Essential Concepts for PPP Loan Forgiveness
15 Jul 2020
Reading time: 3 minutes
The Paycheck Protection Program (PPP) has been one of the most popular loan programs helping businesses, partnerships, independent contractors, and nonprofit organizations cope with the financial challenges arising from the COVID-19 pandemic. One of the most appealing features that captured the attention of many was the opportunity to receive loan forgiveness. Since the program’s goal was to provide financial relief immediately, there was little time to provide the comprehensive guidance typically provided when a new SBA program is launched. The result has been a bevy of updates and changes leaving many borrowers confused about the forgiveness rules and overall process. On June 17th, new forgiveness applications, including updates to forgiveness rules, were issued to make the process easier. To help clients, prospects, and others, JLK Rosenberger has provided an overview of essential concepts to loan forgiveness below.
- Covered Period – This begins on the date the loans are disbursed and ends 8 weeks (56 days) from that date. There is also the option to select a longer Covered Period if a business needs additional time to spend loan funds. The 24-week period follows the same rules as outlined above but ends after 168 days from loan disbursement. Finally, borrowers that have bi-weekly or a more frequent payroll schedule can elect to use an Alternative Covered Period. This allows a borrower with a loan disbursement date of May 1st with the first pay period following on May 6th to elect the first day of the Alternative Covered Period to begin on May 6th.
- Cash Compensation – For each employee, the total amount of cash compensation eligible for forgiveness is not allowed to exceed an annual salary of $100,000, prorated for the selected Covered Period. For the 8-week Covered Period the total is limited to $15,385 per employee while the 24-week Covered Period is capped at $46,154 per employee.
- FTE Reduction Safe Harbor – The safe harbor provides borrowers protection against reductions in forgiveness based on reduction in full-time equivalent (FTE) employees for those unable to return to the same level of business prior to February 15, 2020, due to compliance with COVID-19 regulations and orders. This is especially important for borrowers in industries who were unable to reopen or required to do so under limited capacity.
- FTE Reduction Exceptions – There are certain exceptions which protect a borrower from an FTE reduction that includes when a borrower made a good faith written offer for rehire which was rejected when an employee was fired for cause, voluntarily resigned, voluntarily requested and received a reduction in hours and when an employer made a written offer to restore hours at the same salary but was rejected. Finally, the exception is also available for borrowers who were unable to hire similarly qualified employees for unfilled positions by December 31, 2020.
- Payroll Costs – There has been confusion around which specific costs qualify as payroll costs. The SBA defines these costs as compensation to employees (when their principal residence is in the U.S.) including salary and wages, cash tips or equivalent, payment for vacation, parental, family, medical or sick leave, allowance for separation or dismissal, payment of employee benefits including healthcare premiums and payment of state and local taxes assessed on employee compensation.
- Non-Payroll Costs – This includes covered mortgage, rent, or utility payments for which the obligation or service was in force prior to February 15, 2020. This includes business mortgage interest payments, business rent or lease agreements and electricity, gas, water, transportation, telephone, and internet access expenses. It is important to note that non-payroll costs may not account for more than 40% of the total forgiveness amount.
Although the loan forgiveness process has been streamlined with the introduction of the two new forgiveness applications, there are still a number of complex calculations and determinations to make. For this reason, it is important to work with a qualified advisor who can guide you through the process. If you have questions about the information outlined above or need assistance with a PPP loan issue, JLK Rosenberger can help. For additional information, call us at 949-860-9895 or click here to contact us. We look forward to speaking with you soon.