How on earth does PPP Loan forgiveness work?
Congress passed the CARES Act several weeks ago, and so far, over 5,400 lenders have approved a whopping 3.9 million Payroll Protection Loans through the Payroll Protection Program.
Even so, the CARES Act text is unclear about how the finer details of loan forgiveness will work. The Small Business Association (SBA) and the Treasury Department have not yet provided guidance on the subject, leaving many business owners confused and eagerly seeking enlightenment.
Our Finance Department has carefully read the act and discussed it with our most trusted business colleagues. Together, we've compiled guidance that will keep our communities working in the right direction.
We’ve based our reading on what we consider sound and reasonable judgment. Keep in mind the SBA and Treasury Department could release guidance at any time. Trust Allevity to update you immediately should they do so.
Is forgiveness for payroll costs based on when the costs are incurred, or on when they are paid?
- Section 1106 of the CARES Act refers to forgiveness and states both "costs incurred and payments made." This is a confusing construction. Is it "incurred" or "paid" or both?
- Every other reference to payroll costs refers to them as "payments."
- SBA loan qualification guidance refers to payroll costs as "compensation." Someone is compensated when someone is paid.
- Therefore, to be safe, be sure all payroll costs you want to be forgiven are paid within your 8-week period.
I have a semi-monthly pay schedule. I only have three paydays in my 8-week period. My forgiveness payroll costs will be understated. What should I do?
- Given the absence of guidance from the SBA and Treasury, it is a reasonable interpretation to reflect 8 weeks of payroll activity in this situation.
- Therefore, we recommend moving up your last payday so that it falls within the 8-week period. This will better reflect your true payroll costs for that period.
Some of my employees are collecting unemployment and don't want to or can’t come back to work. What do I do?
- Given the wide variety of circumstances, this isn’t a black and white question. There is no one answer. We recommend you contact your HR Representative or a labor attorney to discuss alternatives specific to your situation.
- We also recommend you carefully document these conversations with your employees.
What happens if I can't pay 75% of my loan in payroll?
- That means a portion of your loan will be unforgiven—but don’t worry. That portion can still be used to support your bottom line by offsetting qualified expenses.
- The amount of your forgiveness will be proportional to your payroll costs.
- You will be required to pay back the unforgiven portion, at a 1% interest rate, over the life of the loan.
- PPP Loan = $140k
- Payroll costs during 8-week period = $75k
- Loan forgiveness max = $100k
- Up to $25k in other eligible expenses can be forgiven
- Loan to be repaid with 1% interest = $40k
Some of my employees make more than $100,000 per year. Should I cap their salaries at the $100,000 rate during the forgiveness period?
- Continue to pay them their normal rate during the forgiveness period unless you reduce their salaries for other reasons.
- However, the same payroll cost calculation formula that determines the maximum amount of your PPP loan is also used to determine your forgivable payroll costs.
- Therefore, only the portion up to the $100,000 cap is eligible for forgiveness.
When does the 8-week period for calculating loan forgiveness begin?
- It begins on the date your lender funds your loan.
I understand forgiveness is reduced if my number of full-time-equivalent employees or my average wage decreases. How are these calculated?
- The SBA has not specifically defined the formula for calculating these values.
- There are various ways to calculate each of these.
- It is currently up to lenders to determine reasonable formulas for calculating these values.
- Furthermore, lenders have been so focused on issuing PPP loans; they probably have not had time to define their approach to processing forgiveness applications.
- We recommend employers do their best to keep both values up, as intended by the CARES Act.
Still Have More Questions?
Shoot an email to firstname.lastname@example.org. We'll continue to answer the most common questions in our updates. If you need specific guidance, don't hesitate to reach out to your Allevity HR Representative.
Allevity is dedicated to being a resource for you during this unprecedented time. We're here for you. We’re getting through this together.