Last week, the U.S. Treasury Department released extensive new guidance regarding loan forgiveness for businesses participating in the Paycheck Protection Program (PPP). Much of the guidance focused on the application process and instructions for completing the on-line form. In this article, we offer some important clarifications to specific points in the loan forgiveness application and its instructions.
Full Time Equivalent Employee (FTE) calculation
FTEs are calculated using a 40-hour workweek. For each employee, take the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. There is also a simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours that may be used at the election of the company.
FTE Reduction calculation
Forgiveness of the PPP loan is reduced by taking the Average FTEs during the covered period (8-week period after receiving proceeds) divided by the Average FTEs from one of the following reference periods:
- February 15, 2019 – June 30, 2019;
- January 1, 2020 – February 29, 2020; or
- For seasonal employers either of the preceding periods or a consecutive twelve-week period between May 1, 2019 and September 15, 2019.
There are exceptions to this calculation, in cases where employees are not replaced:
- When the company made a good-faith, written offer to rehire an employee which was rejected by the employee;
- The employee was fired for cause;
- The employee voluntarily resigned;
- The employee voluntarily requested and received a reduction of their hours.
FTE Reduction Safe Harbor
This option is available only for companies that reduced FTE levels after February 15, 2020 (as defined below), and then eliminated the reduction in FTE by June 30, 2020. A safe harbor from the FTE loan forgiveness reduction is available if both of the following conditions are met:
- The company has fewer average FTEs during the period February 15, 2020 through April 26, 2020 compared to the payroll period that included February 15, 2020; and
- The company then restored its FTE employee levels by no later than June 30, 2020 accomplished by having its FTE count at June 30, 2020 equal to or greater than its FTE count in the pay period that included February 15, 2020.
EXAMPLE: If a company has 100 FTEs on February 15, 2020, and the average FTE for February 15 – April 26, 2020 is reduced to 75, then it must restore back to 100 or more FTEs on June 30, 2020 to qualify for this safe harbor. If the company’s average FTE for February 15 – April 26, 2020 was 110, it does not qualify for this safe harbor.
Salary / Wage Reduction
The salary / wage reduction limitation on the PPP loan forgiveness is calculated for each employee by comparing the salary/wage in the covered period to the previous payroll quarter.
Salary / Wage Reduction Safe Harbor
If the company restored salary/hourly wage levels, the company may be eligible for elimination of the Salary/Hourly Wage Reduction amount. The safe harbor is available if the following conditions are met:
- The salary/wage during the period February 15, 2020 through April 26, 2020 is less than the salary/wage as of February 15, 2020; and
- The salary/wage is restored as of June 30, 2020 accomplished by having the salary/wage as of June 30, 2020 equal to or greater than the salary/wage as of February 15, 2020.
Alternative Covered Period
For calculating payroll costs, a company may be able to elect an alternative 8-week period as its Alternative Covered Period. A company with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan disbursement date.
Eligible Expenses Paid or Incurred
Payroll costs are considered paid on the day that paychecks are distributed or the company originates an ACH credit transaction.
Payroll costs incurred but not paid during the company’s last pay period of the Covered Period are eligible for forgiveness if paid on or before the next regular payroll date.
An eligible nonpayroll cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date.
Compensation to Owners
Owner Compensation (owner-employees, a self-employed individual, or general partners) is limited to the lesser of:
- Amounts paid, capped at $15,385 (the eight-week equivalent of $100,000 per year) for each individual; or
- The eight-week equivalent (8/52) of their applicable compensation in 2019.
- Payroll cost calculations related to owner’s profit sharing and or health insurance can be complex. Please consult your Weiss CPA professional for more information
Like all news related to the CARES Act, we will continue to analyze this guidance and expect Treasury and the SBA to follow with more in the weeks to come. In the meantime, if you have any questions about this article or the PPP itself, please feel free to contact your Weiss professional.
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