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On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted to expeditiously aid small businesses in the wake of the Coronavirus pandemic, including $349 billion in funding to the Small Business Administration (“SBA”) for Paycheck Protection Program (“PPP”) loans. Not surprisingly, less than three weeks later, on April 16, 2020, the SBA announced that the funds have been depleted. Thankfully, a deal was just announced to replenish funding to the tune of over $300 billion. So, we expect more funding to be available for PPP loans.
If you were one of the lucky ones to have already received a PPP loan or are planning to seek a PPP loan, assuming that the additional funding legislation will be enacted, you should understand the loan forgiveness provisions for your PPP loan. These provisions are found in Section 1106 of the CARES Act.
Under Section 1106 of the CARES Act, and as clarified by the Treasury Interim Final Rule issued on April 2, 2020, up to the full amount of your PPP loan can be forgiven based on the borrower’s compliance with certain requirements.
1. What are the general requirements for loan forgiveness?
• A maximum of 25% of the loan may be used for non-payroll costs.
• The covered costs must be paid out within eight weeks from the loan origination date (the “Covered Period”).
2. What are the covered costs that can be forgiven?
• Payroll costs consisting of payments made to US resident employees for salary, wage, commission, or similar compensation; payment of cash tip or equivalent; payment for vacation, parental, family, medical, or sick leave; allowance for dismissal or separation; payment required for the provisions of group health care benefits, including insurance premiums; payment of any retirement benefit; or payment of State or local tax assessed on the compensation of employees;
• Payments for rent on lease in force before February 15, 2020;
• Utilities, including electricity, phone and internet access for services that began prior to February 15, 2020;
• Mortgage Interest on liability incurred prior to February 15, 2020.
3. What are the exclusions to covered costs?
• Payment for compensation to employees above an annualized salary of $100,000.
• Payment of compensation for qualified sick leave under Families First Coronavirus Response Act Sections 7001 and 7003.
4. Are there reductions to the loan forgiveness amount?
Yes. There are two types of reductions in the amount of the loan forgiveness (“ALF”): (a) Reduction based on the number of employees and (b) Reduction based on salary and wages.
First, the Reduction Based on Number of Employees requires that the amount of the ALF is reduced by the amount of loan multiplied by the ratio of Average Number of Full-Time Equivalent Employees (“FTE”) in the Covered Period (“FTEc”) divided by FTE during one of two periods selected by the employer, either (a) from February 15, 2019 through June 30, 2019 (“FTEa”) or (b) from January 2, 2020 through February 29, 2020 (“FTEb”). From a formula standpoint, this would look like:
ALF is reduced by the amount of the loan x FTEc/(FTEa or FTEb)
Second, the Reduction Based on Salary and Wages requires that the amount of the ALF is reduced by the amount of any reduction in total salary or wages (other than those who have annualized pay in excess of $100,000) that is in excess of 25% of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the Covered Period.
There is a caveat from “eliminating the reduction,” e.g., rehires and/or simply adding new employees. If an employer has “reductions” because between February 15, 2020 and April 26, 2020 (30 days after enactment of CARES Act), there is a reduction as compared to February 15, 2020 in the number of FTEs, and by no later than June 30, 2020, employer has eliminated the reduction of FTEs, then such reduction does not count for purposes of loan forgiveness. In other words, for example, if an employer furloughed some employees between February 15, 2020 and April 26, 2020 but rehired them by June 30, 2020, such employees would be counted as part of the FTEs during the Covered Period.
If you received a PPP loan or are planning to seek one, navigating the loan forgiveness rules to plan your payroll through this unprecedented coronavirus pandemic is critical to ensure maximum loan forgiveness.
