8 tips and warnings on PPP loan forgiveness
For small business owners who got a Paycheck Protection Program (P3) loan, not having to pay back what they borrowed is a huge bonus. Under the CARES Act (amended by the Paycheck Protection Program Flexibility Act (PPPFA) in June), PPP allows small businesses to borrow up to $ 10 million without collateral, personal collateral or fresh. The loan does not have to be repaid as it is used to cover the first 24 weeks (eight weeks for those who received their loan before June 5, 2020) of salary costs, rent, utilities and expenses. mortgage interest of the company. However, at least 60% of the amount remitted must be used for the payroll. Small business owners have until August 8, 2020 to apply for P3 loans and until December 31, 2020 to use the funds.
To get their P3 loans canceled, small business owners must first submit a 11-page application to the bank or lender who approved their original loan application. The app, along with other tips recently released by the SBA, answers many questions about loan repayments that worried small business owners. Here are 8 important tips and warnings on PPP loan cancellation gleaned from the app and the new SBA guidelines. Hopefully this information will help improve the bottom line for many small businesses.
Other periods covered by the payroll
Since the 24-week coverage period does not always match a company’s payroll cycle, the SBA offers a “Alternate payroll period” for borrowers with bi-weekly or more frequent pay schedules. Therefore, borrowers can calculate eligible salary costs using the 24 week period that begins on the first day of the pay period after the loan is disbursed, rather than the first day of disbursement.
Example: If a hairdresser received the proceeds of their PPP loan on Monday, June 8, and the first day of their first pay period following the disbursement of their PPP loan is Sunday, June 14, the first day of the alternate pay period Covered is June 14 and the last day of the alternate payroll period is Sunday, November 29.
Labor costs incurred but not paid
Borrowers are eligible for remission for personnel costs paid and incurred during the 24 week covered period (or alternate covered period). However, personnel costs incurred but not paid during the borrower’s last pay period of the 24 week period are eligible for the rebate. only if they are paid on or before the next regular pay period.
Non-salary costs incurred but not paid
Eligible no pay charges must be paid or incurred during the 24 week coverage period. For expenses incurred but not paid during this period, they must be paid no later than the next regular billing date, even if this date is later than the 24 week period. That said, the SBA reiterated that no prepayment of interest on mortgages will be eligible for loan forgiveness, but it did not specifically consider whether prepayment of salary, rent and utilities costs is. pardonable.
Bonus and risk premium
The CARES Act defines the term “labor costs” broadly to include compensation in the form of salary, wages, commission or similar compensation. Therefore, employee bonuses and risk bonus are eligible for loan forgiveness as salary costs, provided the employee’s total compensation does not exceed $ 100,000 on an annualized basis. These payments are a supplement to the salary or wages and, therefore, constitute a similar form of compensation.
Definition of full-time equivalent employee (FTE)
The amount of a P3 loan that is forgiven is typically reduced if the borrower reduces the number of “full-time equivalent” (FTE) employees during the 24-week covered period. However, the CARES Act does not define an FTE employee.
Since this is a material omission, the SBA has determined that an FTE employee is an employee who works 40 hours or more, on average, each week.
For employees paid less than 40 hours per week, borrowers can choose to calculate full-time equivalency in two ways. First, borrowers can calculate the average number of hours the worker was paid per week during the covered 24-week period and divide the number by 40. For example, if an employee was paid 30 hours per week on average at during the 24 week period. period, the employee would be a 0.75 FTE employee. Second, a borrower can choose to use a full-time equivalency of 0.5 for each employee who worked an average of less than 40 hours per week during the 24-week period. Borrowers can only choose one of these two methods and should apply it consistently to all of their part-time employees.
Exceptions to the FTE employee reduction rule
There are a few exceptions to the reduction in loan forgiveness when a small business decreases the number of FTE employees during the 24 week covered period. First, according to the SBA, a borrower will not be penalized for FTE reductions for employees who dismissed for just cause, resigned voluntarily or requested a reduction in their hours.
A borrower is also exempt from the loan forgiveness reduction rules if they lower the level of FTE employees between February 15 and April 26, 2020, but restored the FTE employee level by December 31, 2020, to the level that existed during the pay period that included February 15, 2020. Employees laid off after April 26, 2020 will result in a reduction in FTEs even if they are rehired by the end of 2020.
There is also a exemption based on employee availability which runs from February 15 to December 31, 2020. Under this exemption, the FTE reduction is eliminated if a company can document, in good faith:
- An inability to rehire former employees or hire employees of similar qualification for vacant positions by December 31, 2020; or
- An inability to return to the same level of business activity at which it was operating prior to February 15, 2020, due to compliance with OSHA, CDC or HHS guidelines during the period beginning March 1, 2020 and ending December 31, 2020.
Finally, small businesses will not see a reduction in the loan amount forgiven if workers refuse their old jobs. To qualify for this exemption, the borrower must “have made a good faith written offer to rehire and the employee’s rejection of this offer must be documented by the borrower.” Within 30 days of an employee’s rejection of the offer, a company requesting a loan forgiveness must notify state unemployment offices of the worker’s refusal to return to work.
Exception to the salary or salary reduction rule
There is another way to limit loan forgiveness – by cutting wages paid by more than 25%. However, there is one exception to this rule.
If there are wage or salary reductions greater than 25% between February 15 and April 26, 2020, the borrower is exempt from the loan forgiveness reduction rule. if the salary or salary cuts are reinstated before December 31, 2020.
The SBA has announced that it can review PPP loans of any size at any time. Borrowers must keep their PPP documents for at least six years after the date the loan is canceled or repaid in full.