• Paul Peter Nicolai


Millions of companies have submitted applications under the Paycheck Protection Program (PPP). Those funds are beginning to come out.

Now it is time to think about doing what you can to safeguard the highest possible forgiveness amount. There are no final SBA rules on how forgiveness will work, but the law gives some level of guidance.

THE EIGHT-WEEKS. Once PPP funds hit your account, an eight-week race starts. To get maximum forgiveness, plan to spend 100% of the money before the end of the eight-weeks. The CARES Act computes forgiveness based, in part, on approved costs incurred and payments made during [the eight-week period. There is no guidance on whether there is any leeway on timing. Since you need to prove all of this later, keep meticulous records of what you spent PPP funds on and when.

  • Plan out how you will budget and allocate the money once it arrives. Things you should consider are:

  • Open a separate deposit account just for the PPP funds and write checks from that account.

  • Spend as much as you can on designated payroll costs during the eight-week period. Under the SBA interim rule if you do not spend at least 75% of the loan proceeds on payroll costs, the dollar amount of the shortfall from 75% reduces the amount of forgiveness.

All remaining proceeds not spent on payroll costs should be spent on the three other approved costs: covered rent, covered utilities, and covered mortgage interest.

PAYROLL COSTS MATH. The Interim Final Regulations say the PPP provides a loan amount 75 percent of which is equivalent to eight weeks of payroll (8 weeks / 2.5 months = 56 days / 76 days = 74 percent rounded up to 75 percent). If your average monthly payroll has declined at all since the 12-month period used to compute the loan amount, you will have a hard time reaching 75% for the eight weeks. Remember, even if you don’t achieve total forgiveness, what you are left with is a two-year loan at 1% interest.

  • HEADCOUNT REDUCTION. What you pay out in approved costs for the eight-week period controls your maximum forgiveness. This can be further reduced due to declines in headcount. You start with the number of full-time equivalents (FTEs) during the eight-week period. The FTEs equal the average number of employees you have over a given period who work at least 40 hours per week. If for a given week you had three employees who worked 40 hours that week, two who worked 20, and four who worked 10. That week equals five FTEs. For longer periods, take the numbers of regular hours (not over 40 per week per employee) divide it by the number of weeks in the period, and divide that by 40. If during the eight-week period you had 1,472 regular hours, that means 184 hours per week, divided by 40 means an average of 4.6 FTEs. After calculating your FTEs for the eight-week period, compare this to the FTEs you had in either of two baseline periods. The baseline period can be either 2/15/19 to 6/30/19 or 1/1/20 to 2/29/20, whichever has fewer FTEs. If you had 10% fewer FTEs in the eight-week period than in baseline period, your loan forgiveness is proportionately reduced, by that same 10%.

  • SALARY/WAGE REDUCTION. Whatever forgiveness is left after the headcount reduction math can be further reduced, dollar-for-dollar, for major reductions in wages. To calculate this, you must identify all employees during the eight-week period you employed at any point during 2019 and who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000. For each such employee, determine her average salary/wage rate for the first quarter of 2020. If 1/8th of the total amount of salary/wages paid for the eight-week period is at least 75% of her average weekly rate during Q1 of 2020, then there is no further reduction in loan forgiveness. If that person suffered a reduction in salary/wages that his/her pay for the eight-week period went down by more than 25%, then the dollar amount of the reduction beyond 25% reduces, dollar-for-dollar, the amount of loan forgiveness.

OTHER ADJUSTMENTS. The law includes a fix for the headcount-related reduction in forgiveness. If by June 30, 2020 you bring your FTE levels back up to where they were at February 15, 2020, it excuses whatever reduction in forgiveness was attributable to a drop in headcount between February 15, 2020 and April 26, 2020.

The statute also includes a separate fix for the salary/wage-related reduction in forgiveness. If by June 30, 2020 you have restored the salary/wage levels to at least the level existing on February 15, 2020, it excuses any salary/wage level reductions which occurred between February 15, 2020 and April 26, 2020.

DEFINITIONS. Here are simplified versions of key statutory terms:

  • Payroll costs are wages, salaries, commissions, tips, severance pay, and so forth – but subtract out the portion of any employee’s pay exceeding $100,000 per year (annualized)

  • Covered rent is rent obligated under a leasing agreement in force before February 15, 2020, and seems to include bona fide equipment leases in addition to office leases

  • Covered utilities mean payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020

  • Covered mortgage interest means interest on any pre-February 15, 2020 indebtedness or debt instrument incurred by the borrower in the ordinary course of business, if secured by a mortgage on real or personal property

THE BOTTOM LINE. Many are hung up on the forgiveness feature of PPP loans. Forgiveness is certainly important. But, the ultimate objective for business owners is to protect the business’ long-term health. If business realities are such that you cannot achieve 100% forgiveness, this is a 1% loan with a two-year payback period with no collateral and no personal guarantee. These are artificially favorable terms. When in doubt, like in the Godfather, take the loan and leave the forgiveness.

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