8-week period. Anyone working less than 320 hours will be a fractional FTE.

Second (B) – determine the average number of FTE’s during the period of 2/15/2019 to 6/30/2019.

Third (C) – determine the average number of FTE’s during the period of 1/1/2020 to 2/29/2020.

Divide A by B and divide A by C. Take the larger of the two calculations. If you get a number equal to or larger than 1, you met the requirements and will maintain 100% forgiveness. If you get a number less than 1, only that calculated % amount will be forgiven.

Remember: If you do not fulfill the 75/25 Rule the Headcount Rule does not matter.

  1. Employees who were laid off and may not be allowed to return to work (barbers, salons, restaurants, etc.) may decide they don’t want to be put back on payroll. If an employee rejects your offer, you may be allowed to exclude that employee when calculating headcount.

You must make your offer in writing. The rejection of the offer should be documented.

  1. Pay Requirements – if the employees pay over the 8-week period is less than 75% of the pay they received during their most recent quarter of employment, the eligible forgiveness will be reduced by the difference between their current pay and 75% of their normal pay.

 

  1. Rehiring Grace Period – you have until June 30th to restore your FTE headcount and pay to pre-February 15th If your 8-week period ends before June 30th, you may still be able to use the grace period to reinstate headcount and/or pay.

 

Suggestion: Don’t bend over backwards to get loan forgiveness. Do what is reasonable. The last thing you want to do is sabotage the long-term health of your business in your attempt to maximize PPP loan forgiveness. Instead, invest the time building a business strategy, modeling different scenarios, and have a plan for how to grow your business going forward.


Source: RKL CPA

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

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