Paycheck Protection Program Flexibility Act of 2020 (PPPFA)
In my last post, I covered the basic changes brought about by the PPPFA which was signed into law on June 5, 2020. Today we’ll do a deeper dive into some of the workings of the forgiveness process, particularly as it relates to the exceptions to the Full Time Equivalent (FTE) and pay reduction rules. Many businesses have now passed their 8-week covered period and are assessing whether they jump into the forgiveness pool or wait to utilize the expanded 24-week period (or maybe to see if future guidance makes it even easier).
Remember the loan application fiasco and how stressful it was to get a PPP loan? The SBA and the banks weren’t ready, the rules kept changing, it was first-come-first-serve and the funds ran out quickly. Most discouraging was that loan qualifications weren’t clearly defined, and employers worried about repercussions if they were unable to adequately demonstrate the need for loan assistance. Since then more money has been pumped into the PPP program, the deadline was extended (twice), the rules were relaxed and now they are talking about the next round of stimulus to try to keep the US economy afloat.
While the initial steps of this endeavor were quite difficult, the good news is that asking for forgiveness may be the easiest part. The key factors for forgiveness have always been:
- You have to spend the money. And now, you have three times as long to do it.
- You have to spend it on the right things, however the guidelines in how you have to spend the money have been simplified to make it easier to include non-payroll costs.
- You have to maintain employment levels. These items combined with some additional safe harbor provisions, make maintaining employment levels less impactful.
The most complicated aspect of the forgiveness application is the FTE and salary reduction calculation which now includes expanded safe harbors. If you can navigate these properly, the forgiveness process will be quite easy. As you will see when working through the calculations, these can be meaningless limitations for many.
Not only are there the two separate rules (maintaining both FTEs and salary/wage rates), but there are two options for the application form that incorporate these rules differently. To utilize the new EZ application, you have to meet specific tests – no reduction in wages or rates of over 25% during the Covered Period for anyone earning under $100,000 per year compared to the period January 1, 2020 through March 31, 2020 and meet one of two FTE safe harbors – either no reduction in the number of employees or the average hours of employees between January 1, 2020 and the end of the Covered Period (with exceptions for the inability to rehire or replace workers), or, you can demonstrate that you were unable to operate at the same level as before February 15, 2020 due to compliance with certain government requirements or guidance. Given the extensive ongoing business restrictions, this may be a fairly low standard to meet.
The longer application in comparison is a bit more involved. The safe harbors are covered in Schedule A and the accompanying Schedule A worksheet with three options. Meeting any one of the three allows for no reduction due to any FTE shortfall. The first one is obvious and not considered a “safe harbor” – you didn’t actually have a reduction of FTEs, just like as above for the short form. The second (Safe Harbor 1) is also the same as above – the inability to operate at pre COVID levels. The final (Safe Harbor 2) for the long application is granted if you had a reduction of FTEs from February 15, 2020 through April 26, 2020 compared to your FTEs for the pay period including February 15 but have then restored the FTEs by the earlier of December 31, 2020 or the date of the application. If so, you do not have to reduce your forgiveness.
In summary, if you can’t operate at pre-Covid levels due to restrictions in place and you can document it adequately, you should be fine. If you are operating back to normal, as long as you rehire to your FTE level that you had at February 15, 2020, then you are also under a safe harbor and will not suffer any reduction in loan forgiveness for this factor.
As for the salary/rate reduction, a similar safe harbor exists – restore by December 31, 2020 to the levels of pay from February 15, 2020 and you do not have to reduce your forgiveness for that factor. However that is the only safe harbor for rate reductions whereas for FTE reductions, there are the other options noted above.
Even with all these limitations and complications, since you have 24-weeks (about 5.5 months) of spending on payroll, rent, utilities and interest compared to 2.5 months of a borrowing base of just payroll, you should get to 100% forgiveness even if you have to reduce the total spent by some percentage for FTE or pay rate reduction as it will still most likely still be much more than your loan amount. The key is that the reduction factors are applied to the amount you spend and are not applied to the loan amount. So, most of these reduction rules will likely not matter as you work through the math as you will have likely spent much more than you borrowed especially when the payroll spend needs to be only 60% of the loan amount.
When preparing to apply for forgiveness, the analysis is as follows:
- Did I fully spend the loan amount on qualified expenses during the covered period? This will generally be yes unless you remained shut down for over 6-months or are choosing to use the 8-week period (but then why would you?).
- Do I qualify to use the EZ form? Try to answer yes as this will make the filing “EZ”. You can if you meet one of the requirements above.
- If you don’t qualify for the EZ filing, then you will need to work through the lengthy schedules and minutia of the regular application. However, if you know your FTEs are not significantly reduced and you didn’t cut employees’ rates much and you are using the 24-week covered period, the math is in your favor and you will most likely land at 100% forgiveness. So don’t fret it too much.
Next up – tax deductibility (cross your fingers). While we do expect more guidance and clarification, at this point the dust should be pretty much settled in most areas but hopefully not on this topic.