June 2, 2020
PPP Loan Forgiveness FAQs
Posted by Armanino Financial Advisory Team
The Paycheck Protection Program (PPP) loan forgiveness rules can be quite a confusing maze. Here are some answers to help you navigate the process.
There are multiple steps to the review process:
- When you send us your calculation model and supporting documents, your application is not “final”, “official” or “submitted” yet. Uploading the spreadsheet and supporting documents simply moves your application to the next step in the process, even though you may have had to pass through a workflow step called “Review and Sign” (depending on your bank’s portal). You didn’t actually sign anything yet.
- Armanino will conduct an initial review of your application and supporting documentation. If any issues are identified, they will contact you via email for clarification or additional documentation needs.
- After the initial review is completed, Armanino will prepare and send you a “replica” of Schedule A of the application. This replica will contain all the correct and approved numbers for each line of Schedule A, which then feeds into the Application itself. If you had to enter “0” in the bank’s portal worksteps to move forward to submitting your documents, this will be your opportunity to see the forgiveness for which you qualify before “finalizing” your application. Note, you will also receive in the same email an unlocked copy of the Forgiveness Calculation Model for your records, which will show each of the numbers and how they were determined.
- A) Depending on your bank, you may simply be required to review the Schedule A, certify and sign, then upload the document to the bank’s portal. At this point, your application is considered “official” and there is nothing more for you to do. The bank will render its final decision and convey this to the SBA, who has up to 90 days to review and approve the decision. The bank will notify you when the SBA has completed its process.
B) If your bank uses a portal with a workflow process, you will need to go back to the portal and navigate to the Schedule A workstep to re-enter the final figures on the “replica Schedule A” you were sent. From there, you will proceed through the workflow steps (Forgiveness — Supporting Files — Review and Sign to save your updated application. Even at this point, your forgiveness application still has not yet become “official,” which is defined as certifying and signing the completed application, because you haven’t been asked to sign anything yet.
- For banks with a workflow process — Armanino will conduct a second review of your application to be sure nothing was missed in the second workflow process using “replica Schedule A”. Assuming all is correct, you will be sent an executable PDF of the Forgiveness Application with Schedule A. You will be asked to initial the appropriate certifications and sign and date the application, which will render your application “Final and Official”. At this point, there is nothing more for you to do. The bank will render its final decision and convey this to the SBA, who has up to 90 days to review and approve the decision. The bank will notify you when the SBA has completed its process.
The fields for “Covered Period Begins” and “Covered Period Ends” are not open for us to enter our dates. How do I tell you what my Covered Period is?
Those fields are auto-populated based on the Disbursement Date of your PPP loan (which you enter in cell A41 and is the same date that your Covered Period begins) and the number of weeks you selected for your Covered Period from the drop-down box in cell C23 (which automatically calculates the date your Covered Period ends). Remember, enter all data requested in the yellow cells and the white cells will populate properly.
We have a unique payroll where we pay our staff based upon a 37.5-hour work week and don’t track hours on our payroll register unless the employee deviates from the hours in the standard work week. Do I still need to post hours for February 15, 2019 through June 30, 2019 and for 2020?
Yes. The model will not accurately calculate FTEs without hours data. In your case, simply enter 37.5 hours for each person if you pay weekly, 75 hours if you pay bi-weekly, or 81.3 hours if you pay twice monthly. If your payroll register noted a deviation from the standard work week for an employee, incorporate that deviation into the data you enter for that pay period.
I am not clear why I have to provide every pay period for all of 2019 and 2020 through the Covered Period. I would think you only need the 2020 payroll from January 1 through the Covered Period. I am not using 2019 payroll for the forgiveness, only the 2020 year, and I will have enough payroll during the Covered Period. As well, I will have FTE met during the Covered Period equal to the January-February 2020 measurement period. Entering 24 pay periods for 2019 is a waste of time and effort. Can I provide only 2020 data?
As it relates to Table 2 in the Pay Cycle Input tabs, where you are to input Hours Worked for the February 15, 2019 to June 30, 2019 period, you can safely skip entering data here if you are choosing to use the other baseline period of January 1, 2020 to February 29, 2020 (entered in Table 4). However, you do not have this option available to you for Table 1 in the tab, where you are to enter the gross wages paid per pay period. This data is required by the SBA for determining which employees are to be placed in either Table 1 or Table 2 of the Schedule A Worksheet (which the SBA requires each borrower to maintain for six years) and therefore properly considered or excluded from the Salary Reduction Factor calculation.
On Table 2, I am confused about whether to put in all hours paid during the given time period, or only hours worked (total time — PTO).
Enter all hours for which an employee was paid, whether worked or paid for other non-work reasons.
We are a law firm organized as a limited liability partnership. Is there a distinction between an LLP and an LLC as it pertains to how health benefits are applied for the partners who receive all of their income through K-1 distributions?
We are a law firm organized as a limited liability partnership. Is there a distinction between an LLP and an LLC as it pertains to how health benefits are applied for the partners who receive all of their income through K-1 distributions?
We reduced salaries after our eight-week period but may want to opt for the 24-week period instead. However, we did reduce one <$100,000 employee by 30%. If we reinstate that salary, does that negate the Salary Reduction Factor?
It depends on when you reduced that salary. If you reduced it between February 15, 2020 and April 26, 2020, then yes, reinstating that salary will provide you safe harbor from the Salary Reduction Factor. If, however, you took the reduction after April 26, 2020, reinstating it will not get you safe harbor.
I have noticed a problem in the social security number section. As I am entering the “last four digits of the SS#,” the spreadsheet will not display a zero if it is the first number of the four. How would you like me to handle this?
In instances such as a leading zero (example, you entered 0569 but it shows as 569), that is fine. We will assume that it is missing the leading zero. Regardless, it will not create an error for you down the line as you complete the model, as this field is not used for any calculations.
Forgiveness Calculation Model
Do I understand correctly that we download and complete the model and then upload it to the bank’s portal? Or do we complete it inside the portal?
You understand correctly. Download the model from COVID page on the bank’s website, enter and save your data, then upload it to the portal using the link the bank will send to you via email when the portal is ready to begin accepting data. For banks that have a workflow for you to complete in the portal, you will use some of the output from the Excel model as input to the workflow.
The model was created in Excel for Office 365 MSO 64-bit. It is optimized to properly calculate in Excel 2016 or higher. Older versions of Excel will experience some limits in functionality, especially where advanced formulas are used that were introduced more recently than the older versions contained.
Can we get started on populating this template ahead of time, since the process will take a while to enter information by payroll since 2019?
You may begin entering historical data at any time, and then simply update as you get new data over time.
Yes. Please be sure to follow the naming convention for saving your file, which is described on Tab 0: Instructions & General Info.
Do we have to download the PPP Forgiveness Calculation Model if we are filing for forgiveness using the Standard Form?
Yes, it is required that you complete the full calculation model if filing using the Standard Form (which includes all the reduction factor calculations, Schedule A and Schedule A Worksheet).
We qualify to use the EZ form for our forgiveness application. Do we need to download and complete the PPP Forgiveness Calculation Model?
No. If you choose this path, please download and complete the PPP Forgiveness EZ Calculation Model, which simply requires you to itemize your expenses in the non-payroll categories.
I’m using the EZ form. What happens if I forgot to download and complete the PPP Forgiveness EZ Calculation Model?
The review process cannot be initiated without the PPP Forgiveness EZ Calculation Model. This is a simple workbook for you to itemize the various expenses you included in Mortgage, Rent, Utilities or Owner’s Compensation items of the EZ form. Your application will be on hold until you complete this itemization model.
Armanino is providing an initial review of all forgiveness applications and comparing the supporting documentation with the data entered in the calculation model. This review is intended to validate the data and calculations, and takes place prior to you officially completing the final SBA Forgiveness Application and Schedule A (meaning, all data in the application is accurate and you have made all required certifications and signed the application).
Once the review is complete you will receive an email advising you the review has been completed. Attached to this email will be a PDF document that is a replica of Schedule A in the official application. You will be given instructions to complete your final application using the Schedule A data and to certify and sign the application in the appropriate places.
Upon receipt of you final, certified and signed application, the bank will conduct a final review and notify you of its forgiveness decision and recommendation to the SBA. The bank has up to 60 days to complete this step, and the SBA has an additional 90 days to review the bank’s decision, and assuming concurrence, reimburse the bank for the final forgiveness amount to be applied against the principal of your loan.
If we believe we are nearing the PPP loan amount in qualifying payroll, can we submit a test Forgiveness Calculation Model to review our numbers? It would be good to know the key FTE numbers we need to restore to achieve Safe Harbor.
While we certainly understand the need to model various scenarios, legally and ethically neither the bank nor Armanino can conduct “test reviews” and provide advice on actions you should or should not take. You will need to evaluate your options on your own or in consultation with a retained professional advisory such as your CPA or attorney.
On the EZ form, why isn’t there an input field to put the total payroll payments for the Covered Period?
You should enter your total payroll in Line 1 of the EZ Form application directly on the portal. The downloaded calculation model is only for itemizing the non-payroll expenses.
If we submit our application before the end of our 24-week Covered Period and it yields less than 100% forgiveness, can we reapply after another couple of weeks to seek 100% forgiveness?
No. If you want an estimate of your forgiveness amount before applying with your lender, you should use an estimating model in conjunction with your retained professional advisor. There are many available on the web, including one recently released by the AICPA. While these all have limitations and are not suitable for the actual forgiveness application due to traceability issues, they will give you a good sense of where you stand and can help you decide when to file your official application with the bank.
Our company is a corporation with 17 employees, no salary reductions and no FTE reductions. Do we use the EZ form or Standard Form?
You can use either form you wish. The instructions for choosing the EZ form are listed on the website of the U.S. Department of Treasury under a link called “Loan Forgiveness Application Form EZ Instructions”. There you will find the relevant criteria for determining eligibility to use the EZ form, one of which reads:
“The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period (as defined below) compared to the period between January 1, 2020 and March 31, 2020 (for purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000); AND The Borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period. (Ignore reductions that arose from an inability to rehire individuals who were employees on February 15, 2020 if the Borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020. Also ignore reductions in an employee’s hours that the Borrower offered to restore and the employee refused.) See 85 FR 33004, 33007 (June 1, 2020) for more details.”
Can I make my Covered Period something other than eight or 24 weeks? I will be done spending my money after 12 weeks.
No. The Covered Period, as defined, is either eight weeks or 24 weeks. It is not something in between, no matter when you finished spending your money. That is not the same thing as choosing to file your forgiveness application early — this you can do at any time, but it does not change the duration of your Covered Period as defined.
Do I need to choose the eight-week or 24-week forgiveness time frame? My loan was issued on April 20 and I plan on using the EZ application form.
Only you can answer this question, because it’s your choice. If you spent all your loan proceeds in eight weeks, there isn’t much point in waiting for 24 weeks to file your application, but you do have that option. Conversely, if you needed more than eight weeks to complete spending your PPP money, you probably would want to choose the 24-week Covered Period unless you want to skip getting forgiveness and would rather pay the money back to the bank.
How will I know if we’ll be forgiven the loan amount if I cannot see whether we’ll be forgiven on the 8th tab for the forgiveness data entry? My form is giving me zeros (I have the older Excel).
You will be sent a replica of Schedule A after the initial review is completed, but before your forgiveness application becomes “official,” which is defined as certifying and signing the completed application. This replica will contain all the correct and approved numbers for each line of Schedule A, which then feeds into the Application itself. You will also receive in the same email an unlocked copy of the Forgiveness Calculation Model for your records, which will show how each of the numbers was determined.
I have uploaded the workbook into the portal but, because the workbook is not calculating, I cannot port over the information and the forgiveness application cannot be submitted.
Please enter “0” in the Schedule A step of the portal, as instructed by the error message you receive in the model. We will send the proper calculations back to you to enter in that step of the portal after we complete our initial review. Your application is not “final” or “submitted” until you complete this second step, then certify and sign the application, so rest assured you will have a chance to review your forgiveness outcome before finalizing the application.
I am using the most current version of Excel 365 and still see errors in some cells on Tab 8. Since it’s not an old version of Excel, what could be causing this?
The most likely culprit is cell A50 on Tab 1. Initial Data Input. This is where you are to put the date you are submitting your Forgiveness Application. If this cell is blank, it will throw errors downstream because the safe harbor calculations are based in part on this date. Even if you don’t know the precise date for submission, estimate it and don’t leave this cell blank.
It is also quite likely that your Excel 365 version may need to be updated. Microsoft releases new versions many times each year. The version this model was built in is version 2002 (Build 12527.20880) which was released in March 2020 as a preview for Semi-Annual Enterprise Users and officially updated and put into current production on July 14, 2020. This version contains the brand new XLOOKUP functionality, which is used heavily in this model. This function was only introduced into Excel on January 30, 2020. You can check your version of Excel by clicking on the File menu in the upper left corner, then selecting Account near the bottom of the left pane. This will open a page that includes a button called About Excel; next to that, it should list your version and license that your business is using.
I consistently get an error message on Tab 8 Forgiveness App Data Entry that says “We have detected an error. Please enter “0” in the accompanying field in the bank portal and continue the process of data entry.” What am I doing wrong?
You are doing nothing wrong. For some borrowers, your Forgiveness Calculation Model has a Tab 8 for entering data into the bank portal. If your model does not have this tab, it’s because your bank does not require it. If this error is displayed, it is because you are using an older version of Excel than the version used to create the model. Most older versions do not have the capability to read and execute some of the advanced commands that were necessary to prepare this complex of a model, and so the calculations would not display properly. It’s okay, the model isn’t broken and works just fine. Simply follow the instructions — enter “0” in the appropriate box in the bank portal’s workflow and continue with data entry and documentation upload. Following the initial review of your data, you will be sent a “replica Schedule A” and a copy of the unlocked and properly calculated Forgiveness Calculation Model for your records. You will use this “replica Schedule A” to go back to the bank portal and enter the correct figures where you previously entered “0”. From there, you will be able to complete your official forgiveness application.
Initial Data Input Tab
Only on the Initial Data Input tab in cell A47. The model will automatically deduct this advance from your forgiveness, per SBA instructions.
No, do not leave this field blank as safe harbors are calculated based on this date. Enter the date that you expect to file for forgiveness — it’s okay if it’s not completely precise.
For “Employees at Time of Loan Application” or “Employees at Time of Forgiveness Application,” are we supposed to include furloughed employees in this figure? What about people hired or laid off after the last day of the Covered Period?
You should not include furloughed employees in either cell. That said, the SBA is asking for this data only as an indicator of your eligibility to apply for a PPP loan originally; they did not ask either of these when you applied. The data you enter for these two items does not factor into any calculation for forgiveness, so it’s okay if it’s not 100% accurate.
On the Initial Data Input tab, the only choices for the Covered Period duration are eight or 24 weeks. In the July 1 webinar, you said it could be any period between them. How do I enter this cell if I choose 16 weeks?
There are only two Covered Period options: eight weeks or 24 weeks. There is no option to pick a Covered Period in between. However, you can file your forgiveness application “early,” meaning when you have exhausted the PPP funds, if you so choose. Understand that doing so does not change the duration of your Covered Period. So, if you decide to file at 16 weeks, you still have a 24-week Covered Period for purposes of the model and the calculation rules for the Salary Reduction Factor, so you should select 24 weeks in the model.
I put an “X” in the appropriate boxes of the EZ Qualification Section and I still received a “No” in cell C50 stating I am ineligible to use the EZ Form. Can I use the EZ Form or not?
You can use the EZ Form and the accompanying itemization spreadsheet. This is an error that occurs due to your using an older version of Excel than the version used to create the model. Your version cannot read the functions used in cell C50, so it stays defaulted to “No.” Ignore this and continue using the EZ Form if this error occurs for you.
For the PPP Loan Disbursement Date, do I enter the date we received the loan or the date we first used the loan toward payroll?
Use the date you received the loan this marks the beginning of your Covered Period.
Pay Cycle Input Tabs
We do not have any wage reductions and are using the January 1 through February 29, 2020 reference period for FTEs. Since our payroll company provided us with a report of all employees who made over $1,923 in any weekly pay period in 2019, do we still need to enter all the detailed payroll information for 2019?
No, you do not. If you have already made the decision to use the January-February 2020 period as your FTE baseline, you do not need to enter hours data for 2019. Similarly, if you can certify that you had no wage reductions that would trigger the Salary Reduction Factor and have the documentation to support it in an SBA audit, then you could skip entering the 2019 payroll data. Keep in mind that the rules around the Salary Reduction Factor are intricate and easy to mis-apply.
If I can generate a payroll register for the full year of 2019, can I use that payroll register as one column in the “Pay Cycle 1 Input”?
No. The purpose of the 2019 pay data is to identify employees who may be subject to the Salary Reduction Factor. Summary level data such as a full year of pay will not meet this need, because the rule relates to employees who exceeded a defined amount of pay in any single pay period, not in the aggregate.
The purpose of the 2019 pay data is to identify employees who may be subject to the Salary Reduction Factor. This rule relates to employees who exceeded a defined amount of pay in any single pay period, not in the aggregate. Furthermore, there are two time periods in 2019 that are used as possible baselines for the FTE Reduction Factor, so the hours data in Tables 2 and 3 (if appropriate) is necessary to properly perform that calculation.
We have not been successful in getting the third-party payroll providers to produce a standard report that produces the input the model requires. It is possible that you may be able to develop a custom report that does so; if this is the case, you should be able to export to Excel and then copy the data into the appropriate cells in the Forgiveness Calculation Model. Otherwise, you will have to enter the data manually. Early experience suggests a benchmark of being able to enter bi-weekly pay going back to January 1, 2019 for 8-10 employees per hour.
If we extend our Covered Period to December 31, our qualified payroll will be almost three times the total loan amount. Do we have to submit payroll all the way through December 31 or only as long as it takes to exceed the loan amount?
The first issue in your question is that you cannot extend your Covered Period to December 31 unless your loan funds on or after July 17, in which case your Covered Period automatically ends on December 31. You can extend to 24 weeks from the date your loan funded if it funded before June 5, at your option. Your Covered Period is automatically 24 weeks if it funded between June 5 and July 17. The second issue in your question is the notion that your payroll costs will be three times your loan amount. You cannot claim forgiveness for spending your own money. The government wants to know how you spent its money, not your own. Thus, your payroll costs can be no more than your loan amount. So long as you can show that you spent PPP money for payroll, you can stop when you’ve exhausted the total loan amount assuming you are completely confident that you captured all forgivable spend correctly. If you spent at least the total loan amount during the Covered Period, any reduction factors will be applied against the total loan amount, regardless of whether you spent more than that on payroll during the Covered Period. Example: Loan amount = $200,000, payroll in Covered Period of 24 weeks = $300,000, FTE Reduction Factor = 20%. Forgiveness would be $160,000 ($200,000 less 20%), not $200,000 ($300,000 less 20%, rounded down to total loan amount).
I get a “Password needed” error when I try to open additional columns by clicking the “+” sign above the column. What am I doing wrong?
You are doing nothing wrong. You are simply using an old version of Excel that doesn’t recognize grouped and collapsed columns and so can’t open them. Please go back to the bank website and download the current version of the model that has all columns opened for you already. You can simply copy and paste any data you have already entered from the original model to the new one you just downloaded.
Can I copy and paste into the model the information from payroll reports I download to Excel, rather than typing the data in?
Yes, so long as the payroll reports you ran have the same information that the calculation model requires.
No. The SBA form has not stated that companies may select an alternative to the last four digits of the SSN. There are worksheets attached to the application and they need to stay aligned in the event of an audit.
In the “Hourly” column, what do you enter if someone transitioned from hourly to salary or salary to hourly during the defined period?
Keep it consistent throughout, so you’ll have to adjust somewhere. In this example, enter the employee data as hourly throughout since such employees have variable hours while salaried ones do not. When they converted to salaried, simply enter 40 hours for each pay period if weekly, 80 hours if you pay bi-weekly, or 86.7 hours if you pay semi-monthly.
In the “FTE Exception” column, if an employee is part time, was terminated “at will” or “laid off,” do they qualify for an FTE exception?
No, no and no. Part-time status is irrelevant, terminations must be for cause, and a layoff is exactly what the PPP program was trying to prevent, so you can’t get an exception for that either.
Our company had a payroll frequency change effective December 25, 2019, going from semi-monthly to bi-weekly. How do we proceed in the model?
The model is not designed to handle such a change. Simply load them all in as-is (i.e., semi-monthly pay in 2019 and bi-weekly pay in 2020, with “Semi-Monthly” chosen in cell B5 for Pay Cycle Frequency) and do not worry about the change in frequencies.
In our company, we have a lot of part-time employees (non-seasonal). They were laid off when COVID hit and when we got our PPP loan, we made a good-faith, written offer to rehire all of them. Many declined. For purposes of the FTE Reduction Exception, how exactly does that work? Do I add them back in as .5 headcount and then recalculate my FTE Reduction %? If I don’t use .5, then what do I use?
First, you don’t need to do any calculations of headcount — the model automatically does both the standard and simplified FTE calculations based on the hours worked data your entered in the Pay Cycle Input tab(s). For the employees you described, simply list them in Table 1 of the Pay Cycle Input tab and put a “Yes” in column E next to their name indicating they qualify as an Exception. The model will take it from there.
We use two pay cycles: hourly are paid weekly and salaried are bi-weekly. Can this all be entered on the same Pay Cycle 1 worksheet?
No. This exact scenario is why there are two tabs for two different Pay Cycles, Input 1 and Input 2, as outlined in the How-To Video, the User Guide and the webinars that have discussed this.
If the company started January 1, 2020, is there a place to indicate this so the system isn’t looking for data for 2019?
You could simply put a note to that effect in cell B11 of the Pay Cycle 1 Input tab, with no wage or hours information on the rest of line 11 to the right in the model, so the reviewer knows you didn’t skip entering necessary data. In such an instance, simply leave Tables 2 and 3 blank since those are asking for 2019 hours information that does not exist.
Enter the date that corresponds to your payroll report for ease of reference in the review process.
I want to be sure I enter the “stub pay” portion of the payroll input correctly. My Covered Period ended June 11, 2020. I paid payrolls on June 12, 2020 that covers work performed through June 6 and paid my next one on June 19 covering work done through June 13. Do I enter 80% of the payroll I paid on June 19 since my Covered Period ended during that week?
You have it correct. Despite the fact that the June 12, 2020 payroll was paid after the Covered Period, 100% of it was incurred during the period so you can claim all of it for forgiveness. Similarly, you get to claim the portion of your payroll that was incurred during the Covered Period in your last week (work performed June 7 through June 11, 2020) but not any costs incurred on June 12 or June 13 as they occurred after the end of your Covered Period.
Should we list employees covered by grant funding in the salary or hours portions in the model? How do we deal with those people in the model since they’re all part of the same payroll run, just using different sources of money?
If they were not paid using any PPP money, exclude them from the model entirely. Make a note in cell C11 of the Pay Cycle 1 Input tab that indicates which employees in the payroll report were paid using grant funds and not PPP funds, then leave all cells in line 11 to the right of cell C11 blank. To be clear, this note goes in the first line of employee data, using cell C11 under the heading “Last 4 of SSN” — do not enter this note in cell B11 where Employee Name goes; just leave cell B11 blank.
If, on the other hand, during the Covered Period part of their pay came from grant funds and part came from PPP funds, do include the employee in the model and list all pay received, regardless of source. Create a supplemental schedule that explains the issue, lists the affected employees and the amounts that were paid using non-PPP funds, note the existence of this schedule in cell C11 of the Pay Cycle 1 Input tab, then upload the supplemental schedule to the portal as a General Document.
We are a law firm using a PEO and all partners receive some amount of W-2 wages so that they can get medical benefits. The balance of the non-equity partners’ pay is distributed/paid as “Guaranteed Payments” via an ADP direct deposit. How/where do I post the non-equity partners’ guaranteed payments?
Guaranteed payments for non-equity partners should be added to the salary they were paid in the period the guaranteed payments were made, so that there is one entry for amounts paid to the employee in the pay period. Example: Salary payment (W-2) of $4,000, Guaranteed payment (K-1) of $3,000, enter $7,000 in the pay period for that non-equity partner.
We pay all our employees weekly, but occasionally we have corrections or other off-cycle payments between pay days. Should these checks be counted with the prior week, the following week or should they be entered into the model on a separate date entirely?
Such non-standard payments to employees should be added to the salary they were paid in the period when the payments should have been made if they are corrections, or in the next pay period if they are payments such as bonuses, commissions or severance. Do not enter “off-cycle” pay periods in the model — stay consistent so the proper calculations can be made.
How do we handle overtime, vacation, sick or holiday hours in the Hours tables of Pay Cycle 1 or Pay Cycle 2 worksheets?
List all paid hours in the Hours tables (Tables 2-4).
When we originally calculated our loan needs, we did not know we should have included seasonal employees and did not use those numbers to calculate our loan needs. Should we still list any seasonal staff payroll info in Table 3 for seasonal employees?
It doesn’t matter what you used as the basis for your loan when you applied. Now, it’s only about how you spent the loan, so include all employees paid during the Covered Period and the baseline periods. Also, you only need to complete Table 3 if you consider yourself a seasonal employer and wish to use that as your baseline period for purposes of calculating the FTE Reduction Factor. If you anticipate using either of the two “standard” look-back periods, use Tables 2 and 4 to enter the hours everyone worked. Just to be clear, you enter the wages of all employees, seasonal or not, in Table 1.
Since salaried employees don’t have “hours worked, should I just skip entering hours since that doesn’t apply to the exempt staff?
No, do not skip entering this data as none of the FTE calculations will be correct. Salaried employees should have their hours entered as:
- 40 hours for each pay period if you pay your employees weekly
- 80 hours if you pay bi-weekly
- 86.7 hours if you pay semi-monthly
I’m trying to reduce the volume of required data in the model. Can we just use a simplified reporting method for employees receiving a 2019 Form W-2 with gross wages of $100k and above? Will the 2019 ACA Form 1095-C monthly checkbox data suffice for FTE calculations?
No, the model does all calculations based on detailed data. Summary data will not work in the spreadsheet. As to ACA data, the ACA defines FTEs differently than the SBA is using for the PPP program, so this is definitely not a correct approach.
Do we enter the employer payments for Medical in total or by employee, and are they net of employee contributions?
Enter them in total, net of any employee contributions, i.e., only enter the amount paid as the employer’s portion of the expense.
During our eight-week period, we had five employees who were paid via the EPSLA rules. How do I account for the gross wages for those employees in the data entry, since they were deducted from our payroll tax liability and thus should not be part of the loan forgiveness calculations?
If all of their pay during the Covered Period was from non-PPP sources, exclude them from the model entirely (including from 2019 and Q1 2020 data so you don’t accidentally trigger a reduction factor that shouldn’t exist). Make a note in cell C11 of the Pay Cycle 1 Input tab that indicates which employees in the payroll report were paid using EPSLA funds and not PPP funds, then leave all cells in line 11 to the right of cell C11 blank. To be clear, this note goes in the first line of employee data, using cell C11 under the heading “Last 4 of SSN” — do not enter this note in cell B11 where Employee Name goes; just leave cell B11 blank.
If, on the other hand, during the Covered Period part of their pay came from EPSLA funds and part came from PPP funds, do include the employee in the model and list all pay received, regardless of source. Create a supplemental schedule that explains the issue, lists the affected employees and the amounts that were paid using non-PPP funds, note the existence of this schedule in cell C11 of the Pay Cycle 1 Input tab, then upload the supplemental schedule to the portal as a General Document.
Do we include owner’s health benefits, SALT, and 401k employer contributions in the totals of the Pay Cycle 1 tab beginning in column HH?
Owner’s fringe benefits are only includable here if the owner was paid a salary as an owner-employee of a corporation. Otherwise, these costs are not forgivable.
Only include such items if the owner was paid a salary as an owner-employee of a corporation. Otherwise, owner compensation goes in Tab 7. Owner’s Comp.
Yes, in that they asked for and received a reduction of hours.
I have multiple columns that are red in the check sum even though they show $0.00. These errors are not letting me see my results on the “Forgiveness App Data Entry Tab”.
You can ignore those red cells if the check sum reads $0.00. That is a simple rounding error in the formula and not meaningful. That said, those errors have nothing to do with seeing your results on the Forgiveness App tab. You get errors there because you are using an older version of Excel that can’t recognize the advanced formulas the model uses. Just enter 0 in the portal for those boxes as instructed; after the initial Armanino review, you will be given a copy of the workbook with those cells completed along with a “replica Schedule A” to enter into the portal prior to signing and submitting your official application.
We are submitting our application early. Do we need to include predicted costs for the upcoming pay periods until the 24 weeks is up?
No. You need actual costs to complete the application, not projected ones.
We paid our May health insurance on April 13, the day before we received our PPP funds. Can we include this expense as an incurred cost? By the same logic, could we also include half of April as well even though it was paid in March?
The rule is that the cost must have been incurred or paid during the Covered Period. Your May health insurance was incurred during the period even though it was paid before the period began. Similarly, your April 14-30 health insurance was incurred inside the Covered Period though it was paid prior. So yes, you can include both.
How do I handle COVID-19 sick leave pay and associated hours that are not to be included on my PPP loan forgiveness application?
You are correct that those are not forgivable expenses because they were covered already under a different federal program. For purposes of the calculation model, simply make a note in cell C11 of the Pay Cycle 1 tab that instructs the reviewer to see a supplemental schedule that details such exceptions, then create that schedule and include it in your upload to the portal.
Our total actual payroll was $550,000, but after excluding salary portions greater than $100,000 the “eligible” payroll reduces to $525,000. Can we use the PPP funds to only pay the eligible portion while using company funds to pay the balance to ensure the maximum forgiveness amount?
Without knowing the loan amount, this is a difficult question to answer. The net result of the caps is that you are, in effect, using company funds to pay the balance for the highly compensated employees.
I was under the impression that the eight-week payroll time frame was extended to 24 weeks per the June 5, 2020 guidance, and that the eight-week “payroll period” could be any eight-week time frame within that 24-week period. Is that incorrect?
That is partially correct and partially incorrect. The Flexibility Act did indeed extend the Covered Period to 24 weeks, at the borrower’s option. However, that does not mean that the borrower can pick any eight weeks in the midst of 24 for forgiveness. You may choose either an eight-week period that begins with the date you received funds or a 24-week period in which to spend the money, but not a hybrid of your own making.
In the Forgiveness Calculation Model, do I put owners in the Pay Cycle Input tab (tab 2) or the Owner’s Compensation tab (tab 7)?
Any individual who meets the “self-employed” test (“owner employees” who are sole proprietors, Single Member LLCs, General Partners, S-Corp shareholder/employees and C-Corp shareholder/employees) should be listed on Tab 7. Owner’s Comp. Do not list them in Tab 2. Pay Cycle 1 Input because the costs input in Tab 2 show up in Schedule A on other lines than line 9, where Owner’s Compensation is to be reported.
I am unable to enter any value or text in cell HE7, table 4 (Stub period), even though the other “Stub period” fields allow entry. I have Excel 2019 so the version shouldn’t be an issue. What should I do?
This cell was inadvertently locked in the version that was distributed. Just ignore the issue and leave the field blank.
Regarding “Hours worked,” does this mean actual hours worked or Hours paid (i.e., vacation, sick leave, holiday, etc.)?
I read in the FAQ that I should enter 80 hours for my salaried employees since we pay biweekly and not leave the field blank. However, my payroll company reports only include hours worked for hourly employees, so I end up with a Checksum error because of all the extra hours for the salaried people. What should I do?
To eliminate the Checksum error, simply add the total hours of the salaried employees that were not listed on your payroll report to the sum on that report and enter that number in the Forgiveness Calculation Model. For example, if your report shows you paid hourly employees 500 hours in a given pay period, but you also had 5 salaried employees for whom you’ve entered 80 hours each, add these 400 salaried hours (5 times 80) to the 500 hourly employees’ hours and enter the result (900 hours) in the Excel model. The bank reviewer will be able to quickly see what you have done and understand the logic.
When I input the weekly amounts on tables 1 & 4, the date field became red. I am entering the date paid of the payroll. Is that correct? Table 2 was fine, the field stayed blue and I entered the same dates. And I got the same error on Checksum, even though it reads $0.00.
Ignore the red dates and checksums if they are $0.00. This is a conditional formatting issue that you do not need to worry about.
I did not see a tab for Transportation expense broken out in the Forgiveness Calculation Model. Where should this expense be added?
Simply list any eligible Transportation expenses on the Utilities tab 6. You will note in cell A3 of this tab that allowable Utilities expenses includes Transportation.
Yes. When you initially sign into the portal, you will have an option to add “Trusted Advisors” to have access to the portal. These could be assistants, other staff, your CPA, or anyone you choose.
If a CPA is helping me with our application, are they able to see everything on the portal that I can see?
Yes, so long as you have listed them as one of your “Trusted Advisors.”
Certifications and signatures will be handled electronically via DocuSign.
We are using a PEO service. How do we obtain or calculate State and Local Taxes for the Covered Period?
If the PEO made payments to a state or local authority on behalf of you as the employer, ask your PEO for appropriate evidence of the payments made. If you paid the costs directly, simply include those expenses in Table 7 of the Pay Cycle 1 Input tab in the Forgiveness Calculation Model. Please remember that State and Local Taxes for purposes of forgiveness exclude any amounts you withheld from your employees’ gross wages and remitted (or your PEO remitted) to the government. These costs are ONLY for taxes paid by the employer based on employee compensation.
If a stockholder of a C Corp is paid as an employee of the C Corp, can his salary be included in the calculation of PPP forgiveness?
Yes, that is included as employee pay, not owner’s compensation. In the Forgiveness Calculation Model, you would list this person and their compensation in the Pay Cycle 1 Input tab.
Our eight-week Covered Period ran from April 24 through June 19. The hours employees worked from June 14 through June 20 won’t be paid until June 26, but those wages were earned during the Covered Period. Can I claim that payroll, and if so, do I exclude hours worked on June 20 since it’s outside of our Covered Period?
First, the dates you cite for your Covered Period are incorrect. If your eight weeks began on April 24, the last date of your Covered Period is June 18, not the following day. To your specific question, yes, you can claim the portion of your final payroll that was incurred prior to the end of your Covered Period, meaning any wages earned from June 14 through the end of June 18. You cannot claim any wages earned beginning June 19.
It appears from the “incurred versus paid” rules as though a recipient can claim more than eight weeks of salary since you used five pay periods in your example chart. Is this allowed?
Yes, it’s allowed, using the guidance from SBA that defines an eligible payroll cost as “considered paid on the day that paychecks are distributed, or the Borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period).” So, payroll costs that are paid during the Covered Period, but incurred prior, are deemed eligible based on this final sentence.
If you chose an Alternative Covered Period for payroll, does that Alternative Covered Period apply to the non-payroll costs?
No. The Alternative Covered Period is only available for payroll costs. All other forgivable expenses are bound to the Covered Period that begins with the date your loan was funded.
Our Covered Period began on April 16. We paid our April employer health insurance costs with a check that cleared the bank on April 23, but the check was dated on April 15 and mailed on April 16. Can we include this payment in our forgivable expenses?
You are allowed to take the portion of the insurance costs that relate to the Covered Period, meaning from April 16-30.
To properly calculate our union health and pension benefits costs, do I follow my Covered Period and take the hours worked for each union employee and multiply by the rate of those costs?
If we choose to use the Alternative Payroll period, would the first payroll be included or excluded in the calculation? What about the last one?
The Alternative Payroll Period option was put in place to simplify the calculation of payroll costs for businesses who pay weekly or bi-weekly, so that the business could use whole payroll cycles rather than have to apportion stub cycles at the beginning and end of the Covered Period. For an eight-week Covered Period, this means either eight complete pay cycles (weekly payers) or 4 complete pay cycles (bi-weekly payers). For 24 weeks, this would be 24 or 12 complete pay cycles. There are no “paid but not incurred” or “incurred but not paid” issues under the Alternative Payroll Period option.
We pay our union employees vacation/holiday time weekly at $5 an hour, which is taxed and then deducted back out of the employee’s check. It is included in their gross taxable wage and our 941 reports. We are planning on including this $5 an hour in the payroll model rather than with our health insurance and pension payment or some other part of the application. Can you confirm this is the correct treatment?
Yes, this approach is correct.
I am confused by the “incurred and/or paid” rules. The IFR of May 23, 2020 clearly states “…payroll costs incurred during the last pay period of the Covered Period are eligible if paid before the next pay date”. Shouldn’t I be able to include the entire last payroll of my Covered Period so long as I pay it on the next regular pay date?
No, you can’t take credit for the entire last payroll if your Covered Period ended in the middle of it. You may only count the portion that was incurred during the period, even though it was paid afterwards. The key words in the IFR you quote are “incurred during” the Covered Period. It says nothing about payroll costs incurred after the Covered Period, only about costs that were paid after but incurred during. The chart below illustrates what may and may not be included in costs based on the incurred/paid rules.
We understand that the salary maximum for the eight-week Covered Period is $15,385 and for the 24-week Covered Period is $20,833. What if we apply for forgiveness after week 12? How is the salary max for forgiveness determined? Basically, we want to know how much of the salaries we are paying can count toward forgiveness.
First, let’s correct your opening statement. The maximum compensation for a 24-week Covered Period is $20,833 only for owners, not for employees. Employees are capped at $46,154 for this length of time. Based on your last sentence, we infer that you are asking about employees and not owners. If you were to apply for forgiveness after week 12, there is no guidance to suggest whether the maximum compensation for any employee is the full $46,154 of the 24-week Covered Period or half that ($23,077) for just 12 weeks. A technical reading of the guidance to date only references the eight-week maximum and the 24-week maximum, with no mention of what happens in between. Clearly you will have elected a 24-week Covered Period, since the only other option is an eight-week period which you have passed. Theoretically, this opens a very large loophole wherein a business could potentially pay a $240,000/year executive at full rate and get forgiveness for it, simply by filing for forgiveness after 10 weeks instead of eight when they would have been limited to just $15,385 ($240,000 per year = $4,615.40 per week times 10 weeks = $46,154). This is obviously not the intent of the Act, so we expect future guidance to clarify and close this loophole. Regardless, taking such a stance runs a high likelihood of SBA scrutiny.
We are a Catholic Church. Our priests are paid just like the rest of the employees. Should we include the payroll, pension and health insurance costs for the priests in our forgiveness application?
Unless the priests own the church, which would probably defeat its non-profit status, their employment costs should be included in your Payroll Costs and not Owner’s Compensation.
Our payments of auto allowances are paid as a non-accountable plan and therefore fully taxed to the employee. Would these monthly auto allowances be forgivable if paid during the Covered Period?
Because they are part of your employee’s taxable income, and presumably reported on your Form 941 each quarter, these can be included in your Payroll Costs for your forgiveness application. If they were not taxed as income, they could not be included.
I’d like to use the Alternative Covered Period for my payroll. Does my first week of funds spent need to match my first week of forgiveness?
The Alternative Covered Period applies only to your payroll costs and not other costs. Those other costs will be for the period beginning the date you received your PPP funds. The Alternative Covered Period begins with the first day of the first complete pay period that starts after you received the funds.
How would distributions to S Corp shareholders be viewed during the eight-week or 24-week forgiveness period in terms of using liquid resources, arguably the PPP loan, to distribute out? Would that be a valid business transaction or be viewed negatively and possibly jeopardize full forgiveness?
Distributions are not forgivable uses of PPP funds.
Could we extend the eight-week coverage to nine weeks to cover the semi-monthly payroll that is due on June 15, 2020? Since we have basically maxed out the PPP funds, when shall we submit the PPP loan forgiveness application?
Question 1: No. Pick either eight weeks or 24 weeks but remember the “incurred but not paid” rule described elsewhere. You also now have the ability to file for forgiveness before your 24-week Covered Period ends if you have used up all PPP funds. Question 2: You have 10 months from the end of your Covered Period to apply for forgiveness.
I have three questions. First, is the per diem payment or subsistence paid to employees for out of town work forgivable or allowable? Second, how about a monthly truck allowance for salespeople? Third, what period is to be used to compare the eight-week total wage payroll — can we still use the January-February 2020 reference period?
To your first two questions, no — those are not part of taxable wages. Your third question relates to the Salary Reduction Factor, in which you compare the Covered Period average wage to the average each employee earned in Q1 2020, not just January-February 2020.
For a C Corp, are all employee shareholders considered owners for the payroll cost forgiveness calculation, or only those above a certain ownership percentage?
The threshold used by the SBA is a 20% ownership stake.
Where is it stated that compensation over $100,000 is not forgiven? I know it was used for the loan basis and to determine whether a pay reduction results in an amount being unforgiven, but that’s different than the amount we are allowed to pay employees out of PPP funds. When/how did this change come about?
This change came about when the PPP program was invented. See CARES Act language signed into law on March 27, 2020: Section 1102 of the CARES Act, which is what creates paragraph (36) and outlines the Paycheck Protection Program, defines in 1102(a)(2)(36)(A)(viii)(I)(bb) “the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in one year, as prorated for the Covered Period.” The forgiveness provisions outlined in Section 1106 state in paragraph (a)(8): “the term “payroll costs” has the meaning given that term in paragraph (36) of section 7(a) of the Small Business Act (15 U.S.C. 636(a)), as added by section 1102 of this Act.” So, it’s always been there.
Say funding is on April 23, 2020, the payroll period is April 13 to April 24 with a pay date of May 1. If I understand correctly, we can claim the whole pay period for forgiveness, not just the two days after the funding date. Is that correct? Then, at the end, my Covered Period ends June 17, in the middle of my payroll period from June 8 to June 19 that we will pay June 26. Is the entire pay period still covered as long as it is paid prior to the next cycle, or only the part that occurs during the Covered Period?
To your first question, you have it correct. The amount paid for payroll in the Covered Period (in this case, paid May 1) can be included even if the cost was incurred prior to the Covered Period, so long as it is the immediately contiguous period. As to your second question, only the part that occurs during the Covered Period may be claimed. In this case, you do not get the benefit of the entire June 26 payroll, so you will have to figure out the amount you incurred through June 17 for forgiveness purposes.
Our loan was funded on April 15, 2020. Can we include the payroll we issued that day or does our Covered Period start the day after the loan funds, so April 16, 2020 for us?
Covered Period day one is the day the funds hit your bank account. So, in this case, you can include the payroll you issued on April 15, 2020.
Our payroll journals do not show hours for salaried exempt employees, only hours that have been used like sick, vacation, holiday, etc. Will this be an issue in terms of applying for forgiveness and providing supporting documentation?
We assume you meant you are using a PEO company and not a PTO company. As a co-employer, your PEO company should be able to provide you with the necessary reports and documentation. Just ask them.
No. Workers comp is not an allowable payroll cost expense regardless of how you accrue it.
Two owner-employees in our S Corp had an increase in salary in mid-2019. Therefore, their salary is greater in 2020 than the average 2019 number that contributed to the calculation of the original PPP funds. For the forgiveness application, can we include the increased salary, or do we need to stay with 2019 salaries?
To calculate payroll costs, add up the total amount paid to your employees during the Covered Period you choose. Apply the maximum limit threshold explained elsewhere where necessary. Then add in any employer payments made for health insurance, retirement benefits or state/local taxes on compensation. Their 2019 pay level is irrelevant to how much payroll cost you can claim for your Covered Period in 2020. The 2019 pay comes into play only in determining whether they should be considered for the Salary Reduction Factor later on, so ignore it for payroll cost purposes.
We got our first project in Texas and brought on two people to perform the project. They are not technically on our payroll as a W-2, but instead are paid through a 1099. This is considered payroll cost, correct?
Incorrect. Payroll costs include W-2 employees only. Contract employees paid through a 1099 are not to be included in your payroll cost calculation.
We have reasons to not want certain wages to be considered for PPP forgiveness. For example, we may want only $6,000 of an employee’s wages considered for forgiveness, even though the employee earned $10,000 in the Covered Period. Can we do this and still use the $10,000 amount paid as the basis for the various reduction factors?
Without speculating on your reasons, the answer is no.
The AICPA website says that employee federal withholding is included in allowable payroll costs for the purposes of determining the amount to be forgiven, but the employer federal payroll taxes (i.e. FICA and Medicare taxes) imposed on the gross payroll are not eligible payroll costs for the loan forgiveness calculation. Is that right?
Yes, the AICPA got that one right. Understand that employee withholdings are deducted from gross pay. Also understand that the payroll cost calculation uses gross pay for each employee. Therefore, those withholdings are “allowable” because they are included in gross pay. However, the payroll taxes paid by the employer, separate from the amounts withheld from the employees, are ineligible because otherwise you would be using federal government money to pay federal government taxes. If they wanted to do that, they would have simply waived the requirement to pay taxes and kept it simple. On that notion, though, they do now allow any business, regardless of whether it has had PPP money forgiven, to defer (not avoid) paying the FICA portion of payroll taxes (6.2%) through the end of 2020, with half of the deferral amount due December 31, 2021 and the other half due December 31, 2022.
When an employee passed away during our eight-week period, we split up his duties to other current employees and gave out raises that pushed two employees over the $100,000 limit (annually). Do I use my last payroll (for the eight-week period) to calculate their costs?
No. To calculate payroll costs, add up the total amount paid to your employees during the Covered Period you choose. Apply the maximum limit threshold explained elsewhere where necessary. Then add in any employer payments made for health insurance, retirement benefits or state/local taxes on compensation. Do not simply take the last payroll and multiply by eight.
If an employee will earn over $100,000 this year, does this employee’s pay have a maximum for inclusion in payroll costs?
If an employee earns $110,000 per year, can I include the first $100,000 of wages in the forgiveness amount?
No, that’s not how it works. For this or any other employee, you can only include up to $15,385 if using an eight-week Covered Period, or $46,154 if you choose 24 weeks. The $100,000 maximum is an expression of annualized pay, meaning how much they would have been paid if you had persisted for a full year at the same level you paid the person during the Covered Period.
Is it okay to pay an employee $15,385 for one week and nothing for the remaining Covered Period, or do you have to pay $1,923 each week?
Aside from possible employee relations issues this may cause, this is allowable. You could pay them $15,385 every week if you want — you would just be limited in your forgiveness claim to $15,385 once, assuming you are using an eight-week Covered Period.
No. Wages are capped at $15,385 during an eight-week Covered Period, or $46,154 during a 24-week Covered Period. There is no individual weekly cap.
For purposes of totaling your payroll costs during your Covered Period, add the total of each payroll you run during the period, plus any pay that your employees may have earned before the end of your Covered Period but that you didn’t pay until the next regular payroll cycle after your Covered Period. It doesn’t matter if the amount of pay varies widely from payroll to payroll — just add it up.
Do we have to include commissions or bonuses in looking at 2019 annualized pay to determine if they should be included or excluded from the Salary Reduction Factor calculation?
Yes. If in any single pay period in 2019 an employee was paid an amount that, when multiplied by the number of pay periods the business had in 2019 (i.e., annualized), totals more than $100,000, they are to be excluded from the Salary Reduction Factor calculation. The amount the individual was paid could include salary, wages, commissions, bonuses, overtime pay, sick leave pay, tips or other sources of taxable income. For ease of understanding, the limit in any single pay period in 2019 is as follows, depending on the frequency with which you pay your employees:
- Weekly payroll (52 pay periods): $1,923
- Bi-Weekly payroll (every 2 weeks) (26 pay periods): $3,846
- Semi-Monthly payroll (twice per month) (24 pay periods): $4,167
- Monthly payroll (12 pay periods): $8,333
Yes. Gross salary or wages includes an employee’s standard paycheck, plus any bonuses, commissions, overtime pay, tips, etc. that are considered taxable income. In total, they are subject to the $100,000 annualized maximum.
If a new employee is hired during the Covered Period, will we be able to include them in payroll costs?
Yes. Every employee who works for you for even one paid hour during the Covered Period should be included in your payroll costs. It is to your benefit to include them.
Yes. Every employee who works for you for even one paid hour during the Covered Period should be included in your payroll costs. It is to your benefit to include them.
No. The only place where there is a $100,000 cap is on annualized gross salary or wages, which means a maximum of $15,385 if the borrower chooses an eight-week covered period or $46,154 for a 24-week period. The employer’s portion of pension payments and other retirement benefit payments, along with health insurance benefit payments, may also be forgiven in total regardless of the employee’s gross salary.
Allowances and reimbursements are typically like other expense reimbursements — non-taxable and not considered wages — so they are not allowable for forgiveness. However, if you leased a vehicle for an employee to use for business purposes, that lease payment could be included in your rent costs.
Has the $15,385 cap on salaries for the eight-week period been increased to $46,154 for the 24-week period?
Unlike a temporary agency, a PEO (Professional Employer Organization) contracts with your organization as a “co-employer”. The PEO will file payroll tax returns and also administer benefit plans as your “co” employer. Employees paid in a PEO relationship will be provided benefits and you’ll work with your PEO in a relationship that allows you to control the employee. You will jointly provide benefits. When the employee files for unemployment, they can name you as the employer of record. The difference is documented in the contractual differences between the PEO and Temp Agency arrangements you engage in.
We make monthly union benefit payments and understand that these payments can be included in our forgiveness calculation. We paid the March bill in April after we received our PPP funds, paid the April bill on schedule in May and paid the May bill early to get it in under the wire of our Covered Period. Can we include all three payments?
Prepayments are generally not allowed in the forgiveness program. However, in this example, because the payment would have been made in the next regular billing cycle and covered a cost that was incurred during the Covered Period, all three payments are able to be included in the forgiveness application.
When we submitted our labor, we included all employees including part-time. If the goal was to keep employees working their normal schedules, can we include our part-time employees in our total payroll expenses?
Yes. Include all employees in your payroll costs, regardless of whether they are full-time or part-time.
We have several “employees” who each own 20% of the business. Are they excluded entirely from the forgiveness calculation?
For questions on self-employed persons, an excellent reference document is the IFR released on April 14. In that document, it was clear that owners of either sole proprietorships or pass-through entities can be forgiven for paying themselves the smaller of $15,385 (assuming an eight-week period) and 8/52 of their reported 2019 self-employment income. For borrowers choosing the 24-week period, this amount adjusts to the smaller of $20,833 (which is 2.5 months of $100,000) or 20.83% of their reported 2019 self-employment income. However, they may not be forgiven for spending on health or retirement benefits that are passed-through and deducted on their personal tax returns.
I understand that FICA costs are not forgivable, but what about Federal Unemployment, Medicare or State Unemployment Insurance payments?
Employer costs for federal programs, including Social Security, Federal Income Tax, Federal Unemployment Tax Act and Medicare are expressly prohibited from being included in forgiveness by the CARES Act. Specifically, the law reads that “taxes imposed or withheld under chapters 21 (FICA and Medicare), 22 (Railroad), or 24 (FIT) of the Internal Revenue Code of 1986 during the Covered Period” are excluded. The federal government would essentially be giving you the tax money back if they allowed this. On the other hand, state taxes paid by the employer are forgivable, but not if those amounts were withheld from the gross pay of the employees.
We erroneously included the cost of 1099 contractors in our original loan amount but are now able to spend the full loan amount on true W-2 employees with the extension to 24 weeks. Will the payroll spend be forgiven or does the miscalculation of the loan amount lead to significant un-forgivability?
The payroll spend will be eligible to be forgiven if it was used for W-2 employees, regardless of the calculation that was used to secure the loan originally.
The $100,000 cap is in place throughout the PPP program, originally in calculating your loan amount. In the forgiveness phase, this cap limits the amount of forgiveness available for payroll costs. This amount is also used to determine the employees who may be subject to the Salary/Hourly Wage Reduction Factor.
If I received my funding on April 26, can I make my Alternative Covered Period start April 21, or does it have to be a date after the funding of the loan?
The Alternative Covered Period cannot pre-date the loan and would need to start after you received the funds.
The SBA has not defined seasonal employees; however, the clear implication is they are referring to summer workers. Employers using seasonal employees — from agricultural workers to lifeguards — have the option to include either of the two elective baseline periods or a consecutive 12-week period between May 1 and September 15, 2019.
Yes. PPP loans cover payroll costs, including costs for employee vacation, parental, family, medical and sick leave. However, the CARES Act excludes qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.
Yes, anything that goes toward employee welfare such as dental, vision and HSA contributions (the employer portion) can be included in health insurance benefits.
If I don’t think I can get to the 60% payroll threshold for forgiveness, can I repay some of my loan now to lower my denominator and better my chances?
No. The loan amount is determined by the loan document on record, not how much you have repaid. Furthermore, for forgiveness purposes the 60% payroll threshold is relative to what you spent during the Covered Period, not what the total loan amount was.
In the forgiveness calculation, can I include the payroll cost for people I did not include in the loan application (e.g. equity partners)?
Yes, and it would be helpful to do so because it helps you get your FTE and wages up.
Does forgiveness use the same $100,000 payroll cost per person limit as the loan application calculation?
The $100,000 per person limit remains. Do not exclude employees who make more than $100,000 annually. Instead include payroll costs for those employees up to that limit, prorated for the number of weeks in your Covered Period.
In the webinar, there was discussion around the $100,000 maximum annual compensation and when to include it in certain calculations. I’m confused as to whether the $100,000 should be subtracted altogether or just the amount over $100,000?
There are two places where the $100,000 figure comes into play: payroll costs and the Salary Reduction Factor. For purposes of calculating payroll costs, you include all employees no matter what they are paid, but for those paid more than $100,000 annually you may only count gross salary paid up to $15,385 or $46,154 depending on the number of weeks during the Covered Period. Any pay over that amount will not be forgiven. For purposes of calculating the Salary Reduction Factor, you exclude those highly paid employees from the Salary Reduction calculation altogether.
We have union payroll and union benefit costs that we incur during our Covered Period. Are both the union health and the union pension benefit qualified expenditures for payroll costs?
Yes, all contributions to health insurance and pension programs for your employees are to be included in payroll costs for the forgiveness calculation.
Can we include the entire April 30 payroll toward our forgiveness because it was paid after disbursement (April 29), even though it includes payroll records for time worked prior to disbursement?
Yes, any payroll paid during the Covered Period counts toward forgiveness.
For those whose income exceeds $100,000 annually, do I use the 8/52 formula or, since I’m a semi-monthly payer, do I divide by the 24 equal payments I make over the course of the year?
No, do not divide by the number of payments. Instead, the maximum amount allowable to be claimed for any employee is either 8/52 or 24/52 of $100,000, depending on the number of weeks in your Covered Period.
I came away from the last webinar with the understanding that only 75% of the amount that I spend on payroll could be eligible to be forgiven. Am I correct?
No, that is incorrect. The rules have changed, but let’s first correct the misperception in your question. The payroll threshold test did not say that you could only get 75% of whatever you spent on payroll forgiven — that would be to multiply payroll costs by 0.75. Rather, you would divide by 0.75, in effect “grossing up” your payroll costs. So, under the old rules, at least 75% of the total amount spent (not just the amount that you spent on payroll) needed to be spent on payroll costs in order to maximize forgiveness. Under the new rules enacted by the PPP Flexibility Act, this 75% threshold has been reduced to 60%. In either scenario, every payroll dollar funded by PPP money will count toward forgiveness except for any amounts paid in excess of $15,385 (eight-week Covered Period) or $46,154 (24-week Covered Period) to any single employee.
Our loan funded on April 20. Since my first payroll and use of the funds was on April 30 for our April 16-30 payroll, does the Covered Period start then?
As a semi-monthly payer, you do not have access to the Alternative Covered Period concept. Your Covered Period began the date you received the funds for both payroll and non-payroll costs.
For employees who were making more than the $100,000 maximum allowance for PPP, do they have to be reinstated to their full payroll amount by December 31 (even if that amount was, for instance, $250,000)?
No. Those employees are not subject to the Salary Reduction Factor because they made more than $100,000 in 2019.
You have indicated that Profit-Sharing contributions for 2019 are not forgivable, but what about for the current year? Could we allocate our Covered Period’s worth of what we contributed in 2019?
Yes, but only if you make the Profit-Sharing contribution during the Covered Period or in the next pay cycle following the Covered Period.
I had accrued bonuses from my fiscal year end of February 29. For decades, we have paid those bonuses out in early May. Since our PPP loan got funded in late April, should I back out all of those bonuses for loan forgiveness since they were actually earned in February, but will show up during my PPP payroll records?
You should include them as a normal business practice which you can demonstrate through historical records.
Do I have to spend 60% of my forgiveness expenses on payroll or 60% of my total loan expenses on payroll, or both?
According to guidance from the SBA interim final rules, the answer is both. The guideline is 60% or more of the forgiveness amount, which is the amount spent during the Covered Period, must be spent on payroll in order to maximize forgiveness. A separate interim final rule notice also specifies that 60% of the total loan proceeds are to be spent on payroll. This would apply to any loan amount that is carried over beyond the Covered Period.
If I don’t spend 60% on payroll during the Covered Period, am I eligible for any forgiveness at all?
Yes, you are. The PPP Flexibility Act reduced the amount required to be spent on payroll costs from 75% to 60%. However, subsequent guidance from the SBA and Treasury indicates that they are carrying over their prior interpretation that allows for a graduated forgiveness amount, even if a borrower fails to meet the 60% threshold. In this instance, the non-payroll costs will be reduced by an amount necessary to establish payroll at a 60% level. For example, a borrower who spends $540,000 on payroll and $460,000 on non-payroll (total: $1 million), would fail the 60% test, so they would have to lower the forgivable portion of their non-payroll costs to $360,000. This would adjust the ratio to be $540,000 on payroll (60%) and $360,000 on non-payroll (40%). The net effect of this adjustment would be to reduce their total forgiveness amount from $1 million to $900,000.
I laid people off during the Covered Period and paid them severance and their accrued PTO. Can I include that in the payroll costs for forgiveness?
Yes. Paid time off and severance payouts to employees can be included in wages up to the limit of gross compensation per person in the Covered Period. However, keep in mind that eliminating those positions will also affect your FTE count in determining forgiveness reductions.
I pay state taxes on compensation that I paid to my employees. Can I include that in the forgiveness calculation?
Yes. State taxes that are the employer’s cost can be included in the forgiveness calculations. Any state taxes that you withheld from the employee’s gross pay should be excluded because those costs are already captured in the gross wages part of the Payroll Costs calculation.
Yes. Technically you could cover a larger share of your employees’ health benefits during the Covered Period and submit it for forgiveness.
Many of my employees have earned a bonus beyond their salaries during the Covered Period. Can I pay those?
Yes. Any regular payments of wages, commissions, or bonuses can be included and may be forgiven up to the $100,000 per person annualized limit prorated for the length of your Covered Period, meaning maximum pay during the Covered Period is either $15,385 or $46,154 per person depending on the chosen time frame.
Fringe benefits are not included in the $100,000 cap. The $100,000 annual maximum (either $15,385 or $46,154 depending on the Covered Period) applies only to the gross salary or wages earned by the employee and does not include any benefits or other additional payroll costs.
Yes. The wage maximum is $100,000 annually per person. If you choose an eight-week Covered Period, this means that you can include no more than $15,385 per person on the forgiveness application. If instead you choose a 24-week Covered Period, the maximum you will be allowed to claim for any employee on your application is $46,154.
What is the process I should use to accrue wages and other payroll costs at the end of my Covered Period that will be paid in the next payroll following the Covered Period?
To properly accrue for and document earned wages at the end of your loan period that have not been paid but will be paid in the next payroll cycle, you should prepare a schedule that shows:
- For hourly workers: hours worked in that accrual period and rate of pay
- For salaried workers: their annual rate of pay divided by 260 to get their daily pay rate, then multiplied by the number of workdays between the final payroll and the end of the Covered Period
I have employees who have earned pay between the time of my last payroll and the end of my Covered Period. Can I count that cost in my payroll costs?
If I choose an alternative Covered Period for my payroll costs, how do I calculate my payroll schedule for the forgiveness application?
The alternative payroll schedule ensures you don’t have to move your pay dates to match your Covered Period and enables you to more easily calculate costs for the forgiveness application. If your payroll schedule starts four days after your loan is funded, you can start counting your covered payroll on the first day of the next pay period (example: your loan funds on May 6 and your next pay period starts on May 11, you can start your Covered Period on May 11 for Payroll Cost purposes only). You may not change your Covered Period dates for non-payroll costs.
The alternative payroll schedule is an option that people can choose. Who is an eligible employer to choose the alternative payroll schedule?
Eligible employers have either a bi-weekly payroll schedule or one that is more frequent, such as weekly. Bi-weekly means that you pay payroll every two weeks, or 26 pay periods per year. This does not apply to employers that have fewer than 26 pay periods per year, such as semi-monthly (example: paydays on the 15th and last day of the month) or monthly payers.
Can you clarify covered payroll costs? Are they based on the date that the money was disbursed from the employer’s cash account, or is it the date that the employees earned the money? Or is it the date on which the employee actually received their paycheck?
All three of those things can apply, providing you never pay an employee twice for the same hour or same period:
- Any payroll cost paid during the Covered Period may be included in the forgiveness application (example: I received my funds on April 28. I paid my payroll on April 30 covering the period of April 15 to April 30.) This is allowable under the rule that allows costs based on the date that the paychecks were distributed.
- At the end of your Covered Period, you may include payroll costs that have been paid to the payroll provider but not yet paid to your employees (example: your Covered Period ends June 14, with a payroll due on June 15, and you funded the payroll to your payroll provider on June 12. This too is allowable.
- At the end of your Covered Period, your employees have earned pay that has not yet been paid but will be in your next regular payroll run. (example: you pay your payroll semi-monthly on the 15th and 30th, and your Covered Period ends June 24. You may include in your forgiveness application the payroll costs incurred, but not yet paid, for the period from June 15 to June 24.)
Gross wages without any other deductions for benefits or for taxes that the employee pays, state tax expense paid by the employer, health insurance benefits paid by the employer, and retirement plan benefits paid by the employer.
The $46,154 cap is based on the 24-week payroll for each person. Does the cap of $100,000 still apply for the year?
Yes. That’s how the cap was arrived at in the first place — it’s not a randomly generated number. They are one and the same. $46,154 = ($100,000 / 52 weeks) x 24 weeks.
What types of tax-deductible ESOP contributions may be considered retirement benefits for forgiveness?
ESOP contributions may include cash contributed to the plan, which is used to make a payment on a loan, or cash contributed to the plan for any purposes permitted under the plan document, or stock contributions to the plan.
There isn’t clear guidance on this yet. It’s unknown if the full amount of the ESOP contribution is forgivable, or if only a pro-rated amount of an annual contribution will be forgiven. It’s possible the SBA will issue further guidance on this in the coming weeks.
Can I make my profit-sharing contribution for 2019 in the Covered Period and include it in my forgiveness calculation?
No. To be forgivable, any profit-sharing contributions that you make should be related to the Covered Period. Our interpretation is that retirement plan expenses should be both paid and incurred in the period that is covered, or, incurred in the immediately preceding contiguous period and paid in the Covered Period, or, incurred in the Covered Period and paid in the immediately following contiguous period.
A defined contribution plan is just like any other retirement plan, and if you can allocate the portion that is attributable to the period now, if it’s calculable, you could do that. You could put it in your forgiveness calculation, but you would also have to fund it and pay it so that it was both earned and paid in the Covered Period.
For self-employed people generally, the answer is no. If an owner is on payroll in a corporation, receives a W-2, contributes to their own retirement and the company matches their contributions, the portion that is the employer matching expense can be included in the forgiveness calculation up to a maximum of 2.5 months’ worth of the employer’s 2019 contribution.
Yes. The employer cost that is 401(k) match expense can be included.
No. The 401(k)-match expense should be applicable to the Covered Period and not to a future period.
Do contributions to an employee stock ownership plan, or ESOP, qualify as retirement benefits when computing the forgivable amount of a PPP loan?
In general, yes. Contributions to an ESOP are considered tax contributions to a qualified retirement plan. Contributions should be forgivable if paid within the Covered Period.
Mortgage and Other Debt
I see my mortgage payment is an allowable use of PPP funds; however, what portion of that is actually forgivable?
You may use PPP funds to pay eligible mortgage expenses; however, only the interest portion of that will be considered a forgivable expense. All principal payments made with the PPP money will not be forgiven.
I have some non-mortgage debt. Can I use PPP funds to pay interest on payments to a former owner that I’m paying off or buying out?
Payments of other business debt that is non-mortgage related is an allowable use of PPP funds; however, none of those payments will be considered forgivable expenses.
I drew down my line of credit and am making regular interest payments against that during the Covered Period. Can I use PPP funds to make those payments and will that be a forgivable expense?
Yes and no. You may use PPP funds to pay non-mortgage related debt; however, none of those payments will be included in forgivable expenses.
I understand that we are allowed to use PPP funds for non-mortgage interest but that it is not forgivable. Can I include the interest payments that we were making on our equipment loan in my forgiveness calculation?
Yes. An equipment loan is considered a mortgage for purposes of forgiveness.
Yes. Interest on personal property loans for business assets, such as equipment loans or loans used to buy delivery trucks, may be included in expenses for forgiveness. To be clear, the principal portion of payments made for these loans must be excluded from the forgiveness calculation.
Yes, so long as they were in place prior to February 15, 2020 for real estate or other personal property associated with the business.
Rent and Other Lease Expenses
My landlord charges me not only for the space that I occupy, but also for my portion of the building’s property taxes, maintenance and common area charges. Can I include those in my rent cost?
No. Only rent is an allowable and forgivable expense. If the bill from the landlord clearly includes maintenance, common area maintenance charges, property taxes and insurance, those charges should be stripped out of the PPP request for forgiveness.
My business rents off-site storage to hold files and other business materials. Can I include the rent for that storage facility in my forgivable expenses?
Yes, so long as the storage unit rental was in place prior to February 15, 2020. Remember to provide your rental agreement for that storage space as documentation.
Can I prepay my fourth-quarter rent during the Covered Period and include it in my forgiveness request?
No. Rent expense needs to be paid or incurred in the Covered Period.
Yes. Leases of personal business property are included in the forgiveness calculation.
My business leases several vehicles that we use for delivery and other purposes. Can I include the cost of those leases in my rental expense?
Yes. Business vehicle leases are an acceptable use of PPP funds and are included in the PPP calculations for forgiveness.
We pay car leases and gas as monthly auto expenses for our sales team, all of which were in effect before PPP and are still active. Does this qualify for forgiveness either under leased equipment or transportation?
Yes, but in separate categories. The car leases should go in the Rent and Other Lease Expenses category while the gas expense should go under Transportation in the Utilities category.
We have leases on delivery trucks and the drivers who drive those trucks. We get charged weekly for the truck leases, mileage, diesel fuel and the hourly rate for the drivers. Can I include both the leasing costs for the truck as well as the leased employees? We pay a weekly bill to our transportation provider that includes the charges mentioned above.
Trucks and fuel are okay so long as the trucks are leased in the borrower’s name; leased employees are not. If all costs are combined into one amount without any supporting detail, you will need to provide an estimate for the amount that relates strictly to the truck lease and fuel costs.
Our rent statement shows both base rent and expense recovery. Can I only use PPP funds to pay the base rent or can I also include expense recovery?
Our rent statement shows both base rent and expense recovery. Can I only use PPP funds to pay the base rent or can I also include expense recovery?
No, because the expense was not incurred during the Covered Period.
We pay to provide monthly parking spaces for our office employees, but they are not part of a lease agreement. Are these fees eligible for forgiveness?
No, they are not, since they are not covered by a pre-existing lease agreement. This is an operating expense.
My eight weeks end on June 19. Can I include payables that I usually pay on the 25th of each month, such as my June rent? Should I pay it before the 19th?
Yes, if an expense is accrued for up to the last day of the loan Covered Period, and then paid on the next billing cycle, the amount applicable to the Covered Period can be submitted in the forgiveness application (“incurred but not paid in the period”).
Yes. The date you received funds is day one of your Covered Period.
If there is a separate lease agreement for the parking, then you can count it. If not, then it is an operating expense and not a rent/lease cost.
We signed a lease prior to February 15, 2020 but didn’t move in until February 22. Can we get forgiveness on the lease payments?
Yes, since the agreement was in place at February 15, 2020 and your documentation can demonstrate that.
In December 2019, we signed a new lease agreement with a related party that called for higher rent payments to begin in April 2020. Is this new, higher rent payment eligible for forgiveness?
Yes, so long as you have a lease agreement in place as of February 15, 2020.
No. Only the rent portion of a triple net lease is forgivable.
If we have a triple net rent agreement with a related entity in which the common area maintenance and property taxes are not specifically broken out, how should we handle itemizing the rent portion of the monthly payment for documentation purposes?
You will need to develop an estimate of the portion that is allocated to rent as opposed to the other, non-forgivable expenses, and include that in the documentation you submit with your application.
It’s inconsistent to state that renters on FSG leases can include CAM, property tax, etc. which are intrinsic to the FSG lease, and those on NNN or modified gross leases cannot include these expenses. The intent is to keep the business operating for two months regardless of which lease type a tenant has. Please triple check this before using it as a criterion for forgiveness.
Renters on full service gross leases are not allowed to include common area maintenance or property tax expenses in their rent costs for forgiveness either, especially because those expenses are supposed to be paid by the landlord and not the tenant.
We had to downsize and move to a smaller building in May and our landlord let us out of the lease on the larger space. Is the new lease forgivable due to the downsizing?
Unfortunately, no. Lease costs are allowed only so long as the lease agreement was in place at February 15, 2020.
Our lease agreement requires us to pay for the entire year in one lump sum ($250,000 a year). So, if this is paid during the period, must this be broken down by month or can the entire payment be used in the calculation?
You cannot use the entire payment in your rent costs calculation. That is effectively a pre-payment, which are expressly not allowed. You will need to pro-rate the lump sum payment for the length of your Covered Period.
Report the entire amount. Income from sub-leases is not a reportable item.
My business pays rent every month to another business that I own which holds the real estate in an LLC. Can I include in my forgivable expenses my related party rent?
Yes. That is a forgivable rent expense so long as:
- There is a written agreement
- It has not changed during the course of the Covered Period
- It was in place prior to February 15, 2020
The only SBA guidance that has been issued thus far relates to self-employed individuals, and it states that gas which is used for driving a business vehicle is a forgivable use of PPP loan proceeds. There has been no further guidance to define the transportation costs, such as vehicle maintenance expense or other costs associated with owning a vehicle. Those have not been defined as being either forgivable or not forgivable yet.
My staff has been working from home where they have incurred internet access and telephone costs on behalf of my business. Can I reimburse them for that and include it in my forgiveness costs?
In terms of forgiveness, you can submit for those costs providing that was your habit before February 15, 2020 as well.
Internet costs are forgivable. Can I include as part of that my software costs, dues, licenses, subscriptions, etc.?
Are we allowed to include expenses related to disposal of all wastes/trash in our calculations for utilities?
No, these costs are not specified as a utility expense.
We received our PPP funds on April 20 and have an electric bill for generation from the period March 21 through April 20. This bill was paid with a check on May 11. Is this eligible for PPP funding based on paid date, or should we hold off for the payment that would coincide with generation from April 21 through May 20?
Because you paid the bill during the Covered Period, even though it was for a consumption period that pre-dated your Covered Period, you are allowed to include this cost.
Can we include the monthly charge for a company that is housing our servers for access through the “cloud”, which includes the lease and the storage, as well as IT services (help desk) and licenses?
No. Utilities costs guidance specifies that only internet access costs are to be included for IT.
Are utilities prorated for the month if your eight or 24-week period ends in the middle of the month?
Yes. You will need to determine the amount of the utility cost that was incurred from the beginning of the billing period to the end of the Covered Period in such situations.
This is a forgivable expense.
Will the transportation include the mileage that employees drive to work, and the company reimburses them?
No. Expense reimbursements are not allowable expenses, they are payables.
No. This is not specifically highlighted in any guidance as a forgivable expense.
Can utilities costs include server hosting service, data storage service or monthly email/website hosting fees if we were already using the service prior to COVID?
No. Those are not allowable uses of PPP funds.
Can we claim employee home office expenses, e.g., home internet, home phone and cellphones that the company has reimbursed to our employees since pre-COVID time (per our company reimbursement policy)?
If those were required expenses for your employees to perform their duties during the Covered Period, and you can demonstrate that this was in place prior to February 15, 2020, then yes, those expenses can be claimed as internet access and telephone expenses.
No. They are not listed Utilities that qualify for forgiveness according to the CARES Act.
Water, gas, electric, internet access and phone access. Also, gasoline used in any vehicle that is owned or leased by the business. Reimbursements for employee cell phone expenses are forgivable as long as you can show that the business reimbursed employee cell phone bills before the pandemic as well.
Are owner distributions to S Corp owners and LLC members forgivable and included in income for owners on the loan forgiveness application?
No. Only self-employment income is to be included in the loan forgiveness.
If your spouse is truly an employee and performing duties to the organization, the answer is yes. Be prepared to show that your spouse was a part of your staff before the loan was given to you or show that your spouse is filling in for someone who has refused employment.
No, not for self-employed persons who report their income on a Schedule C because they’re sole proprietors, nor for those who report their self-employment earnings on an S Corp return, or those who are owner-members of an LLC.
What is the definition of an owner who cannot submit their benefits expense as part of their loan forgiveness?
The definition here applies specifically to LLC owners, S Corp owners and sole proprietorships, specifically pass-through entities.
No, because technically not-for-profit organizations do not have owners.
On the forgiveness application it specifically says that the owner’s compensation should not go on Table 1 or Table 2 of Schedule A and should be listed elsewhere. Doesn’t that hurt me when it comes to forgiveness calculations and possible Safe Harbor?
The amount paid to owner-employees or self-employed individuals or general partners does not go in either Table 1 or Table 2 of the PPP Schedule A worksheet; instead, that compensation is listed on line 9 of the PPP Schedule A under the heading “Compensation to Owners” and is included in total payroll costs which are summed on the next line.
The owners of the company make more than the capped amount for the Covered Period, so does this mean I should automatically not include their net healthcare costs and employer 401(k) contributions in the payroll costs for the forgiveness amount?
This depends on your form of organization, but these are two separate questions, though neither is dependent on the amount the owners are paid. Regardless of their pay, their healthcare costs are not to be included in payroll costs, with the exception of payments made for owners in a C Corp who are paid as employees. Separately, in the case of retirement contributions, payments made on behalf of owner-employees by an employer that is a corporation (such that the contributions are listed on the corporate tax return) are eligible for forgiveness. These retirement contributions for the owner-employees are limited to 2.5 months’ worth of the employer’s 2019 contributions for them. Retirement contributions for any owner in a non-corporate form of organization are not eligible for forgiveness.
Owners get paid by K-1 sometimes and not by W-2s, so can we include those payments in calculating our payroll costs for forgiveness purposes?
Yes, but be careful to document these as “guaranteed payments” and not “distributions.” It is subject to the $100,000 cap — which is either $15,385 or $20,833 depending on the length of the Covered Period — and K-1 documentation will be required.
Will the self-employed be able to file for PPP forgiveness while also receiving unemployment for sole-ownership program?
Unemployment filing is expressly for those who are unemployed and not receiving paychecks. Therefore, a person receiving payment from an employer, whether funded by PPP sources or not, must disclose that they are receiving paychecks. Payments will reduce eligibility for unemployment benefits.
For LLC owners who are paid by K-1 and not W-2, does the $100,000 maximum compensation still apply?
Are payments to equity partners, up to the $15,385 amount, includable in the forgiveness calculation?
Can you add the amount of employer retirement and health care contributions paid on behalf of the owner-employee?
This is a mixed answer. If the business is a C Corp and the owner-employee receives a W-2, then the answer is yes. If not, the answer is no as it relates to the main forgiveness application. However, for the EZ forgiveness application, there is a provision that allows for retirement contributions for owner-employees up to 2.5 months’ worth of the 2019 contribution. There is nothing in the main application instructions that indicates this same allowance is available there.
If we have minority owners with less than 5% ownership, do they get included in the owner compensation data?
No. Limit owner’s compensation to 20% or greater owners.
No. You can provide profit distributions to shareholders at any time, you just can’t claim forgiveness for them.
Why would the self-employed compensation be limited to eight weeks when we now have 24 weeks to spend on payroll?
Per the 19th Interim Final Rule issued on June 17, 2020: “The Administrator, in consultation with the Secretary, has determined that it is appropriate to limit the forgiveness of owner compensation replacement for individuals with self-employment income who file a Schedule C or F to either eight weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an eight-week Covered Period or 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week Covered Period per owner in total across all businesses. This approach is consistent with the structure of the CARES Act and its overarching focus on keeping workers paid and will prevent windfalls that Congress did not intend. Specifically, Congress determined that the maximum loan amount is generally based on 2.5 months of the borrower’s average total monthly payroll costs during the one-year period preceding the loan. For example, a borrower with one other employee would receive a maximum loan amount equal to five months of payroll (2.5 months of payroll for the owner plus 2.5 months of payroll for the employee). If the owner laid off the employee and availed itself of the Safe Harbor in the Flexibility Act from reductions in loan forgiveness for a borrower that is unable to return to the same level of business activity the business was operating at before February 15, 2020, the owner could treat the entire amount of the PPP loan as payroll, with the entire loan being forgiven. This would not only result in a windfall for the owner, by providing the owner with five months of payroll instead of 2.5 months, but also defeat the purpose of the CARES Act of protecting the paycheck of the employee. For borrowers with no employees, this limitation will have no effect, because the maximum loan amount for such borrowers already includes only 2.5 months of their payroll. Finally, at least 60 percent of the amount forgiven must be attributable to payroll costs, for the reasons specified in the First PPP Interim Final Rule and SBA’s interim final rule posted on June 11, 2020.”
Owners are entitled to take the smaller of the maximum compensation allowed ($15,385 if opting for an eight-week Covered Period, or $20,833 for a 24-week time frame), or a proportionate amount of their 2019 net income (8/52 if 8 weeks, 2.5 months if 24 weeks).
Is it true that self-employed people who file Schedule C on their 1040 can’t include non-payroll costs in their forgiveness application?
Self-employed people have always been allowed to include such costs in their forgiveness application. What has changed, as of June 17, is the elimination of this language from the third Interim Final Rule (which was published April 14): “it is appropriate to limit loan forgiveness to a proportionate eight-week share of 2019 net profit, as reflected in the individual’s 2019 Form 1040 Schedule C.” They limited it thusly because “allowing such a self-employed individual to treat the full amount of a PPP loan as net income would result in a windfall.” Now, “it is appropriate to limit the forgiveness of owner compensation replacement for individuals with self-employment income who file a Schedule C or F to either eight weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an eight-week Covered Period or 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week Covered Period per owner in total across all businesses.” This appears to relieve the prior limitation on overall loan forgiveness, such that non-payroll costs are additive to owner compensation up to the limit of the loan amount itself. For borrowers with no employees, this change is unlikely to have a material effect, but those with employees now have a possible avenue for additional forgiveness. Further clarification may be forthcoming in subsequent guidance.
If they are paid a salary that is reported on a W-2, then those costs should be captured on the employee pay tab (Pay Cycle 1 Input tab). If they are paid distributions or other non-guaranteed payments which they report on Schedule C of their personal income tax return, then those amounts should be captured in the Owner’s Compensation section.
If a stockholder of a C Corp is paid as an employee of the C Corp, can his salary be included in the calculation of PPP forgiveness?
Yes, that is included as employee pay, not owner’s compensation. In the Forgiveness Calculation Model, you would list this person and their compensation in the Pay Cycle 1 Input tab.
Our owners pay is included in the payroll gross pay totals we received from our payroll provider. If we are supposed to list owners’ pay in Tab 7 of the model, how does that get matched with the amounts listed in the Pay Cycle 1 Input tab? Should we include the W-2 pay to owners paid by our payroll provider in the Pay Cycle 1 Input tab or the Owners Comp tab 7?
Any salary paid to an owner by your payroll provider is presumably reported as W-2 earnings at the end of the year, and as such should be reported on the Pay Cycle 1 Input tab so the amounts entered in a payroll cycle column match the total at the top (as denoted by a $0.00 in the CheckSum cell). The amounts that should be listed in the Owners Comp tab 7 of the model are non-salary amounts that an owner receives that are reported on their Schedule C or as guaranteed payments on a K-1.
Self-employed people are also subject to the $100,000 per year maximum, or $15,833 for the 8-week Covered Period forgiveness application. In the event of a 24-week Covered Period, this maximum increases to $20,833. If a self-employed person filed a Schedule C on their 2019 tax return (meaning that they’re a sole proprietor or a single member LLC), the net profit on the Schedule C for that self-employed person is also used to calculate the maximum allowable payroll cost for forgiveness. The rule allows for 8/52 of 2019 net profit for an eight-week Covered Period, or 2.5 months’ worth of 2019 net profit for a 24-week Covered Period. The 2019 Schedule C is required documentation for loan forgiveness in this instance. The self-employed person is required to use the smaller of the two maximums ($15,833 vs. 8/52 of 2019, or $20,833 vs. 2.5 months of 2019 net profit) in their forgiveness application.
Can General Partners submit retirement plan contributions or health plan premium costs on their forgiveness application?
No. Partners are limited to a pro-rata portion of their 2019 taxable profit found on their schedule K1 multiplied by .9235 to eliminate employer FICA.
No. Owner compensation caps are applied across all combined businesses owned by each taxpayer. Each taxpayer was only eligible for one PPP loan.
Can sole proprietors and Single Member LLCs (SMLLC), those who file Schedule C or F, submit retirement plan costs contributed to their own retirement plan or their health plan premiums on their forgiveness application?
No. Sole proprietors and SMLLCs are limited to a pro-rata portion of their 2019 taxable profit.
Can self-employed owners of S Corporations submit health plan premiums on their forgiveness application?
No. S Corporation owners health plan premiums cannot be submitted for forgiveness.
Can self-employed owners of S Corporations submit retirement plan costs contributed to their personal retirement plan?
Yes. S Corporation owners can submit the employer (corporation) paid portion contributed to their retirement plan.
Can self-employed owners of C Corporations submit retirement and health expense costs in addition to payroll compensation on their forgiveness application?
Yes. C Corporation owners can submit the employer (corporation) paid portion of their retirement and health plans.
Business owners and shareholder/employees put their wages, or earnings from self-employment, on Schedule A, Line 9.
C Corp shareholder/employees put their wages on Schedule A, Line 9.
2019 compensation is found on corporation owners form W2. Partners will refer to schedule K1 reported Earnings from Self Employment. Sole proprietors and Single Member LLCs will find their business Net Profit on form Schedule C or Schedule F.
What is the maximum forgiven payroll compensation amount for a self-employed person? (Please review definition of self-employed person.)
For an eight-week loan Covered Period, a self-employed person may submit the lower of $15,385 or 8/52nd of 2019 compensation. For a 24-week period, the amount is the lesser of $20,833 or 2.5 months (2.5/12) of 2019 compensation.
Who is considered a “self-employed” person for purposes of completing Schedule A, line 9, on the PPP Forgiveness Application?
Self-employed persons, also referred to as “owner employees” in this context, are those who are sole proprietors, Single Member LLCs, General Partners, S-Corp shareholder/employees and C-Corp shareholder/employees.
Disallowed Costs or Costs That Are Not Included in Payroll Costs
No. Those are not taxable wages.
No. Wages included should be earned and/or paid in the applicable loan Covered Period. It would be inappropriate, for example, to prepay fourth-quarter wages in the loan Covered Period.
No. The employer part of Social Security tax (also known as FICA) is not to be included in the expenses for payroll when considering loan forgiveness.
Do I include in payroll costs the amount of benefits costs that I deduct from my employees’ gross pay?
Those costs are already included in their gross pay and should not be deducted from your forgiveness calculation.
Do I include in employer paid benefits costs the amount of benefits that my employee pays that I deduct from their paychecks?
No. In this category, you only include the portion of benefits that are actually paid by the employer. The employee portion paid via a payroll deduction is already included in the employee’s gross pay calculation.
No. The bill should be apportioned between the part that is employer cost, which is covered, and employee cost, which is already included in their gross pay calculated elsewhere. Counting the entire health insurance cost would result in “double-dipping” by counting the employee portion twice.
I have many temporary employees who are part of my business but paid by a staffing agency. Can I include their costs?
No. That is a vendor bill and not an employee payment. You can only include W-2 employees that are on your Form 941 payroll returns.
I am a not-for-profit that receives money in the form of a grant to pay for certain jobs that I have filled. Can I include those wages in my PPP forgiveness?
No, because those wages have been covered and earmarked and will be reported as paid for by another entity, they should not be part of your PPP forgiveness.
I am required to pay union dues each pay cycle that include health insurance and non-health benefits for my union employees. Can I deduct all the union dues?
No. Only include the portion of union dues that relate to employee benefit costs for health, retirement and leave. You cannot include other costs such as membership, apprenticeship or industry advancement costs that may also be part of the union dues you pay.
Many of my salespeople earn commissions during the Covered Period, but they won’t be paid until later. Can I include those accrued commissions as earned by the employee but not yet paid in my forgiveness calculation?
You may include those costs only if the commissions are paid during the next payroll cycle following the end of the Covered Period.
No. The intent of this program is to cover health insurance premiums related to wages paid during the Covered Period and not in other periods.
No. Any amounts that an eligible borrower has paid to an independent contractor or sole proprietor should be excluded from the eligible business’s payroll costs. Those are considered operating expenses.
It seems counterintuitive that payments to temporary agencies are not allowed since the underlying client is the one who is making the true decision and expense with regards to employment. Can you clarify the guidance on this?
Staff provided by temporary employment agencies receive a W-2 from the agency, not from the underlying client. Therefore, they are not employees of the client, do not participate in the client’s benefits programs and do not list the client as the responsible employer if they apply for unemployment benefits. Temp staff provided by an agency are no different than staff working on a client IT project that are provided by a consulting firm. The temp agency is a vendor, like many others contracted by the client. In this regard, temporary agency staff are comparable to 1099 contractors, who are very clearly prohibited from being included in payroll costs per Treasury guidance.
Our company hires temporary staff through a temp agency which we included in the computation of the loan. I was told that we can also include those in our forgiveness expenses. But we see conflicting guidance on whether we can actually include this in the computation of payroll cost for forgiveness. Can you please clarify?
Temp agency staff are not allowed. Anyone employed by a staffing agency is, by definition, not your employee. The PPP loan only covers those you employ, and who will receive a 2020 form W2 from you. If you directly employ part-time staff, include them. Those you co-employ in arrangement with a PEO can be included. Provide a copy of your co-employment agreement confirming that you are responsible for taxes, benefits and other employment matters.
Can I include the costs for workers comp insurance, long-term care insurance or disability insurance?
No. You cannot include workers comp, long-term care or voluntary paid disability insurance.
Forgiveness Reduction Factors
Salary Reduction Calculation
Which employees do I put on Table 1 and which employees do I put on Table 2 of the PPP Schedule A worksheet?
Only put on Table 1 those employees who, during every pay period in 2019, earned less than $100,000 at an annualized rate. Also list any employees hired during 2020 on Table 1 regardless of their compensation. All employees who earned more than $100,000 annualized in any pay period in 2019 go in Table 2.
For each employee, find the maximum amount that they earned in any pay period in 2019 and multiply that gross wage by the number of pay periods that you had in 2019. For example, put on Table 2 anyone who:
- Earned more than $8,333 in any pay period for a monthly payer (12 pay cycles)
- Earned more than $4,167 in any pay period for a semi-monthly payer (24 pay cycles)
- Earned more than $3,846 in any pay period for a bi-weekly payer (26 pay cycles)
- Earned more than $1,923 in any pay period for a weekly payer (52 pay cycles)
Only salary and hourly wage reductions that were greater than 25% need to be calculated for purposes of the Salary Reduction Factor.
No. You only count the portion that was greater than the 25% cut. So, in this example you would only use 5% (30% minus 25%) and not the full 30%.
Overtime pay is paid to hourly employees. For those employees, you use the employee’s standard average hourly wage (e.g., $20.00 per hour) as the basis for determining a reduction, such that any reduction that exceeds a 25% cut (e.g., standard hourly wage reduced from $20.00 per hour to $14.00 per hour) must be included. Overtime becomes relevant after this step when you multiply the value of the reduced hourly wage beyond 25% (in this example, the difference between $15.00 and $14.00, or $1.00) by the average number of weekly hours during Q1 2020 (which may have included overtime hours). For salaried people, bonus compensation is not included for purposes of the salary reduction. The calculation is looking at salary on an average basis during the Covered Period versus average salary during the baseline period and comparing the two.
Compare the average salary or hourly wage paid to each employee during the Covered Period with the average salary or wage that they earned during the first quarter of 2020 from January 1 through March 31.
If we fired an employee during the loan period, but replaced them, do we have to take a salary reduction penalty for the employees we let go, even though our employee count remained constant?
While there is no specific guidance yet issued on this point, our interpretation is no. Employees who were fired for cause are excluded from the FTE reduction calculation if the position was not backfilled — they get listed at the bottom of Table 1 on the Schedule A Worksheet. If the position was backfilled, then there is not a significant impact to the number of FTEs. It follows that this should be the case for the Salary Reduction Factor as well, in consideration of the spirit of the CARES Act. However, we expect future guidance will be issued to clarify or correct this interpretation.
When looking at Step 1 of the Instructions for the PPP Schedule A Worksheet to determine if pay was reduced more than 25%, both line A and line B say to enter the hourly wage during the Covered Period. That seems to be asking for the wage per hour versus the total of all wages. We did not change anyone’s hourly rate but did reduce weekly hours from 55 to 40 hours per week. In comparing 1Q20 versus the Covered Period, are we looking at overall wages OR the hourly rate a person was getting during that time regardless of the number of hours?
Correct, it asks for “hourly wage”, meaning the rate per hour that you pay. Because you did not lower anyone’s hourly rate during the Covered Period as compared to Q1 2020, there is no Safe Harbor necessary or available to you. Furthermore, you had no employees with their hourly wage reduced by over 25%, so you will have no reduction factor to apply. On the other hand, had you actually had some employees whose average rate per hour did decline by more than 25%, then you would need to go through the Safe Harbor calculation (to see if you have that available to you), and if not, you’d have to go through the Salary/Wage Reduction Factor calculation which is where the impact of your Q1 overtime hours would show up — In this calculation, you multiply the amount of the hourly rate that exceeds a 25% reduction by the average hours worked during Q1, not during the Covered Period.
I’m confused about the salary reduction calculation. We cut pay 40% starting May 1, but if we restore those cuts before December 31, are we okay?
The actual amount of loan forgiveness depends in part on whether the average salary or hourly wage of certain employees (those under $100,000 annualized in every 2019 pay period, or anyone hired in 2020) during the Covered Period or Alternative Payroll Covered Period was less than during the first quarter of 2020. If the average during the Covered Period was more than 25% lower for any employee, the Salary Reduction Factor applies. There is a Safe Harbor available, but it only is available if the average salary or wage was lower during the period of February 15 through April 26 than the individual employee’s pay was at February 15 AND the borrower restores the salary/hourly wage levels back to the February 15 level by the earlier of either December 31 or the date that the application is submitted to the lender. This calculation needs to be performed for each employee individually, not in the aggregate. A similar Safe Harbor provision exists for restoring FTE cuts. Again, the salary/wage reduction Safe Harbor applies only to those employees who earned an annualized rate of pay of $100,000 or less during every single pay period in 2019 or were hired in 2020.
Does the Salary Reduction Factor only include 2019 employees, or do we also have to include employees hired in 2020 in the calculation?
Include any employee hired in 2020 in Table 1 for the calculation, regardless of their compensation level.
Is the Salary Reduction Factor based on the average salary for all employees or is it calculated for each employee?
You have to calculate both the Salary Reduction Factor and the Safe Harbor for each employee, not in the aggregate across all employees.
No. An employee who was laid off and not backfilled goes into Table 1 of the Schedule A Worksheet at the bottom as an FTE Reduction Exception, which means you do not have to calculate a Salary Reduction Factor for those exceptions.
We know that employees who receive legitimate offers of employment and choose not to return do not count against the employer’s FTE count, but we also need to return payroll dollars to February 15, 2020 levels. How will that be calculated to qualify for forgiveness?
An employee who refused an offer to return to work goes into Table 1 of the Schedule A Worksheet at the bottom as an FTE Reduction Exception, which means you do not have to calculate a Salary Reduction Factor for those exceptions.
If employees are paid hourly, is the reduction based on their hourly rate? So, if they worked more hours in Q1 than in the Covered Period but had the same hourly rate, do we have to calculate a reduction percentage?
The Salary Reduction Factor is calculated using a reduction in the hourly rate for non-salaried employees. In your example, you would not be required to calculate a reduction percentage because the hourly rate did not decline by more than 25%. Any hourly rate reduction that is larger than a 25% reduction (meaning they were paid less than 75% of their baseline hourly rate) needs to be included in the Salary Reduction Factor calculation. The math requires that you take the amount of the hourly rate that is beyond the threshold (e.g., for a 30% cut from $20/hour to $14/hour, you would use $1/hour — the difference between the actual cut and the allowable 25% cut to $15/hour) and multiply this by the average number of paid hours during Q1 2020, then multiplying this product by the number of weeks in your Covered Period (either eight or 24).
You are missing the distinction between payroll costs and the Salary Reduction Factor. Both use $100,000, but for different purposes. For payroll costs calculations, you are correct that compensation is capped at $100,000 on an annualized basis (either $15,385 or $46,154 depending on the length of your Covered Period). For the Salary Reduction Factor, the $100,000 threshold applies to annualized 2019 pay in any one or more payroll periods and determines whether you need to include or exclude that employee from the calculation. It is unrelated to the payroll costs calculation.
For Salary Reduction Factor calculation purposes, you need to list every employee in Table 1 because they were hired in 2020. If any of them experienced a pay reduction of more than 25% as compared to Q1 2020, then you will need to calculate the reduction for those employees.
For Salary/Wage Safe Harbor, if my overall wage is restored by the December 31, 2020 date because we hired new employees (employees who were laid off were no longer available), can we still qualify for the Safe Harbor?
The Safe Harbor is not a function of your overall wages. It is calculated on an employee-by-employee basis.
Somewhat. The basic math is still the same, except at the very end where any employees who are subject to the factor would have their average weekly reduction multiplied by 24 weeks instead of eight weeks.
Why do we need to enter the payroll from January 1, 2019 to the Covered Period, if the baseline we chose is January 1, 2020 to February 29, 2020? What is the relevance of the extra data?
The 2019 data is necessary to determine which employees earned more than $100,000 in any single pay period, so they can be properly placed in either Table 1 or Table 2 of the Schedule A Worksheet for purposes of calculating the Salary Reduction Factor.
To confirm, if we had a $200,000 officer who took a 50% reduction in pay, his reduction will be $25,000?
No for two reasons. First, highly compensated individuals (over $100,000 annualized in any pay period in 2019) are excluded from the Salary Reduction Factor calculation; in other words, you can cut those people as much as you want with impunity as it relates to your forgiveness application. Second, your math is off even if you did need to include this person — a 50% reduction would make their pay $100,000, which is $50,000 less than the allowable reduction threshold of $150,000 (a 25% cut from their baseline pay), not $25,000. Furthermore, you are using annual amounts of pay; the Salary Reduction Factor calculation actually looks at the amount of the reduction during the Covered Period only.
When calculating FTE, we do not use overtime hours, as I understand it, but do we use overtime dollars when calculating the reduction in payroll?
The Salary/Wage Reduction Factor calculation uses the average hourly wage paid to the employee, without regard for overtime wages. However, if an employee does have a reduction beyond the 25% threshold, you would multiply that excess reduction in the hourly wage by the average weekly paid hours for the employee during Q1 2020, which does include any overtime hours they worked in the quarter.
We have a commission-only employee (no hourly wage or salary) who earned considerably less during the eight-week Covered Period than during the first quarter of 2020. Am I correct in presuming this will count as a salary reduction when calculating loan forgiveness?
No, that is not a correct presumption. If the employee’s commission rate stayed unchanged, but the outcome was lower because they failed to meet the first quarter performance levels on which the commission is based, it would not qualify as a Salary/Wage Reduction. Conversely, had the employee performed at an equivalent level but you lowered the commission plan so that the payout was less, that would trigger the Reduction Factor (if the rate dropped by more than 25%).
One of our payroll cycles included a special one-off payment for an employee. Does that one week’s pay have to be considered in whether to put that employee in the over $100,000 earnings category?
Yes, but let’s be clear about what you are asking. If you are asking for purposes of the Salary Reduction Factor, a person who is paid bi-weekly that received an amount greater than $3,846 in any single pay period in 2019 would be considered an “over $100,000” person — but ONLY for the Salary Reduction Factor. Do not confuse this $100,000 rule with the $100,000 maximum compensation cap. They are different rules that operate differently, but just happen to use the same line of demarcation. If you are asking whether that person has exceeded the $100,000 maximum compensation cap based on this one payroll, that is not the correct test. If you choose an eight-week Covered Period, the test is not what happens in any given payroll, it is what happens across the entire eight weeks — the total they could be paid for forgiveness purposes is capped at $15,385, regardless of how that amount was distributed across the eight weeks. The same holds true for a 24-week Covered Period, except the maximum amount there is $46,154 instead.
Does a wage reduction in excess of 25% for hourly employees mean the hourly wage is increased by more than 25%?
As it happens, “reductions” are the diametric opposite of “increases”. A wage reduction in excess of 25% means that the employee was paid at a rate that was less than 75% of what their hourly wage had been previously. That means their pay went down. Conversely, if their hourly wage was increased by more than 25%, that means their pay went up. Since what we are talking about here is the Salary Reduction Factor, we only want to focus on people who had a reduction. There is no Salary Increase Factor that you have to calculate for forgiveness, though any such employees would likely be happier.
Is it correct to say that the wage and salary reduction factor is not applicable if you have furloughed or reduced days for employees, so long as you have NOT reduced wage rates or salary rates?
If you have not reduced the hourly rate of pay or the salary of an individual, then the Salary Reduction Factor does not apply, even if you reduced hours. This factor looks only at rate of pay per unit of measure (rate per hour or salary per year) to determine if the factor should apply. Any furloughed employees, however, will bring the separate FTE Reduction Factor into play.
We are a licensed childcare program which has been required by various government agencies to severely limit our enrollment. We have maintained our entire staff at their full rate of pay from when we were ordered closed through June 30. To determine if we qualify for the “EZ” loan forgiveness form, what is our look back period to determine if we are maintaining employees at 75% of their wages, and when does the active evaluation period end? Are we able to reduce staff hours more than 25% at this point without jeopardizing loan forgiveness?
The test you are referring to is the second criterion in the instructions for using Form 3508EZ. There, you must meet two sub-tests to qualify: 1) you did not reduce rate of pay by more than 25% during the Covered Period compared to the Q1 2020 average; and 2) you did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of your Covered Period.
The “active evaluation period” in both sub-tests ends with the final day of your Covered Period. After this date, you are permitted to take whatever steps necessary for your business needs without impacting loan forgiveness. Keep in mind, though, that there is a difference between “rate of pay” and “hours worked” — you seemed to combine those two concepts in your final question. Any reduction in hours means an FTE Reduction if it occurs during the Covered Period, and there is no 25% grace amount available on this reduction factor like there is on the Salary Reduction Factor.
FTE Reduction Factor
An FTE is defined as 40 hours worked per week.
No. Not even in France or Italy.
No. An FTE is 40 hours per week. This employee would be considered a 0.9 FTE.
No. Employees need to work 40 hours per week to be considered an FTE.
Why do employees have to work 40 hours to be considered full time? On the ADA anything over 30 hours is considered full time.
The SBA has chosen to abide by the prevailing wage and hour laws and defined an FTE as 40 hours, regardless of what the ADA or ACA defines as full-time work.
Do employees who take unpaid vacation during the Covered Period reduce the FTE calculation since they were working less than 40 hours per week?
Yes. You must calculate their total hours worked and paid (up to 40) during the Covered Period and divide by the number of weeks to get the average hours per week, then divide this amount by 40 to determine the individual’s FTE.
Forgivable expenses include qualified expenses both incurred and paid in the loan Covered Period. In addition, guidance allows costs that were incurred prior to loan funding but are paid during the Covered Period to be included (“paid but not incurred in the period”). This applies to costs from the immediately contiguous period prior to funding, not to pre-existing liabilities from earlier periods. Further, costs that are incurred before the end of the Covered Period but not paid until after it ends are also eligible to be included (“incurred but not paid in the period”). However, to include any costs “incurred but not paid”, the borrower must pay those costs in the next immediate billing cycle following the end of the Covered Period and provide evidence of payment in their supporting documentation.
FTE stands for “Full-Time Equivalent” employee. In the PPP program, full-time is defined as 40 hours of work per week. Any employee paid a salary is considered one full-time equivalent unless they are on a reduced hours program where their salary is reduced accordingly (e.g., an employee with a salary of $83,200 asks for a reduced schedule of 30 hours per week instead of 40, and their salary is reduced accordingly to $62,400 (75% of $83,200)). Such employee would be considered a 0.75 FTE because of the reduced standard hours, even if they worked more than 30 hours some weeks due to business needs.
If you have no “part-time employees,” then your FTE count is simply 1.0 times the number of employees you have, because presumably everyone is paid a straight salary every pay period regardless of hours worked.
What does it mean if an expense is allowed but not forgiven? Isn’t that the same thing or does “not allowed” indicate a future penalty or something?
Interest payments on non-mortgage debt obligations are “allowed” by Section 1102, paragraph 36(F)(i)(VII) of the CARES Act, which is part of the section that originated the PPP program. However, those payments are not included in the list of “forgivable” expenses by Section 1106, which details the forgiveness aspect of the law. Therefore, they are “allowable” but not “forgivable”. The fact that these particular costs may not be included in forgiveness does not suggest there will be future penalties associated with spending PPP funds on them; it just means you will need to pay the money back as part of the loan repayments.
Our work week is 35 hours and we consider that full-time. Do we still need to use 40 hours as an FTE?
Yes. The definition of FTE for purposes of the forgiveness application is a 40-hour work week; however, you are also calculating FTEs in a baseline period for comparison in the FTE reduction calculation. In both cases, if an employee worked 35 hours in the baseline period and 35 hours in the Covered Period, they would equal each other at 0.875, or rounded to 0.9 FTEs, which would not result in a reduction.
Since we have seasonality in our business, a Q1 2020 baseline comparison doesn’t make as much sense as a Q1 2019 comparison or the annual average from 2019 (which was the basis of the loan amount anyway). Can we just use either of those alternatives as the baseline for comparison for forgiveness?
No. For calculating the FTE Reduction Factor, you must compare your average FTEs during your Covered Period with the most favorable prescribed baseline period: either February 15 through June 30, 2019 or January 1 through February 29, 2020. Seasonal businesses may alternatively elect a consecutive 12-week period between May 1 and September 15, 2019. You may not use Q1 2019. The calculations you made to determine the loan amount are irrelevant to the forgiveness calculations.
Only to the extent that the number of employees you listed on your loan application should match the number that you put on your forgiveness application on the line “Employees at time of loan application”. Any calculations you did for your loan application are not relevant to your forgiveness application because they focused on “average 2019 monthly payroll”, which is not used anywhere in the forgiveness application. Now, the focus is on FTEs, not employees, with one exception: FTE Reduction calculation criterion #1, which states “If you have not reduced the number of employees or the average paid hours of your employees between January 1, 2020 and the end of the Covered Period,” you can be exempt from the FTE Reduction Factor.
That was the correct calculation to do for your loan application. It is irrelevant to your forgiveness calculation because you’ll use FTE, not headcount. On the forgiveness application itself, you will be asked to provide headcount at the time you applied for your loan. The SBA is asking for this data simply as a verification that the number of staff comply with the PPP general limitation of 500 or fewer staff.
We overstated the number of employees on our loan application because we included independent contractors by accident. Will this create an FTE reduction for us?
No. Your FTE Reduction Factor calculation definitely should not include independent contractors, only W-2 employees. Compare the average W-2 FTEs during your Covered Period with the average W-2 FTEs you had during the prescribed baseline period, disregarding any independent contractors. The fact that you included them erroneously when you applied for your loan is not relevant to this calculation.
We had four employees in 2019 but laid off one of them in October 2019. Does the laid off employee need to be listed in the forgiveness model? Note, this laid off employee was not in the loan application documentation.
Yes, you will need to consider the impact of the laid off employee in your FTE Reduction Factor calculation, as the employee affected your FTE count during the baseline period of February 15 through June 30, 2019. Remember, you have the option of choosing that period as your baseline or the period of January 1 through February 29, 2020, when that employee did not affect your FTE count. Choose the more favorable period.
No. It is supposed to be 2019. This is one of the baseline periods used in the FTE Reduction Factor.
Is the initial date of February 15, 2020 for FTE measuring the only start date that can be used, or can a later date be used?
For measuring your FTEs, you use your Covered Period which begins on the date your loan funded. For purposes of determining if you qualify for Safe Harbor from the FTE Reduction Factor, the baseline date is February 15, 2020 and that is not optional.
In calculating FTEs, what payroll periods should I use if they don’t match up perfectly to the required dates?
You are to use the payroll that includes the specified dates, such as February 15, 2020 or April 26, 2020.
For employees who quit during the Covered Period, the FAQ says to exclude them from the baseline reference period. Do we also exclude them from the FTE calculation during the Covered Period?
You are to match up the numbers so as not to get any advantage or disadvantage. If you remove them from the baseline period, remove them from the Covered Period, and vice versa.
In determining the FTEs, not all employees that now work for the firm worked here during the baseline period. Do I only account for those who worked during that time that are still with the firm, which would make our baseline much smaller?
In calculating FTEs during any period, use the people employed at the time. FTE comparisons use an aggregation of people, not necessarily the same people. For example, if a business had one full-time employee in 2019, that person resigned in early 2020 and the business replaced the person, the business still has one full-time employee for comparative purposes.
Can I use the calculation method for part-time employees to determine FTEs if they work more than 20 hours per week and use the 0.5 simplified method for any part-time employees who work less than 20 hours per week?
No. You can only use one method.
Can I use one method for the Covered Period and a different method for the baseline period for purposes of comparing my FTE reduction calculation?
No. You may only use one method for both periods.
No. You have to use an FTE count in this analysis for forgiveness. Headcount is not the same as FTE count.
Do I calculate FTE by taking the total hours worked across the entire Covered Period and dividing by the number of weeks? Or do I use only the last week of the period? Or something else?
Something else. You can only use a maximum of 40 hours per week for each employee, so overtime does not count. Total those hours and divide by the number of weeks in your Covered Period to get the average work week. Take this number and divide by 40 to get the FTE calculation for each employee.
Using the reference period January 1 to February 29 to calculate FTE, I have one employee on payroll for only one week within this period. Do I count this individual as FTE?
Yes. Calculate the FTE equivalent as one week out of the 8.6 weeks, which is a 0.1 FTE for the baseline period.
We have been paying all of our employees, whether they are working or not. Are we able to designate employees as full time even if we aren’t entering their time as hours worked?
Yes, enter those employees as full-time, assuming you are paying them for the equivalent of a 40-hour work week.
FTE is not the same as dollars. If you did not reduce their hours you still have your full FTE count. However, if you reduced both their hours and their pay you would count them as 0.8 FTE.
If I hire more people and didn’t reduce any wages, do I have to fill out the salary and hourly wage reduction and FTE reduction calculations in the application?
Yes. Do not leave this section blank. You would simply put a 1.0 indicating Safe Harbor was met on line 13 of the Schedule A, and you would put zero on line 3 in Schedule A for the salary and hourly wage reduction and check the box in the line 3 text.
What about the employees I hired during the Covered Period? Can I use the money that I spent on them for payroll costs in my forgiveness calculation?
Yes. You do not have to have the same people; you just need to have the same number of FTEs.
If we select the 24-week option, our spend will significantly exceed the loan amount we received. Therefore, if we have an FTE reduction of 25%, we will still end up with a total greater than our loan. Will this be acceptable?
No. You cannot claim forgiveness greater than your loan amount. Forgiveness relates solely to how you spent the PPP loan proceeds, not to how much you spent in aggregate on payroll and other authorized uses in 24 weeks, regardless of source. In your situation, clearly you will have spent all the PPP funds, along with a significant portion of operating funds you held independently from the PPP funds. You can’t claim forgiveness on your use of non-PPP funds. In this example, your gross forgiveness amount would begin with the total loan amount received, against which the FTE Reduction Factor would be applied, netting you 75% forgiveness.
We have employees who were part-time before, during and remained so after our Covered Period. Will that create a deduction in forgiveness because they are working less than 40 hours?
Not likely. Part-time employees during your Covered Period will be calculated at either the actual FTE level (such as 0.8 FTE) or the simplified FTE level (where all part-time staff are counted as 0.5 regardless of how many hours they worked on average). The same approach you use to calculate this numerator must be applied to your calculation of the denominator during your baseline period as well. So, if your part-time employee worked a steady 24 hours per week in both the baseline and covered periods, they will count as 0.6 FTE in both — hence, no reduction. If, on the other hand, hours for the employee were less in the Covered Period (say, 16 hours per week, or 0.4 FTE), then that employee would create a reduction in your total FTEs by 0.2 assuming you used the actual FTE calculation and not the simplified method.
If we reduce hours by only 20% for our staff to aid in cost savings, will that impact our forgiveness amount?
Yes. Remember, it is the Salary Reduction Factor that allows a decrease of up to 25% without penalty. The FTE Reduction Factor, which is calculated based on the hours worked and not the pay given, does not have such a feature. Even a 1% reduction in FTEs will lower your forgiveness amount.
Yes. All employees, regardless of role or exempt status, must be included in the FTE calculation.
Do we still need to include in our FTE calculation employees that were laid off, terminated or quit prior to March 31?
Yes. Though they will not be counted in your Covered Period (the numerator in the FTE Reduction Factor) because the PPP program did not yet exist at March 31, they will need to be counted in your baseline period (the denominator) of either February 15 through June 30, 2019 or January 1 through February 29, 2020.
This employee would need to be considered in your baseline period FTE calculation. However, for purposes of the Safe Harbor rule that can eliminate the FTE Reduction Factor, this person would not factor into that calculation as they were terminated before the look back date of February 15.
For the FTE Reduction Factor calculation, this employee would be counted in your Covered Period FTEs assuming they stayed with the company through the period — so they would count in the numerator. They also would have a fractional impact to your baseline period if you selected the January 1 through February 29, 2020 period as your baseline, because they were employed by you for the final 12 days of that period. For the Safe Harbor calculation, this employee would not be counted in your February 15 look back baseline (the denominator), but they would be counted in your average FTE count during the period of February 15 through April 26, 2020 (the numerator). For the Salary Reduction Factor calculation, they would be included as a Table 1 employee regardless of their compensation level because they were hired in 2020, so any reductions they took would have to be considered.
You are allowed to exclude from your FTE baseline any employee who, during the Covered Period, was fired for cause, resigned and was not replaced, or asked for and received reduced hours. You may also exclude any employees who rejected a written offer to restore a prior reduction in hours to prior levels (assuming pay was also offered to be restored to prior levels). Finally, you are also allowed to exclude anyone who was an employee at February 15, 2020, was subsequently laid off, rejected a good faith written offer to be rehired, and you were unable to hire similarly qualified employees for the unfilled position on or before December 31, 2020.
What happens if the number of our FTEs are the same, but the employees during our Covered Period are completely different people?
The FTE Reduction Factor looks only at numbers, not names. In this example, there would be no reduction.
In the webinar, it was stated that one of the baseline periods for the FTE Reduction Factor is February 15 through June 30, 2019. Are you saying this is 24 weeks? This is actually only 20 weeks. 24 weeks would be February 15 through July 31, 2019.
You are confusing different aspects of the program. If you elect it, the 24-week feature relates only to the amount of time in 2020 in which to spend your PPP loan funds. The 24-week time frame does not factor into any other calculations, including the FTE Reduction Factor. The baseline period stated for 2019 is correct.
If you did not lower payroll costs according to the Salary Reduction Factor calculation or reduce the number of employees between January 1, 2020 and the end of your Covered Period, you are entitled to use the Form 3508EZ to apply for forgiveness, so long as you also can demonstrate that you meet the test of not reducing average paid hours of your employees during the same time period. While specific guidance has not yet been issued on this last test and is expected, it is quite possible that this “average paid hours” test must be determined on an employee by employee basis and not in the aggregate across the entire business. There is also no guidance yet issued to indicate the specific time period to compare a “reduction” of average paid hours against, nor for how long a reduction needs to be in place to qualify as a reduction (for example, if someone worked 38 paid hours in the third week of May, does that count as a reduction thereby nullifying use of the EZ form?). If you are unable to meet all of the tests above, you should calculate your FTEs. The average number of FTEs is not the same as the average number of employees unless all employees were full-time in both the baseline and covered periods and there were no reductions or increases.
We hired two people as full-timers during the Covered Period who subsequently returned to their former jobs within weeks of coming to work for us. Can I count them as full time, or should I treat them as part time? If part time, can I use the “0.5” FTE method for them to determine FTE?
Since they were hired as full-time employees, you would count them among your FTEs as such. Had you hired them as part-timers, you could have chosen to count them as either 0.5 or a calculated fractional FTE.
Our FTE on February 15, 2020 was 28. The current FTE is 27. One person left us voluntarily, and we laid off one person, all during February. In March, we laid off another full-time person, but we rehired that employee during the Covered Period. I assume that the person who voluntarily resigned will reduce our previous headcount so that it matches our current head count.
Let’s be clear about what you are asking: to calculate any FTE reduction, you compare the average FTEs during your Covered Period with the average FTEs during either February 15 through June 30, 2019 or January 1 through February 29, 2020. Your FTE count at February 15, 2020 has no bearing on this part of the calculation. Where the February 15, 2020 date becomes relevant is in qualifying for Safe Harbor from the reduction calculation above. If what you are asking is whether you qualify for the Safe Harbor rule based on your circumstances, it is difficult to assess due to the timing of the events. You state only that you had a resignation and a layoff in February; if the resignation happened prior to February 15, 2020, it does not qualify you for an FTE exception. If after February 15, 2020, then it would, thereby reducing your February 15 FTE baseline to 27 since you did not backfill the position. Separately, because you laid off an employee in March, you reduced your FTE during the February 15 through April 26, 2020 period, which makes the Safe Harbor potentially available to you. The key now becomes whether you have restored your FTE count to the February 15 level as of the earlier of the date you file your forgiveness application or December 31, 2020.
If a company lost a contract in March/April 2020 and the employees working on the contract transferred over to the new company that took over the contract, will that reduction still affect the FTE calculation?
Yes. The number of FTEs during your Covered Period was likely reduced as compared to your chosen baseline period in the FTE Reduction Factor calculation. The reason you outlined does not qualify as an FTE Exception.
We have not done any payroll reductions so far but are now contemplating a possible reduction through year-end. Even with this reduction, our payroll over the 24-week period will far exceed the loan amount. Is there anything else we need to review to make sure we still maximize the forgiveness percentage?
Your payroll costs over 24 weeks may exceed your loan amount, but that does not preclude you from being affected by the FTE Reduction Factor. Keep in mind that total payroll costs over the 24-week Covered Period can only exceed the loan amount if you paid for the excess portion yourself and did not use PPP money to do so (since you’d already exhausted the PPP funds). The government is not asking how you spent your own money, only how you spent theirs. You can’t get forgiveness for spending your own money, nice as that would be. So, assuming you do these contemplated reductions during your 24-week Covered Period — which means prior to September 17, 2020 for any borrower who was funded the day the PPP program opened (April 3, 2020), or later than that if funded after April 3, your forgiveness amount will be subject to being reduced based on a lower number of FTEs compared to your chosen baseline period.
This is the borrower’s choice. You may do the average calculations on each FTE to determine the FTE count of your part-time employees or you may simply adopt 0.5 for each part-time employee and total those. Choose the larger of the two for your FTE reduction calculation.
I had an employee go out on disability and another one take maternity leave. Does that count against me as an FTE reduction?
There is not specific guidance that has been issued to date in either the FAQs, the IFRNs or the loan forgiveness application itself that specifically addresses disability and maternity leaves. It is possible that these qualify as “voluntarily reduced hours” but that is not clear. We expect additional guidance to be forthcoming.
I had an employee resign. I tried to replace them during the Covered Period but did not succeed in finding a qualified candidate. Will this count against me as an FTE reduction?
No. In the case of an individual fired for cause or who voluntarily resigned, it will not count against you if the position was not filled by a new employee. In such case you should enter the position as an FTE reduction exception at the bottom of Table 1 and count the FTE value in Box 2 only if the person who left earned less than $100,000 on an annualized basis during any single pay period in 2019. You may also exclude any employees who rejected a written offer to restore a prior reduction in hours to prior levels (assuming pay was also offered to be restored to prior levels). Finally, you are also allowed to exclude anyone who was an employee at February 15, 2020, was subsequently laid off, rejected a good faith written offer to be rehired, and you were unable to hire similarly qualified employees for the unfilled position on or before December 31, 2020.
I had several employees who went out on leave under the Families First Coronavirus Relief Act. Do I have to count those people as reduced FTEs?
No, you do not. You would put those down as FTE reduction exceptions at the bottom of Table 1 in Box 2, so long as those people earned in any pay period in 2019 an annualized amount less than $100,000.
I had to terminate two individuals for cause during the Covered Period. Does that count against my FTE reduction?
Any employees who were fired for cause or voluntarily resigned and were not backfilled during the Covered Period will not count against your FTE reduction calculation. You should enter those positions as an FTE reduction exception at the bottom of Table 1 for Box 2 if during any period in 2019 they did not earn an annualized rate greater than $100,000.
If payroll was reduced because people resigned, but were not laid off, does that affect forgiveness?
The FTE Reduction Factor specifically excludes from the baseline period any FTEs who were fired for cause, resigned and were not replaced, or asked for and received a reduction in their hours (which we believe includes FMLA leaves). The Salary Reduction Factor also excludes such employees by listing them at the bottom of Table 1 of the Schedule A Worksheet with no reduction listed.
Our business had to change direction to save the company, so when we re-hired, we brought in different kinds of talent than we had before the layoff. Does that affect our FTE Reduction Factor?
The FTE Reduction Factor does not discriminate between the individuals or the types of jobs; it only counts noses, no matter whose nose it is.
What documentation is needed to substantiate a legitimate decrease in the number of FTEs, such as people not wanting to come back due to fear of exposure to COVID-19 or lack of sufficient business activity to require the employee?
For employees who were laid off or furloughed and refused, for whatever reason, to return to work, you need to have both the offer to be reinstated (preferably, a formal offer letter) and their refusal in writing. In the case of insufficient business activity, you should be able to show a significant decrease in revenue or other relevant operating statistics during the Covered Period as compared to the same period in the prior year.
If we elect to take the eight-week period, are we precluded from using the “unable to return to business activities” excuse for reduction in FTEs?
No, you are not precluded. Because the test is for sanitation, social distancing, or any other safety requirement related to COVID-19 to have been established or guidance issued by the Secretary of HHS, the Director of the CDCP or OSHA during the period beginning on March 1 and ending December 31, 2020, the eight-week Covered Period clearly falls within this applicable time frame. To be clear, however, restrictive requirements issued by health departments or other government officials at the state, county or city level do not meet this test; only federally issued mandates apply. However, if a lower level governing body implemented a restrictive requirement and based their decision in part on guidance from one of the federal agencies listed, that will meet the test so long as you can provide written documentation to that effect.
Does the FTE reduction exclusion for being unable to restore business because of social distancing apply if our business has declined because most of our customers are “unable to return to business activities”?
This is a tricky one and likely to be interpreted differently by different reviewers. By the letter of the law, your customers clearly have an exclusion available to them because they are unable to return to business activities. However, your business does not face that hurdle — you are able to work, you just don’t have sufficient work as you once did. Our interpretation would be that this does not meet the exclusion test as defined, but again, this is subject to potential future guidance.
We have a small office of five employees. Two employees left the company of their own will. Do we need to replace them in order to get loan forgiveness?
No, in the broadest sense as you posed the question. Loan forgiveness is not solely a function of the number of your employees; that merely modifies your loan forgiveness amount. As it relates to just the FTE Reduction Factor calculation, if you replace them, you would count your FTEs accordingly. If you do not replace them during the Covered Period, either because you are unable to find suitable replacements or you simply don’t have sufficient work to justify hiring replacements, then you will be allowed to exclude the two positions from your FTE calculation.
Yes, you would need to document both the offer and the refusal in writing to show that you attempted to fill the position but were unable to do so.
Do we get penalized on forgiveness for employees who went on FMLA (birth of child) or pregnancy disability (i.e. non-COVID or business-related reasons)?
Though FMLA is not specifically addressed in the forgiveness application or guidance to date, it is a reasonable interpretation to include FMLA in the exclusion category of “asked for and received a reduction in hours”, in this case to 0 hours. Thus, you would not be penalized.
I have two employees who asked for and were granted reduced work schedules during the Covered Period. Does that count as a headcount reduction?
Any employee who voluntarily requested and received a reduction of their hours does not count as an FTE reduction. You should list them at the bottom of Table 1 on the line that says “FTE reduction exceptions” in Box 2 and include their average FTE prior to the reduced work schedule going into place. For example, they worked 32 hours per week on average normally, but following their voluntary reduction they were down to 16 hours a week. You should enter 0.8, or 32/40 in Box 2 for that employee.
Effect of Layoffs/Furloughs
We will have spent all our PPP money during our initial eight-week period that ends on June 14. Based on this would it be safe to make staff reductions as of June 15? Or do we need to wait until June 30 or December 31?
You would be safe to reduce staff on June 15 without impact to your forgiveness calculations. Staff reductions that occur after the end of your Covered Period are permitted.
If your initial eight-week Covered Period ends before June 30 and you have exhausted your PPP funds, any layoffs after June 30 will not affect your forgiveness calculations. Under the new rules of the Flexibility Act, if you elect to use the full 24 weeks available to spend your PPP funds, employee reductions after June 30 will impact your FTE and Salary/Wage Reduction Factors subject to possible Safe Harbor qualifications by the earlier of the date you submit your forgiveness application or December 31.
If we elect to take the 24-week Covered Period, does that mean we have to keep our head count for the entire Covered Period or risk the reduction because of lowered FTE?
Yes. The numerator in the FTE Reduction Factor calculation specifically uses the average FTEs during the Covered Period, whether eight weeks or 24 weeks. However, if you choose to apply for forgiveness prior to the end of your Covered Period, the clock apparently stops on this issue. Though no guidance has yet been issued to clarify the FTE calculation impact of filing early, it does appear impractical to determine what average FTEs may be at a future point in time subsequent to filing the forgiveness application. This may change with new guidance.
We will run out of PPP funds at approximately 16 weeks and will have to furlough people. What effect will this have on our forgiveness?
If you choose the eight-week Covered Period, it will have no effect because the reduction occurs after the end of the period. On the other hand, if you choose the 24-week option, it will reduce your average FTEs during your Covered Period and have a resulting negative impact to your forgiveness total unless you file your forgiveness application before you furlough the employees.
No. The FTE Reduction Factor looks only at average FTEs during the Covered Period as compared to a prior period. It does not consider any changes after the Covered Period.
Our prior Covered Period of eight weeks has passed, and the funds have been exhausted. All funds were used entirely for payroll. Now, we need to layoff some employees due to reduction in business. This will reduce the FTE count. How does this affect the PPP loan forgiveness with the extended Covered Period?
If you have used all PPP funds during the eight-week period, there is no advantage to elect a 24-week Covered Period. To the contrary, there is actually a disadvantage to do so for this very reason. Any layoffs that take place after the Covered Period will not affect your FTE Reduction Factor calculation. If you opted for the eight-week window and did the layoffs afterwards, you will not have your forgiveness reduced for this reason. But if instead you chose 24 weeks, any reduction during the 24 weeks will negatively impact forgiveness unless you filed your forgiveness application before the reduction.
Our baseline FTE is 95 and our Covered Period FTE is 110. Can we lay off 5 people without it impacting our forgiveness amount?
Simple math would say that 110-5=105, which is greater than 95. The requirement for not triggering the FTE Reduction Factor is that the ratio be 1.0 or greater. In this case, it would be greater than 1.0. Also, remember that the Covered Period FTE calculation is the average of the entire period, so if you were at 110 for most of the period and only dropped to 105 toward the end, your average would be somewhere between 105 and 110.
If we followed the rules and paid our people through our eight-week Covered Period with no reductions in salaries or staff, but now need to reduce staffs, will this affect our forgiveness prospects?
You are allowed to take whatever employment actions you need after your Covered Period has ended, without ramifications to your FTE Reduction Factor calculations.
Yes, it counts. Furloughs and layoffs are given equal treatment in the Paycheck Protection Program for purposes of the FTE reduction calculation.
Safe Harbor for Forgiveness Reduction Factors
I reduced my staff on May 1 and my Covered Period began May 5. After receiving my PPP funds, I hired my staff back on June 1 and kept them through December 31. Does that give me Safe Harbor?
No. The Safe Harbor only applies to the calculation related to FTEs from February 15 to April 26, 2020 being less than FTEs at February 15 and is unrelated to the dates of your Covered Period. Those are the only dates that apply to Safe Harbor.
Yes, so long as your FTE count between February 15 and April 26 on average is less than your FTE count at February 15.
If we chose to proceed with the eight-week option, do we have to continue with staff levels until December 31 or June 30 for Safe Harbor?
If you did not have any FTE reductions during your eight-week Covered Period, you are not required to maintain staff levels until either June 30 or December 31; you may make whatever changes you deem necessary after your Covered Period without affecting your forgiveness amount. That said, if you did have an FTE reduction during your Covered Period such that you need Safe Harbor, the June 30 date is no longer available for Safe Harbor purposes. The key dates now are December 31, 2020 and the date you submit your forgiveness application to the lender. By the earlier of those dates, you will need to have restored any FTE or salary/wage reductions back to the level of February 15, 2020 in order to qualify for Safe Harbor (assuming that you had reductions during the February 15 to April 26 period as compared to February 15).
Between February 15 and April 26, 2020, we did in fact have lower FTE than at February 15, however at the end of our Covered Period on June 11, our FTE count was the same as February 15. With the Safe Harbor date change from June 30 to December 31, can we use the June 11 FTE numbers to qualify for Safe Harbor?
To qualify for Safe Harbor, you will need to use your FTE numbers based on the earlier of the date you submit your forgiveness application to the lender or December 31, 2020. Do not use the FTE total as of the end of your Covered Period to determine if you have Safe Harbor.
If we have a project that temporarily bumps the FTE count above the baseline period for more than one pay period, does that qualify for restoring the FTEs before December 31?
No. Current rules are that the restoration will be determined based on your FTE count as of either the date you file for forgiveness or December 31, 2020, whichever is earlier. It does not matter if you restored before either of these dates, only if you have restored at the earlier of these two specific dates. Nothing yet has been issued that indicates there is any minimum amount of time required to have restored FTE levels in order to get Safe Harbor.
As it applies to the FTE Reduction Factor calculation, yes, so long as your FTE count is back to its February 15, 2020 level and you have not yet filed your forgiveness application.
If we furloughed 35 employees and brought them back, plus hired another 20 employees within that 24-week period, will that be factored in?
Yes. This action would affect your Safe Harbor calculation and, assuming it met the February 15 test, eliminate any FTE Reduction Factor calculation.
If our company has a reduction in FTEs since the quarantines began, what options do we have as to the actual date we need to return to that same FTE total?
To qualify for Safe Harbor, you will need to restore your FTE total by the earlier of the date you submit your forgiveness application or December 31, 2020.
Our loan funded on April 16 and we will most likely exhaust our funds with our next payroll cycle on June 16. Since business has not picked up at all, we will need to furlough an FTE. What date can we do the termination and be able to fully forgive their payroll without getting disqualified because we let them go too early?
If you choose an eight-week Covered Period, that ended on June 10. Your June 16 payroll cycle is past the Covered Period, meaning you would only be able to get forgiveness on the amount you incurred through June 10. You would be free to furlough the employee at any time after 6/10. If you determined that you needed the entire cost of the June 16 payroll, then you would have changed the picture significantly: your 24-week Covered Period will run through September 30 and any furlough you do during those 24 weeks will impact your FTE Reduction Factor unless you file your forgiveness application prior to the furlough. Model this carefully.
If I needed to increase my FTE by one, is it as simple as hiring a full-time employee the day before June 30?
If you’re asking for purposes of qualifying for Safe Harbor, the June 30 restoration date is no longer in play; that date has shifted to December 31, or the date you file for forgiveness if before then. But yes, the application currently asks for the FTE count as of the earlier of those two dates. No guidance has yet been issued to indicate there is any minimum time frame for maintaining a restored number of FTEs to get Safe Harbor. On the other hand, if you are asking for purposes of calculating any FTE reduction, then hiring one day before the end of your Covered Period will have minimal effect. The reduction calculation uses average FTEs over the course of the Covered Period, not at a single point in time.
If my 24-week period ends in August and we furloughed employees for three months but will rehire most of them after the end of our Covered Period, will the Safe Harbor still apply?
To begin with, a 24-week period ending in August would mean that you got funded no later than March 17, 2020, but since the program didn’t open for applications until April 3, 2020, your 24 weeks don’t end in August. That said, the Safe Harbor from the FTE Reduction Factor holds that you may qualify only if one of the following is present:
- The business was able to document that it was unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020, by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19. (Note: interpretive guidance on these rules is discussed elsewhere in these FAQs.)
- You reduced your FTE levels between February 15, 2020 and April 26, 2020 as compared to the level you employed at February 15, 2020, and you restored to the February 15 level by the earlier of the date you apply for forgiveness or December 31, 2020.
Two important items to note in the second test: you do not qualify for Safe Harbor if you reduced your FTEs after April 26, 2020 but held them constant between February 15 and April 26, and the dates are not dependent on your Covered Period but rather the date you apply for forgiveness if during 2020.
The Safe Harbor rule for FTE reduction applies only to the average FTEs that a borrower had between February 15 and April 26 and compares that number to the FTEs that the business had during the February 15 pay period. If the average during the February 15 to April 26 period is less than the February 15 FTE amount, then the Safe Harbor applies if the February 15 FTE count was restored no later than December 31.
Safe Harbor for Demonstrating Need for the Loan
I borrowed more than $2 million. I understand that means I will absolutely be audited, but what do I need to do to prepare for that?
You need to be prepared to show your rationale for the original loan application, because you certified that you had a need for the funds due to economic uncertainty. Separately, you should also gather and keep all the documentation necessary to substantiate your use of funds because that is a separate audit which you’re also likely to undergo. You need to keep all of this documentation for six years.
I’m over the $2 million loan. I had other sources of borrowing available to me. Would I be eligible for partial forgiveness?
This is really a question of whether you were eligible for the money in the first place. This is subject to review by the SBA and if they determine the borrower lacked “necessity” for the PPP loan, then all forgiveness will be eliminated. Conversely, if “necessity” is deemed met, then all standard forgiveness rules apply.
In determining need for our PPP loan that was over $2 million, will payment of 2019 S-Corp distributions after the end of the Covered Period be perceived negatively by SBA?
It is unclear what the SBA will evaluate in their assessment of need for these larger loans. They have given no guidance of any kind on what meets the “sufficient liquidity” test, other than to single out large companies with access to public markets.
The $2 million Safe Harbor rule applied only to the certification of need for the loan at the time that you applied for the loan. That Safe Harbor rule does not apply to any review or audit that may be conducted on the use of funds during the Covered Period or subsequent forgiveness calculations.
Applying for Forgiveness
Borrowers have 10 months from the end of their Covered Period to apply for forgiveness.
If I’ve used the funds within my eight weeks, do I have to wait until December 31 to apply for forgiveness just so I can see if we can restore our FTEs?
No. You can elect to use the eight-week Covered Period.
Yes, you can, but understand that your Covered Period election is still 24 weeks.
If we use the 24-week Covered Period, we should be more than able to justify 100% forgiveness of our loan amount with our payroll costs only. Can we then reduce our application paperwork and submit only payroll costs, not interest nor utility costs?
Yes, but it’s unlikely your paperwork will be reduced much. You will still have to list your staff, one at a time, to show that you did not reduce wages. You will also need to provide FTE calculations, unless future guidance indicates otherwise.
In the most current loan forgiveness application on the SBA website, the Schedule A worksheet asks for “cash compensation” but should that include health insurance and retirement costs as well?
No. Review the entire application, particularly Schedule A, where all payroll costs are calculated. Line 1 and line 4 ask for cash compensation from the tables. Lines 6 and line 7 on Schedule A ask for employer portion of health insurance and retirement costs. If using the EZ form, there is no Schedule A worksheet and all payroll costs, including health insurance and retirement costs, should be listed on line 1.
You can find the main and the EZ application, along with instructions for both application forms and all Interim Final Rules, on the Treasury Department website: https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses
A borrower qualifies to use the EZ form if any one of the three conditions below applies:n
- The borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and had no employee costs included in the calculation of their loan amount.
- The borrower has no employees who meet the Salary/Hourly Wage Reduction Factor requirement AND had no reductions in the number of their employees or the average paid hours of employees between January 1, 2020 and the end of the borrower’s Covered Period.
- The borrower has no employees who meet the Salary/Hourly Wage Reduction Factor requirement AND was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.
There are several important nuances to note in each of these:n
- In the first criterion, the test essentially is no employees in 2019 and none at the time of loan application either. The loan at that point was one for owner replacement compensation only.
- The second criterion raises several interpretation questions that future guidance must clarify. The Salary Reduction test is clear. The second part of the test requires no reductions in employees or average paid hours since the beginning of the year. If an employee resigns and it takes the business four weeks to replace them, does that qualify as a “reduction” since it happened during the time period? If a single employee takes two hours of unpaid time to see a doctor, such that they were paid for only 38 hours that week, is that a “reduction” in average hours paid? What time period, specifically, is a borrower to compare the “average paid hours since January 1, 2020” against to know if there was a reduction?
- “The same level of business activity” in the third criterion is also undefined to date. What is clear is that the “inability to restore” business means the inability to recover from a reduction, not simply experiencing a reduction. It is also important to understand that “during the Covered Period” means throughout the period, not just reduced at a point in time. Also be aware that this test appears to be limited solely to requirements issued at the federal level, meaning restrictions placed on businesses at the city, county or state level will not meet this test unless those lower level restrictions relied in part (and in writing) on guidance issued by one or more of the three federal agencies.
The SBA has promised additional guidance that hopefully will clarify these important eligibility questions.
We kept all employees on at the same hourly rate and they could work their normal 40-hour weeks, but some took a little unpaid time off and did not get the full 40 hours paid during a given week. Are we now not eligible for the EZ forgiveness application?
This is a good question for which we await additional guidance from the SBA. There has been no clarification around the words in the EZ form qualifications to date. A literal reading of the second qualification criterion would suggest that any unpaid time off — no matter how little the amount — would count as a reduction in the average paid hours of employees. The other challenge with properly interpreting this criterion is the use of the word “average” when the criterion is “no reduction in average paid hours between January 1, 2020 and the end of the Covered Period.” It is open to interpretation, and hopefully subsequent guidance, whether one is to calculate the average paid hours each week and study the trend, the average paid hours of the entire period and compare to some unnamed prior period, or what exactly.
I only have two employees who would be under the $100,000 cap for any pay period. Each of these employees only missed a few hours total during the entire eight-week loan period and therefore did not have their pay or hours reduced by more than 25%. Are we okay to use the EZ Application?
This is a good question for which we await additional guidance from the SBA. First, let’s be clear that qualifying to use the EZ Form is not based solely on employees making under $100,000. That rule applies only to whether there was any Salary Reduction Factor — the first part of both the second and third criteria. From the facts presented, it would appear there is no risk of triggering the Salary Reduction Factor as it is unlikely that their pay would have been reduced by over 25% by missing a few hours. However, the FTE Reduction Factor, which is the second part of the second criterion, has no “grace amount” — any reduction at all will trigger that reduction factor. A literal reading of the second qualification criterion would suggest that any unpaid time off — no matter how little the amount — would count as a reduction in the average paid hours of employees.
During the FTE Safe Harbor period, our FTE count declined due to a termination for cause and a disability. Then, during our Covered Period, another employee went on maternity leave. Everyone else remained at their full hourly pay rate and hours through depletion of the PPP funds. Can I use the 3508EZ form based on the following circumstances for my company?
Assuming the facts described, yes. The employees who departed each qualify as an “FTE Exception” for purposes of Safe Harbor. Because you say there were no reductions in pay, both factors required to meet the second qualification criterion appear to be met. However, you must be able to demonstrate that there was no reduction in average hours paid for your other employees, or you will not meet this test.
If a borrower did NOT reduce salaries or wages in excess of 25%, can they apply for early forgiveness when their PPP money runs out?
A borrower can apply for forgiveness when their PPP money runs out, regardless of whether you had pay reductions. “Early” application does not rely on not having Salary Reduction Factor impacts. The key thing to understand is that, if you do choose to apply prior to the end of your Covered Period, any Salary Reduction Factor calculations must use the full 24 weeks and will not be cut off because you ran out of PPP money earlier.
I have three questions about qualifying to use the EZ loan forgiveness application using the second certification criterion. First, this requires that we “did not reduce number of employees or the average paid hours”. Does “number of employees” refer to FTEs or actual headcount? Second, does use of the word “or” mean the borrower can qualify with either of these or does he have to quality with both? Third, this certification also puts the time period as “… between January 1, 2020 and the end of the Covered Period”. When is the end of the Covered Period?
To the first question, the answer is number of employees equals actual headcount. It is not “FTEs”. For your second question, we will need additional SBA guidance. Use of the word “or” can be construed in either way you mention; preliminary interpretation suggests that “both” are required, but this is by no means a definitive interpretation. Finally, the end of the Covered Period is the date either 56 days or 168 days from the date the PPP loan was funded.
If we request forgiveness before the end of 24 weeks, do we measure FTE and hourly wage reductions as of the time of the forgiveness application or do we have to wait until the end of the 24-week period?
This is a good question for which we await additional guidance from the SBA. The opportunity to file an application prior to the end of the Covered Period emerged as an aside in the middle of guidance not specifically related to this important topic. The only discussion connected early forgiveness to having to use the entire Covered Period for calculating the impact of the Salary Reduction Factor. It was silent on the FTE Reduction Factor. However, the Standard Form application does request information in both categories as of the earlier of either December 31, 2020 or the date the application is filed in order to determine potential Safe Harbor. Keep in mind that this application form was issued prior to the surprise notice that a borrower could file early, so we anticipate future guidance and possible changes in this.
To be clear, we are not permitted to provide you any recommendations regarding actions you should or should not take. Such decisions must be made by you or in consultation with your professional advisors. The criteria for qualification to use Form 3508EZ are spelled out in the Instructions link on the Treasury website as well as elsewhere in these FAQs.
Does answering “no” to the inability to operate during the forgiveness period question disqualify a company from using the EZ Form?
Not necessarily. That simply disqualifies a company from using Form 3508EZ based on the third criterion outlined in the Instructions. There are two other possible ways to qualify to use the EZ form, which are spelled out in the Instructions directly above the third criterion you mention.
That would qualify as an FTE Exception, so you would meet the second sub-test in the second criterion of the EZ Form qualification tests. However, you must also meet the first sub-test in that criterion that you did not reduce annual salary or hourly wage of any employee by more than 25% during the Covered Period as compared to Q1 2020.
If we satisfy all the requirements but did not use up all the PPP money, can we still use the EZ Form?
Yes. There is no requirement in the EZ Form qualifications that you have spent all PPP funds you received.
Is there consensus as to filing for loan forgiveness as soon as possible or waiting until the end, as the SBA might be inundated with applications and might approve with a less stringent audit process?
The choice is yours as the borrower. Speculation as to actions the SBA may or may not take is simply speculation and not to be relied upon.
The bank will provide you a very specific list along with instructions for completing the application for forgiveness near the end of your Covered Period. According to the instructions for the forgiveness application produced by the SBA, on page 6 there’s a complete list of documents that each borrower must submit with the application as well as other documents that the borrower must maintain but is not required to submit. On the EZ form, this list is found on page 4. This documentation includes support for payroll costs, including tax forms such as a 941, as well as documentation for FTE calculations and all non-payroll costs.
Auditability of the Loan
Our payroll accounts are at a different bank than the one holding the PPP money. Do we need to show bank transfers that have the funds going out of the PPP account directly to the payroll account, or can we just show our payroll records to document our allowable uses of the PPP funds without showing the actual bank transfers?
You need to be able to show a clean audit trail of the use of funds. While direct bank transfers are not required, they do provide a clear path. Absent such transfers, you will need to provide the payroll records and demonstrate that you did not use the PPP funds for unauthorized purposes.
If we paid non-payroll costs from our general account, can we just transfer amounts from our PPP loan account at a later date to show that PPP money ultimately paid for the expense?
Yes. Just remember you’ll need to show copies of the invoices paid, and evidence the cash was actually disbursed and received by a payee. Provide an audit trail from invoice to payment.
I’ve heard that a best practice for a business is to keep the PPP money in a separate bank account. Is this required, or could I just put my money into a separate cash account in my general ledger and keep track of it that way?
It is not required to set up a separate bank account to hold your PPP money. You can keep track of it in your accounting records to provide a clean audit trail.
If we don’t have a salary or FTE reduction, can we get forgiveness for utilities and mortgage interest?
Yes. The reduction factors potentially reduce total forgiveness but do not specifically block forgiveness for non-payroll costs. Assuming your salary costs are at least 60% of the total amount forgiven, you’ll have up to 40% of the amount forgiven left to allocate to other non-payroll allowable expenses.
If the basis of the original PPP loan was payroll/health insurance only, can you later claim other expenses (utilities, postage meter, copier) for forgiveness purposes?
Yes. The loan can be used for other, specifically listed, non-payroll expenses up to a certain amount. Note that postage would not be an allowable expense, but a lease on a postage meter machine would be allowable.
Given the 24-week period, we may spend two or three times the amount of the PPP loan in forgivable expenses. Can we start out with a gross forgiveness amount of, say, 150% of the PPP loan amount, and have the reduction factors subtract from that 150%, so that we still could get 100% of the loan forgiven?
No. You cannot claim forgiveness greater than your loan amount. Forgiveness relates solely to how you spent the PPP loan proceeds, not to how much you spent in aggregate on payroll and other authorized uses in 24 weeks, regardless of source. In your situation, clearly you will have spent all the PPP funds, along with a significant portion of operating funds you held independently from the PPP funds. You can’t claim forgiveness on your use of non-PPP funds.
After the 24-week period, I will have spent 100% of the proceeds on payroll and payroll related costs. Should I still submit the costs for rent and utilities in my forgiveness application?
You’ll still need to fill out the application, but it’s possible those other expenses won’t be necessary, or even applicable to increasing your forgiveness. However, you will want to be certain that you have calculated all payroll costs and forgiveness properly if you choose to skip including the non-payroll costs.
If we opt for the 24-week period, and exhaust all loan funds prior to the end of 24 weeks (say by week 12), do we need to continue tracking/outlining all covered expenses?
With the ability now to file for forgiveness when you’ve exhausted the loan funds, you may stop tracking such expenses once you have filed your forgiveness application.
If economic uncertainty changed during the course of the application process and/or eight-week period, does that affect eligibility for forgiveness?
Maybe, depending on your loan size. The SBA has deemed that any borrower with a loan under $2 million automatically had uncertainty, so in this case you are fine. However, if your loan was over that mark, the SBA has said they will audit all such loans for proof of economic uncertainty at the time of loan application. If they conduct that audit and find that the case for economic uncertainty was insufficient, then they may reject all forgiveness.
At the time we applied for a PPP loan in April, we had guaranteed funding only until May 10 and had no way of knowing whether it would be extended beyond that date. Since then, our funding has been extended twice with no gaps. Are we at risk of failing the economic uncertainty test?
If your loan was less than $2 million, you’re fine. If larger, you will need to be able to document the uncertainty you indicate you had. Given what you describe, it is reasonable to conclude that you had sufficient uncertainty, but the SBA is the arbiter of that and they have not provided any guidance as to what constitutes “necessity” for the loan or how much available liquidity was enough or not enough. We continue to hope for guidance on this important issue.
If we pick the 24-week option and use all our funds for payroll only, and there has been no reduction in any employee’s pay, will there be 100% forgiveness?
Possibly. It depends on whether you had any reduction in your average FTEs during the Covered Period as compared to the baseline period, and whether you qualify for Safe Harbor in the event that you did have a reduction.
In the webinar, the forgiveness calculation examples for ABC Co. and XYZ Co. included three potential forgiveness figures, of which the lowest would be the forgiven amount. Since one of these forgiveness figures was based solely on the payroll costs, does this mean that rent and utilities can never be included in the final forgiven figure?
This “proportionate rule” that is based solely on payroll costs is used to determine the allowable amount of non-payroll costs in situations where payroll makes up less than 60% of total spend. By “grossing up” the actual payroll costs (dividing by 0.60), the borrower is able to determine the amount of non-payroll costs — such as rent and utilities — that are allowed to be forgiven (in other words, the difference between the grossed-up total and the payroll costs themselves).
We already repaid $2 million of our PPP loan. Now it appears that our forgiveness will calculate to about $300,000 more than we still have outstanding. I believe I heard it said that we can receive that extra amount back along with our forgiveness amount. Is that correct? Can we choose just to ask for forgiveness for the outstanding amount of our loan?
Wherever you may have heard that, it is not correct. You cannot get forgiveness for more than your outstanding loan amount, which is net of your payback. That would be the equivalent of giving you the money twice, the first of which you refused by paying it back. That decision cannot be unwound at this point.
Deductibility of Expenses
No. At this time, these expenses will be added back to taxable profit in the tax preparation process.
By not allowing the expenses to be deducted on our taxes, doesn’t the IRS position effectively make PPP forgiveness taxable?
No. Forgiven loan proceeds are not taxable. Therefore, by adding back the forgivable expenses paid, this a net-zero tax effect.
The forgiven loan proceeds are not taxable as income.
Length of the Covered Period
While the extension is intended to enable businesses to spend more of their loan proceeds, for many sectors of the economy shut-downs or slow-downs may persist through much of the rest of year. In such instances, it is quite possible that a business that has maintained its employees through the eight weeks may be unable to sustain those employees for the full 24 weeks. This could result in a layoff midway through the 24 weeks that will cause the FTE Reduction Factor to reduce their overall forgiveness, which could have been avoided had they chosen the eight-week option.
There is no rush to make this decision. Borrowers have 10 months after the last day of the loan Covered Period to submit the application for forgiveness, and only on the application itself do they need to declare their choice. Banks do not require any advance notice or approval of this election.
Can we choose a Covered Period between eight weeks and 24 weeks (for example 16 weeks) to use the PPP funds? Or is it just either eight weeks OR 24 weeks?
Borrowers can select a Covered Period of either eight or 24 weeks and those are the only specified options. Understand that this does not preclude a borrower from filing their forgiveness application at some point between eight and 24 weeks, but this does not change the definition of your Covered Period — it will always be 24 weeks in this scenario.
If it takes me 12 weeks to expend all my loan funds, do I have to measure my FTEs over 24 weeks? Or can I match the FTE calculations against the time it takes to use all the funds?
The average FTE calculation will apply to the entire 24-week Covered Period, unless you file your forgiveness application before the end of the 24 weeks. This is a complicated answer, and more guidance may be forthcoming.
Yes. Borrowers can elect to use the 24-week period for any PPP loan regardless of funding date.
Borrowers will notify the SBA of their election via the loan forgiveness application. Nothing needs to be done now to elect it.
If we aren’t happy with the eight-week forgiveness approval we receive, can we change our forgiveness period from eight to 24 weeks afterwards?
No. Evaluate both options and select the most advantageous Covered Period before submitting your application.
The final day of our Covered Period is today. With the changes in the program, do we need to have spent the money by today or spent it and pulled it out of the designated account that holds the PPP funds?
You will need to demonstrate that you actually used the PPP funds, so for a cleaner audit trail you would want to show that you reimbursed your payroll account with PPP funds.
I have approximately $55,000 left over after the eight-week period. Am I able to use up the remaining funds for payroll since the time frame was extended to 24 weeks?
Yes. That was the whole point of the extension to 24 weeks.
It looks like about 75% of our loan will be forgivable, which covers 10 weeks of payroll. Since you said not to be in a hurry to apply for forgiveness, do we now just sit tight and see what develops over the next few weeks/months?
To be clear, we are not permitted to provide you any recommendations regarding actions you should or should not take. Such decisions must be made by you or in consultation with your professional advisors. We can point out, though, that you have 24 weeks in which to spend your PPP money, not just 10. If what you are saying is that you will have spent all of your funds in 10 weeks, but due to the reduction factors you will only get 75% forgiven, you have the choice to file for forgiveness now or at any time until 10 months after your Covered Period ends (which may be in the future even if you’ve already spent all your money — remember, your Covered Period is 24 weeks (unless you opt for 8 weeks), regardless of when the PPP money runs out).
We would like to opt for the 24-week Covered Period option but expect to complete the spend in 11 weeks with the full loan amount spent on payroll. How do we officially advise the bank that we wish to opt for the 24-week period, and will we be allowed to complete the spend in less than the 24 weeks?
You do not need to advise the bank of which Covered Period you elect — either eight weeks or 24 weeks. You simply note your choice when you file for forgiveness. And yes, you complete spending the PPP money when you run out of it. You don’t have to try to stretch it to run out exactly at the 24-week mark.
Start Date for the Covered Period
We received the PPP loan, but we’re not open for business. Can we change the start of our Covered Period to be the date when we are officially open?
No. You have the money. You cannot change the loan funding date, which is when your Covered Period officially begins regardless of business status. The Flexibility Act addresses this situation: it may be beneficial to elect the 24-week loan Covered Period and take the time to rehire.
The Covered Period begins on the day of funding. February 15 has no relationship to any borrower’s Covered Period, only the various Safe Harbor rules.
When does the Covered Period begin, the loan date or the funding date? Our loan is dated May 1, but we were funded May 7.
The Covered Period begins on the day of funding, regardless of the date the documents were prepared or signed.
In your case, your weeks are Friday through Thursday for either eight or 24 weeks beginning the Friday that you received your PPP funds.
Our PPP loan was received on April 13, 2020. Our first payroll was paid on April 24, 2020 which covers the period from April 6 through April 19. Is the 24-week start date April 6 or the paycheck date of April 24? If it starts on April 6, the 24 weeks would end September 11, 2020, right?
First off, 24 weeks from April 6 actually is September 20, 2020. That said, neither April 6 nor April 24 are correct start dates for your 24 weeks. Your 24-week Covered Period started on April 13, the date you received your funds. Your Covered Period ends September 27. If you chose to use the Alternative Covered Period for your payroll costs only (because this choice is not available for non-payroll costs), your first date for payroll costs would be April 20, the date that your first full pay cycle inside your Covered Period begins.
Yes. The 60/40 rule applies to all loans regardless of funding date or length of Covered Period.
The joint statement issued by the SBA and Treasury on June 8 states: “If a borrower uses less than 60 percent of the loan amount for payroll costs during the forgiveness Covered Period, the borrower will continue to be eligible for partial loan forgiveness, subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs.” What happens if we don’t hit the 60% threshold?
You will still be eligible for partial loan forgiveness. If you do not spend at least 60% of the loan proceeds on payroll expenses, your forgiveness amount will be reduced by limiting the amount of non-payroll costs that are forgiven until the 60/40 ratio is achieved.
Do the revised repayment rules — after the bank receives forgiveness dollars from the SBA — only apply to new loans made after July 5, or all PPP loans? If for all PPP loans, what about the repayment terms in the promissory note I signed (payments starting in month seven)?
This revised repayment rule applies to all loans regardless of when they originated (and for what it’s worth, the date for “new” loans is June 5, not July 5). If you have any questions about your loan documents, you should contact your loan officer.
We received a PPP loan of about $520,000 in late April. About $200,000 of this loan came from 1099 employees, which we now know should not have been included so most likely we will not meet the 60% threshold. Do we have the option to pay back the $200,000 (1099 employee part) now, and reset the amount used in the forgiveness calculation to $320,000 so we can meet the 60% threshold? If not, do you suggest to just convert the loan to a two-year or five-year loan?
No, paying back the portion of the loan earmarked for unauthorized 1099 contractors will not help you meet the 60% threshold. That said, understand that forgiveness calculations apply the 60% threshold to the amount you spent, not to the amount of the loan itself. So, if you did not spend the extra $200,000 and instead only spent $320,000, your payroll costs threshold will be $192,000 (60% of $320,000). Assuming you hit this mark, all of the $320,000 would be forgivable if you had no other reductions. This would leave the unspent $200,000 as remaining principal on your loan. This would be required to be paid back within two years of your loan origination unless your bank agreed to extend the term to five years. This requires mutual agreement; you can’t simply declare a different term. Of course, there is no pre-payment penalty, so if you opted instead to simply return the remaining $200,000 after you received forgiveness, you would owe nothing. Finally, though, be aware that your loan amount eligibility may be challenged by the SBA upon review, as you erred when including 1099 contractors and so technically filed a fraudulent loan application. Should this occur, you likely will have your forgiveness amount reduced significantly.
When will we be required to start paying back our remaining loan amount? I’d like to submit our forgiveness calculations 30 days prior to avoid more work.
Borrowers who have a portion of their loan remaining after forgiveness will be required to start repaying once the forgiveness process is completed, meaning when the bank receives the forgiveness amount from the SBA and can apply it to your loan.
If we elect the 24-week forgiveness period, will we be obligated to start paying on the loan prior to getting forgiveness?
No. Payments will commence after the loan balance has been determined and the forgivable amount has been deducted from the principal.
On a two-year repayment term, does the first payment of the note start after the loan forgiveness application has been processed and total loan forgiveness has been defined?
Yes. Your lender will notify you of your payment obligation as soon as the forgivable amount has been approved by the SBA and the bank has received the forgiveness funds from the SBA to lower your outstanding principal.
Yes, the interest on the entirety of the loan begins accruing at the time the loan was disbursed to you. The SBA will pay the accrued interest to the lender on the amount that is forgiven when they complete the forgiveness process. The borrower will be responsible for all accrued interest on the unforgiven portion of the loan, regardless of when repayments begin.
Are there any restrictions on the use of any money that I have leftover during the remainder of the term of the loan?
Based on the terms of the PPP Flexibility Act, 60% of all loan proceeds need to be used for payroll costs, which includes any loan proceeds that are left over after the Covered Period and the forgiveness. There has been no guidance yet issued as to the use of the remaining non-payroll funds.
Yes. There are no prepayment penalties if you prefer to prepay the balance.
Any money not spent during the Covered Period will convert into the remaining principal of your note which amortizes at one percent over two years (five years for new loans issued after the enactment of the PPP Flexibility Act, beginning June 5, 2020). For loans issued prior to enactment of the Flexibility Act, it is up to the borrower and lender to agree to extend the terms beyond the original two years to as long as five years. You will not be required to make any payments against the note until the date the forgiveness amount has been reimbursed from the SBA to the lender. Note that the lender has a 60-day window to render a forgiveness decision once the borrower’s application has been received, and the SBA has an additional 90 days to finalize the forgiveness and reimburse the bank following the lender’s decision process.
Payroll Tax Deferral
The form we received from our payroll provider to defer payroll taxes includes a note that penalties will be assessed by the IRS on taxes not deposited once the PPP loan is forgiven. Does this mean the date we receive notice the PPP is forgiven, or will it go back to the last day of the eight or 24 weeks? I also found this on the IRS website: “Employers that received a Paycheck Protection Program loan may not defer the deposit and payment of the employer’s share of Social Security tax that is otherwise due after the employer receives a decision from the lender that the loan was forgiven. (See FAQ 4).”
You can safely ignore both of those advisories. The PPP Flexibility Act (H.R. 7010, Section 4(a)) abolished this rule by striking this paragraph that was in the original CARES Act: “EXCEPTION. — This subsection shall not apply to any taxpayer if such taxpayer has had indebtedness forgiven under section 1106 of this Act with respect to a loan under paragraph (36) of section 7(a) of the Small Business Act…”
Yes. All businesses can defer the employer portion of Social Security payroll tax, regardless of whether they have a PPP. Remember, the payroll tax deferral is not the same as the PPP. It’s a separate CARES Act benefit under section 2302.
If a business with a PPP loan closes down, can that company continue to defer all the payroll taxes through 2020?
No. If an employer account is being shut down, and the payroll returns are being designated “final,” the tax will be due at that time.
When your quarterly form 941 is filed, there will be a place to notify the IRS of the amount that you are deferring and paying on the later due dates.
If you use a payroll service, you’ll need to notify them of your election to defer so they can make the adjustment. If you do payroll on your own, you’ll book the liability as you always do, but you won’t pay it. You’ll let the liability accrue on your balance sheet through December 31, 2020. No election needs to be filed with the government.
As a cash basis taxpayer, are the payroll taxes still deductible in the year they are incurred if they are not paid (i.e. deferred)?
No. As a cash basis taxpayer, you’ll deduct expenses when paid. You’ll book this as a liability and at tax time your tax CPA will adjust.
Does the deferral ever have to be repaid? It says deferral which means pay later, so I am confused.
Yes, this tax is due later. 50% is due December 31, 2021 and 50% is due December 31, 2022.
If I do not need to take advantage of the tax deferment for financial purposes, should I still take advantage of it? It is eventually going to be due.
You are effectively paying the bill before it’s due. It is your choice if you wish to continue to do so or to elect the deferral.
We use ADP so taxes are filed under their tax ID. ADP is debiting our account for ER FICA. Is there a way for us to defer those taxes?
If you are using ADP in a “PEO” capacity, then you are a co-employer. You must notify them that you want to elect to defer those taxes. They will ask you to sign a document regarding your understanding that the deferred taxes are going to be due December 31, 2021 and December 31, 2022, and that you understand your responsibility to pay.
It includes the employer portion of OASDI, commonly known as Social Security tax, not the Medicare portion. For clarity, that is 6.2% up to a wage limit of $137,700 in 2020.
Other CARES Act Loans
No, so long as you use the EIDL money for different purposes than you used the PPP money.
If the $10,000 EIDL grant (the advance, not the EIDL loan) is used exclusively for rent and utilities and the PPP loan is used exclusively for payroll, why would the PPP loan amount that is forgiven be reduced by $10,000?
In the instructions to the new loan forgiveness application, on page two it reads: “Line 11: Enter the smallest of lines 8, 9, or 10. Note: If applicable, SBA will deduct EIDL Advance Amounts from the forgiveness amount remitted to the Lender.”
Yes. You can get an EIDL loan provided you use the EIDL loan proceeds for different purposes than you use the PPP loan proceeds.
Am I eligible for Title IV, also known as Main Street loans, if have a PPP loan and when can I get one?
Yes. You should be eligible for Title IV or Main Street loans.
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May 28, 2020 Disclaimer for Paycheck Protection Program (PPP) loan and forgiveness information provided by Armanino LLP:
Information regarding the Paycheck Protection Program (PPP) shared by Armanino LLP exhibits Armanino LLP’s interpretation of the PPP loan regulations, application, forgiveness and process, as of the date hereof. All information and guidance regarding PPP loan and forgiveness is for convenience purposes only. The information provided is subject to change, based on PPP regulations updates, however Armanino LLP is not obligated to update or supplement any shared PPP loan and forgiveness information following the date hereof or beyond.
Those applying for the PPP loan and forgiveness are responsible for concluding qualification, completing the application and providing correct and required information to their lender based on PPP regulations and requirements. Eligibility and whether the information provided is correct is the borrower’s responsibility. In providing this FAQ resource, Armanino LLP is not acting as the applicant’s advisor or preparer, as the application and information provided is the applicant’s responsibility. All advice, guidance, and information provided by Armanino LLP is solely for informational and convenience purposes only.
Armanino LLP cannot guarantee forgiveness of a PPP loan. Forgiveness is not granted automatically; the borrower is responsible for requesting forgiveness of the PPP Loan. The borrower is required to provide the requisite documentation and ensure compliance of PPP regulations and certify that the forgiveness amount qualifies per those regulations. The borrower is also responsible for compliance with such further processes, procedures and requirements that their lender may require. All amounts that do not qualify for forgiveness will remain the responsibility of the borrower. The lender will rely upon the borrower’s certifications in all requirements and compliance.
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