By Alan R. Sasserath, CPA, MS
As I have said before, this whole Payroll Protection Program (“PPP”) process is one of the most frustrating processes I have gone through in my career. It reminds me of the saying, “Ready, Fire, Aim.” Fortunately, our practice is focused on working with entrepreneurs, so the saying is familiar to us.
The unusual part of the PPP is that there are tremendous stakes for a widespread audience. Because of that, it was clear that every other tax or cash flow benefit of the CARES Act paled in comparison to the benefits of the PPP, which is why we dove headfirst into helping our clients and contacts with it.
While there are many that have not yet received the PPP loan, many have and are thinking about working through the loan forgiveness calculation. Below we discuss the general calculation related to loan forgiveness and some of the issues related to it. We also reference an article (linked below) that unpacks some of the issues in more detail. This is meant to be a practical document to assist you in calculating an estimate of the amount of PPP loan forgiveness and will evolve as more guidance is issued. This article is a little longer than usual because there are so many moving parts.
Be very wary of any person or webinar that gives you absolutes regarding the loan forgiveness calculation. We are waiting for full guidance on many issues. As poorly as the law was written related to the calculation of the PPP loan, the forgiveness provisions of the law were written that much worse. Unfortunately, we don’t expect to have what we hope will be final guidance until mid to late May at the earliest. However, since many already have the PPP loan proceeds, have a plan for loan forgiveness and adjust as needed.
As we said in an earlier article, forgiveness is not a god given right. The banks will have more say in the determination of the amount of loan forgiveness than they had about the loan amount. Once required support is submitted to the bank, they will have 60 days to determine the amount of loan forgiveness.
To calculate forgiveness, we must first understand what we do not know about the subject. The final sentences of the article we linked below are: “We don’t know what costs are forgiven. We don’t know what will determine which costs are allowed – is it incurred, paid or both? We don’t understand the time frames. We don’t know if we can deduct the expenses paid with forgiven dollars. We have no idea how to compute the reduction in forgiveness related to lost employees or reduced salaries, or how to restore that reduction if it occurs. And lastly, NONE of it may matter, because the banks are going to make the rules, and they don’t know what the hell they’re doing. Other than that, we’ve got this all figured out.”
Just like the loan calculation, we all had an initial opinion about how the loan amount should be calculated. As more guidance was released, we had to pivot. Once we had sufficient guidance as to how to calculate the amount of the PPP loan (new guidance has come out as recently as April 24th), the general feeling was that this was a one-time opportunity to calculate the amount of the loan, so take an aggressive position and if guidance is subsequently issued contrary to a position included in the calculation, then adjust. Because there are so many unknowns, we are going to have to do the same with regard to loan forgiveness.
From a high level, here is our interpretation of how the PPP loan forgiveness calculation is supposed to work:
1. Once you receive the PPP funds, the following “costs incurred and payments made” that occur in the subsequent 8-week period will be eligible for forgiveness:
a. Payroll costs using the same method to determine payroll costs included in the calculation of the PPP loan (salary, wages and other cash compensation limited to $100,000 on an annualized basis per employee; group health insurance premiums; retirement benefits…)
b. Any payment of interest on any mortgage obligation that was incurred before February 15, 2020,
c. Any payment of rent under a leasing agreement in force before February 15, 2020,
d. Any utility payment, including payment for the distribution of electricity, gas, water, transportation, telephone or internet access for service that began before February 15, 2020.
2. No more than 25% of the amount paid used for forgiveness may be for items 1.b., 1.c. and 1.d. above.
3. There are two possible reductions to the forgiveness amounts above:
a. If there is a reduction in full-time equivalent employees when comparing the period 2/15/2020 – 6/30/2020 to either the period 2/15/2019 – 6/30/2019 or 1/1/2020 – 2/29/2020. The period chosen to compare the 2/15/2020 – 6/30/2020 period to be determined at the borrower’s choice, and
b. If there is a reduction in the salaries of employees that earn less than $100,000 by more than 25%.
Please note that if you restore the reduction in either of 3.a. or 3.b. above that occurred during the period 2/15/2020 – 4/27/2020 by 6/30/2020, then you don’t have to include that as a reduction when calculating the amount of forgiveness.
There are several questions related to the calculations above raised in the article linked below. We have also linked a list of questions both from the article and our own additional questions. We hope to be able to answer them as further guidance is issued. We expect other issues to arise as well and will continue to update this list of questions and resolutions as time progresses.
To keep clean records, we recommend that the loan proceeds be kept in a separate bank account and forgiveness-eligible expenses paid out of such account. That may not be feasible for payroll since there will be both forgivable and non-forgivable payroll costs in each payroll run. For payroll costs, we recommend that you calculate the amount of expected forgivable costs in each payroll run and transfer that amount to the bank account used for payroll.
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Click here for the Forbes article mentioned above.
Click here for the many questions that need to be answered in the article above.
As always, please let us know if we can be of any further assistance.