For many PPP loan borrowers that obtained a loan in the spring of this year, there is a high likelihood that the PPP loan of two and a half months (i.e. 10 weeks) of payroll dried up for you a long time ago. Even those borrowers who obtained loans near the end of the application window will find their funds whittling down in the next few weeks. Therefore, your attention has likely shifted towards the loan forgiveness process and application, if it has not been there already for the past few months.
Understand your bank’s process
As we have stated in our previous communications, the first thing borrowers will want to understand is their respective bank’s process. Many of the larger banks have created their own portals to accept the necessary data points and documentation. Therefore, in those circumstances, while preparing the SBA’s PPP forgiveness form may be helpful, borrowers will likely not be submitting that to their bank. Smaller banks may be more accommodating or even require the SBA’s forgiveness application. Additionally, certain banks are currently only accepting forgiveness applications for loans over a certain dollar threshold, which could be $150,000 or even $2 million loans. With the uncertainty around automatic and modified forgiveness, banks have been reluctant to accept forgiveness applications below those thresholds. They feel their effort could dramatically diminish if an automatic or modified forgiveness process is agreed upon within Congress. Therefore, understanding your bank’s situation is the first critical step in this journey.
Key facts about PPP loan forgiveness
- Due date – While there is no defined due date to submit your PPP loan application, borrowers should understand that loan payment requirements begin 10 months following the end of the covered period. Keep in mind the Paycheck Protection Program Flexibility Act (P.L. 116-142) automatically extended the covered period of all loans to 24 weeks (with an allowable election back to 8 weeks for certain loans acquired prior to June 5, 2020). Therefore, borrowers may start their 10-month clock upon the end of a 24-week covered period, regardless of whether an 8-week covered period election is claimed.
- Filing before the end of the covered period – While filing early, prior to end of a covered period, is permissible, there is a catch. Filing early limits the maximum eligible compensation for both employees and owner-employees. Such a reduction is determined by the pro-rata percentage of weeks claimed divided by the maximum number of weeks allowable for the covered period (i.e. 8 or 24).
For example, if a borrower claims a 24-week covered period, but files for forgiveness after week 14, the maximum eligible compensation would be:
Employee: (14 / 24) x $46,154 = $26,923
Owner-Employee: (14 / 24) x $20,833 = $12,152
In the above example, an Owner-Employee’s maximum eligible compensation when filing after 14 weeks and claiming a 24-week covered period is actually lower than the maximum available under the 8-week covered period, $15,385. Therefore, while your PPP funds may have dried up and your calculations show that you are scheduled to obtain full forgiveness, it would behoove borrowers to wait until after the conclusion of their covered period before filing their forgiveness applications to ensure their maximum eligibility is not inadvertently limited.
3. Salary and Wage Reduction – In addition to the above limitation to maximum eligible compensation when filing early for forgiveness, any reductions for hourly wage rates or annualized salaries are extrapolated over the entire covered period.
For example, if a borrower determined that during Q1 2020 an employee’s hourly wage rate was $25/hour, but during the covered period, the company decided to reduce that wage rate to $15/hour to limit their cash burn rate, the PPP forgiveness reduction would be calculated as follow (assuming the employee worked on average 40 hours per week):
$25/hour x 75% = $18.75 threshold
$18.75 – $15/hour = $3.75/hour reduction
$3.75/hour x 40 hours per week x 24 weeks = $3,600
As compared to what may have been calculated when filing early . . .
$3.75/hour x 40 hours per week x 14 week = $2,100
4. “Owner-Employee” definition – In early August, the SBA defined an “owner-employee” as someone who is both an owner and an employee of a C corporation. The SBA further clarified the definition on August 24th that the “owner-employee” designation does not apply to individuals with less than a 5% stake in a C or S corporation. The impact from this designation is significant when considering the maximum eligible compensation level for a specific individual.
- As we have highlighted above, we encourage borrowers to wait until after the conclusion of their covered period prior to filing their forgiveness application. While those borrowers who plan on claiming the 8-week covered period have likely already reached that point, those considering the 24-week covered period should plan accordingly. We encourage borrowers to prepare their calculations and obtain their documentation in the meantime, but wait to “push the button” or mail the application until after the covered period ends.
- Claiming a 24-week covered period may be a lot less stressful. In essence, your company was provided a loan equal to 10-weeks of average payroll, to spend over 24-weeks on certain items including payroll. For those borrowers that have maintained steady payroll during the entire 24-weeks, you may only need to consider payroll as the forgivable expense. In doing so, borrowers will not need to concern themselves with non-payroll expense (rent, mortgage interest, and utilities) or non-cash compensation expenses (health insurance, retirement benefits, and state and local taxes) to obtain maximum forgiveness.
- In addition to the less stressful process in claiming a 24-week covered period, any excess amount spent over the loan principal will guard against reductions in average FTE or hourly wage/annualized salary levels. With the way the forgiveness application works, the adjusted total expenses paid after accounting for such reductions is compared to the loan principal amount. The amount of forgiveness is typically the lower of those two numbers. For example:
PPP Loan Amount: $180,000 (average weekly payroll of $18,000)
Total payroll expenses (24-weeks): $432,000
Historical FTE: 14.3
Covered Period FTE: 12.7
4. Ensure you document as much as your can, and this is where Cassady Schiller is here to help as one of your trust advisors. We can assist with the preparation or review of your calculation and help ensure that you have all the necessary documentation in place prior to submitting your PPP forgiveness application to your lender. We document both your understanding as well as our understanding of the rules and guidance around this program to ensure that if questions arise you are not left scrambling to understand how you arrived at a specific number.
While the debate over the deductibility of PPP expenses remains in limbo, we are here to assist you with any questions you may have regarding the accounting concepts for your PPP loan as well as how the PPP may affect your 2020 and 2021 taxable income projections.
Please reach out to us with any questions.