The Paycheck Protection Program, a first-come, first-served fund of $349 billion approved by Congress and signed by President Donald Trump in March, was designed to assuage some of the financial burden for the nation’s small business owners. Due to high demand, the program reached capacity quickly and the Small Business Administration announced today that it is unable to accept new applications. It is unclear at this time whether Congress will authorize additional funding.
However, companies that already applied for PPP are starting to receive acceptance notices and loan proceeds. We understand that you may have questions about your loan. Below you’ll find general guidance about what is considered forgivable, tax implications of PPP, and how to calculate reductions in your loan forgiveness amount.
What is forgivable under PPP?
PPP loans are meant to cover expenses in the following categories:
- Payroll costs, including benefits
- Interest on mortgage obligations, incurred before February 15, 2020
- Rent, under lease agreements in force before February 15, 2020
- Utilities, for which service began before February 15, 2020
These expenses are considered forgivable under PPP. In other words, if you spend your emergency funds on any of the above categories, your loan will be forgiven provided you adhere to a few requirements. The SBA requires that at least 75% of your loan forgiveness amount be used for payroll costs.
What are the requirements associated with my loan?
We strongly encourage you to read all materials associated with your loan provided by your lender. Generally, in order to be considered eligible for loan forgiveness, you must:
- Maintain the same headcount and salaries that were in place as of February 15, 2020
- Utilize the funds within eight weeks of receiving your loan proceeds
Any of your loan proceeds spent outside of the expense categories listed above or spent after your eight-week period has passed are not forgivable.
I had to reduce headcount – what does this mean for my loan forgiveness?
A reduction to your loan forgiveness amount will be made if the number of full-time employees (FTEs) is reduced during the eight weeks following your loan receipt. To calculate that amount, divide the average number of FTEs during the eight-week covered period by the average number of FTEs during the base period. The base period can either be February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020, at the borrower’s discretion. You can avoid this reduction if you restore the employee headcount to its pre-COVID-19 level by June 30, 2020.
For example, say your loan amount is $100,000, and you spent all of the funds on qualifying expenses. The average number of FTEs that you had from February 15, 2019 to June 30, 2019 was 10. The average number of FTEs during the eight-week covered period was 5.
Calculation: 5/10 = 50%
Maximum loan forgiveness: $100,000 * 50% = $50,000
This means that you will need to repay the remaining $50,000 of the loan.
Remember, you can always use the alternate base period of January 1, 2020 through February 29, 2020 if that is more favorable.
I had to reduce employee salaries – what does this mean for my loan forgiveness?
A reduction to your loan forgiveness amount will be made for each employee whose wages were reduced by more than 25% compared to the most recent quarter before the PPP loan was issued (i.e., Q1 2020). However, for this calculation, you only need to consider employees who earn an annual salary of $100,000 or less. You can avoid this reduction if you restore the employee’s wages to the pre-COVID-19 level by June 30, 2020.
For example, say your loan amount is $100,000, and you spent all of the funds on qualifying expenses. You reduced the annual salary for one FTE from $80,000 to $40,000 (i.e., in Q1 2020 the employee was making $80,000 and during the eight-week covered period the employee was making $40,000).
Calculation: ($80,000 - $40,000) – ($80,000 * 25%) = $20,000
Maximum loan forgiveness: $100,000 – $20,000 = $80,000
This means that you will need to repay the remaining $20,000 of the loan.
How will this be taxed?
The CARES Act, which includes the PPP, states that the forgiveness of debt under PPP will not be taxable to the borrower. Note that additional clarification from SBA is expected regarding whether the expenses will be considered deductible, since they were paid for with tax-free money. We expect to learn more about this and other tax implications for PPP recipients in the coming weeks.
I still have questions – who should I contact?
Employer Flexible seeks to be a resource for you and your company during this challenging time. However, questions specifically related to your PPP loan are best directed to your lender or to the Small Business Administration (visit their website or call 1-800-659-2955).
Should you have any questions related to your company’s HR or Benefits, please do not hesitate to contact your Employer Flexible Benefit or HR Consultant.