NEWS
PPP Loan forgiveness By: sal schibell, lawson, rescinio, schibell & Assoc. Paycheck Protection Program Loans and Loan Forgiveness If your small business was slammed by the COVID-19 crisis, you can obtain a paycheck protection program loan (PPE loan) that is equal to 2.5 times your monthly payroll under Section 1106 of the CARES Act. If your monthly payroll runs $40,000, for example, your PPP loan amount might be $100,000. The calculated value of payroll includes not just wages but also employee benefits, state payroll taxes, and the business owner compensation replacement. What’s more, if you spend the loan proceeds on payroll, rent, interest, and utilities within eight weeks, the Small Business Administration forgives the loan. However, the following situations will limit your loan forgiveness:
Suppose a firm reduces the pay rate for one employee from $8,000 to $2,000. Perhaps this employee earns a sales commission, and the bad economy cuts sales for a few months. That 75% decrease in payroll (from $8,000 to $2,000) equals $6,000. A 25% decrease in payroll would be $2,000, so the reduction in pay rate in excess of 25% equals $4,000. Thus the amount eligible for forgiveness decreases by an equivalent $4,000. In review, if a small business started out with an initial amount eligible for forgiveness of $100,000, a 20% reduction in headcount might reduce that $100,000 to $80,000, and the subsequent pay rate reduction would subtract another $4,000, bringing the total amount eligible for forgiveness to $76,000.
Headcount Reduction
Missing the Rehire Window of Opportunity
According to Section 1106(d)(2)(A) of the CARES Act, reducing your workforce results in an equivalent reduction in loan forgiveness. This adjustment works simply; the amount eligible for forgiveness decreases by the percentage of full-time equivalent employees that you lose. Say you employed five full-time employees and ten halftime employees last year. Converted to full-time equivalent employees, you employed 10 workers. If you terminate two full-time workers, your count of full-time equivalent employees drops from 10 to 8 workers. This represents a 20% cut in headcount, which would reduce the initial amount eligible for forgiveness by 20%. If your firm had spent a total of $100,000 on payroll, interest, rent, and utilities, but you reduced your headcount by 20 percent, your loan amount drops by 20 percent to $80,000.
The Section 1106 statute includes a couple of mulligans. The first? Per the statute and a forthcoming interim final rule, if a firm either rehires or attempts to rehire employees who were laid off between February 15, 2020 and April 29 ,2020, it avoids a reduction in the initial amount eligible for forgiveness due to an earlier reduction in your headcount. To avoid this reduction, a firm needs to rehire the employee by June 30. The firm needs to make "a good faith written offer" to rehire the same employee at the same pay rate and for the same number of hours and then document the employee's rejection.
One thing to note: businesses can choose which period of employment is used to calculate a reduction in workers. A firm can compare its current employment to employment from February 15, 2019 through June 30, 2019 or from January 1, 2020 through February 29, 2020. Pay Rate Reductions After the formula adjusts the initial amount eligible for forgiveness based on headcount, it looks for any reductions in employee pay rates in excess of 25%. Section 1106(d)(d)(A) details this adjustment. Note that the formula ignores pay rate reductions for employees who earned more than $100,000 on an annualized basis in 2019. For everyone else, a pay rate reduction in excess of 25% is subtracted from the amount available for forgiveness.
Note, however, that even if a firm avoids this headcount reduction by rehiring or attempting to rehire, it will still calculate a smaller initial amount eligible for forgiveness. For example, say a firm averages $40,000 a month in payroll during 2019. As a result, it receives a $100,000 loan. Assume, however, that the firm laid off its entire workforce before receiving the PPP loan and can't rehire them until June 30. Because the firm rehires employees by June 30, it avoids the headcount reduction adjustment, but without employees on the payroll during April, May, and June, it lacks payroll costs to plug into the initial amount eligible for forgiveness. Missing the Pay Cut Reversal Window of Opportunity If a firm reverses a reduction in salaries or wages by June 30, that reversal eliminates the requirement to reduce loan forgiveness eligibility based on pay rate cuts in April, May, and June. Again, though, note that the pay rate cuts reduce the payroll cost that plugs into the formula. For example, suppose a firm with
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