PPP Forgiveness FAQs



PPP Forgiveness FAQs

Dear Clients and Friends:

Now that lenders have begun to disburse loan funds under the PPP loan program, an increasing number of questions have been raised related to the usage of the loan funds and mechanics of the calculation of the loan forgiveness.  Below is a summary of some of the frequently asked questions we have received over the past several days, along with our responses.  As noted in our responses, further guidance from the Treasury and SBA is required.  Therefore, it is important to disclaim that the following interpretations are based on information available to us as of this morning (April 20), and that these interpretations will likely evolve over the coming weeks as further guidance is released.

  1. Can you demonstrate how the forgiveness calculation works with the following factors?
    • Decrease in full-time equivalents over comparison period.

Forgiveness will be determined by computing the quotient of:

      Average FTE during 8-Week Covered Period    
Average FTE during Historical Comparison Period

Applicants have the option of claiming the historical period:

February15, 2019 – June 30, 2019, OR
January 1, 2020 – February 29, 2020

Applicants should note that part-time employees or employees on another basis of employment status are excluded from this calculation.

Guidance has yet to be issued around the requirements to be deemed (or not deemed) a full-time equivalent.  For purposes of estimation, we recommend using the same requirements that existed for the Affordable Care Act (ACA).  Additionally, guidance has yet to be posted as to how to calculate an average for partial months, which is likely expected during the 8-week covered period.  The CARES Act defines the average number of employees as:

“[T]he average number of full-time equivalent employees shall be determined by calculating the average number of full-time equivalent employees for each pay period falling within a month.”

    • Compensate employees less than 75% of comparison period.

Applicants should note that all employees are included in this calculation, not simply FTEs.  Additionally, there are no hours requirement for purposes of this calculation.  Thus, employees do not necessarily need to work in order to be considered an “employee” and receive compensation.

For employees with an annualized pay rate below $100,000:

Average Q1 2020 Monthly * 75%
___- Average Monthly Pay over 8-Week Covered Period___
Reduction in Loan Forgiveness (not reduced below zero)

For employees with an annualized pay rate above $100,000:

While we believe the above calculation holds true for those employees compensated at an annualized rate above $100,000, it is unclear if the comparison is capped at an average monthly pay of $6,250 ($100,000 * 75% / 12) or based on the employee’s actual annualized monthly pay above the $100,000 threshold.

    • We received a $1.5M PPP loan, but we only expect to use $750,000 for payroll-related costs.

Notwithstanding the applicability for the two items above, total payroll costs would generally be expected to be fully forgiven.  The maximum loan forgiveness for non-payroll related expenses would be $250,000 (i.e., $750,000 / 3).  This would allow for a total maximum loan forgiveness amount of $1M as 75% of such amount (i.e., $750,000) equates to payroll-related costs.

If non-payroll costs only amount to $100,000, then the total forgiven amount would be $850,000 ($750,000 + $100,000).  If non-payroll costs amount to $350,000, then the total forgiven amount would only be $1M (even though $1.1M was spent), as the non-payroll costs are capped at $250,000, in this example.

Therefore, to determine the maximum loan forgiveness, an applicant would first need to compute the payroll-related costs first, as that will determine the maximum amount of allowable non-payroll related costs to be eligible for forgiveness.

  1. When does the 8-week forgiveness period begin?

The applicant’s 8-week covered period for calculating the forgiveness of the PPP loan begins on the date of loan origination.  Loan origination has generally been proscribed as the date of fund disbursement, which, according to the U.S. Department of the Treasury, must be within 10 calendar days of SBA loan approval (i.e., an E-Tran number has been received).

  1. Is forgiveness based on cash payments or accrued expenses?

Section 1106 of the CARES Act reads:

“An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the [following] costs incurred and payments made during the covered period.”

It is our interpretation that costs must be paid during the 8-week covered period to be eligible for forgiveness.  However, there is ambiguity in the placement of the word “and” as to whether this relates to the summing of costs or the cardinality of the cost.  If “and” relates to the summing of expenses, that would indicate that forgiveness is eligible for both costs paid during the covered period irrespective of when incurred, as well as, costs incurred during the period irrespective of when they are paid.  If “and” relates to the cardinality of the cost, then only those costs that were both incurred and paid during the 8-week covered period are eligible for forgiveness.  Additional guidance is required.

  1. Are payments made with forgiven funds deductible?

Uncertain.  Further guidance is required.

  1. Is Employee and Employer FICA considered payroll costs?

Similar to the calculation of the loan amount, eligible payroll costs include the gross pay to employees.  Inherently, using the gross pay includes the employees’ share of FICA taxes normally withheld from the employees’ net checks and paid to the government.  Such withholding remains included in the gross pay for employees and does not need to be removed for the forgiveness calculation.

Similar to the calculation of the loan amount, the employer’s payment of FICA on employee wages is excluded from the calculation of loan forgiveness.

  1. Can the applicant prepay expenses during the 8-week covered period and be eligible for forgiveness?

The U.S. Department of the Treasury has issued guidance forbidding the prepayment of rent and mortgage interest.  However, no such guidance has been issued with respect to payroll cost.  As such, further clarification is required.

  1. Can we pay a “special” bonus to employees with the remaining funds and be eligible for forgiveness?

There has been no guidance indicating employers can or cannot pay employees above their average monthly compensation used in determining the loan amount, or any historical comparative period for purposes of calculating forgiveness.

Further guidance is required.

  1. What about leave cost covered under the Families First Coronavirus Response Act (FFCRA)?

Issued guidance has expressly excluded from PPP forgiveness those costs for family and medical leave where reimbursement for such costs was received under the FFCRA.  Inclusion of such costs would result in a double benefit to the applicant.

Any costs for medical or family leave where reimbursement was not sought under the FFCRA are eligible for PPP forgiveness.

  1. Is rent paid to a related-party landlord eligible for forgiveness?

It is our interpretation that related-party rent payments would be eligible for loan forgiveness assuming they are paid to a non-consolidating entity which would otherwise be eliminated on a tax return.  In such situations, the expenditure is simply a cash transfer between entities versus a true expense.

  1. Can applicants use the funds to pay non-mortgage interest expense?

While the funds can be used to pay non-mortgage interest (i.e., line of credit, notes payable, etc.), such payments are not eligible for forgiveness.  Therefore, unless the Treasury/SBA states otherwise, we believe such payments would be captured in the remaining PPP loan that is required to be paid back over 2 years at a 1% rate.