Asking for Forgiveness: An Overview of the Loan Forgiveness Provisions of the PPP The Paycheck Protection Program (PPP) under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provided essential monetary relief to many small businesses throughout South Carolina, including in the hospitality industry. As the loan period for many of the loans is expiring or will soon expire, companies need to be aware of the requirements for seeking and obtaining loan forgiveness. If businesses fail to follow the requirements of the CARES Act, they may be on the hook to pay back a loan that matures in two years with a one percent interest rate. Employers need to keep in mind the three primary components of loan forgiveness: 1. What can the loan be used for? 2. How many employees must be retained or rehired? 3. What documentation must be kept and submitted? Acceptable Uses of the Loan To qualify for loan forgiveness, employers are required to use the loan proceeds solely for: • • • •
payroll costs payment of interests on debts (principal payments do not count) rent payments utility bills
Importantly, of the four identified categories, 75-percent of the loan proceeds must be used only for payroll costs. Payroll costs include gross wages, cash tips, commissions, payment for leave, payment for employee benefits, allowance for separation of dismissal, and state and local taxes assessed on compensation. For example, if a restaurant received a $100,000 loan, $75,000 must be used solely for payroll costs of its employees. Accordingly, the remaining $25,000 may be used toward the other three noted categories.
How many employees must be retained and paid at the same rate? Further, and what may be particularly difficult for hospitality employers, the loan proceeds must be used within eight weeks of receiving the loan. The PPP has identified this eight-week period as the “Covered Period.” During the Covered Period, the employer must abide by two conditions to receive full forgiveness: • •
no reduction in workforce no reduction in pay greater than 25-percent
First Condition The first condition is that the employer must maintain the same number of full-time equivalent (FTE) employees as it had during the time period between January 1, 2020 and February 29, 2020 or a 12-week period between February 15, 2019 and June 30, 2019. The employer has the option to choose which date more closely correlates to its business. In determining what counts as an FTE employee, the Treasury Department provided the following calculation: the employer should average the number of hours per employee paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. The employer can use an alternative and simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours. If the employer is a seasonal business, the employer can elect to use one of the time periods referenced above or a 12-week period between May 1, 2019 and September 15, 2019. Importantly, the employer, whether seasonal or not, should choose the option that correctly correlates with how it determined its loan amount eligibility. If the employer is a
Calculation to Determine Loan Forgiveness - Nonseasonal loan amount
x
average # of FTEs per month during covered period average # of FTEs between Jan. 1 and Feb. 29, 2020
Calculation to Determine Loan Forgiveness - Seasonal loan amount
8
x
average # of FTEs per month during covered period average # of FTEs from 12-week period between Feb. 1 and June 30, 2019 or May 1 and Sept. 15, 2019
Employee 1 average weekly hours = 40 40 hours / 40 = 1 Employee 2 average weekly hours = 37 37 hours / 40 = 0.9 Employee 3 average weekly hours = 27 27 hours / 40 = 0.7 Average # of FTE Employees = 2.6
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