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  • Writer's pictureChristina Schenk-Hargrove

PPP Loan Forgiveness Rules as applied to businesses who furloughed employees due to COVID-19

The Small Business Administration released the application for loan forgiveness for the Paycheck Protection Program. There are news sites that are providing an overview, so I will not repeat that, but will focus on small business owners with a small number of employees who they were forced to furlough due to the COVID-19 closures imposed in Massachusetts or states with similar COVID-19 responses. If you have not obtained a PPP Loan yet, they are still available, but you may want to review this information before applying to see if it will be useful to you.

The loan forgiveness application is available here. It is 11 pages, and fairly well-laid out -- about as difficult to complete as a tax return. The SBA's application may be adapted slightly by your lender, so check with them before completing it. But definitely work through it now, as aside from the details, the calculations will remain the same and you will avoid disappointment when you apply for forgiveness.

One piece of good news to start: while we were previously told that the funds would have to be spent within 8 weeks of receiving them, there has been a little bit of flexibility added: if your pay period is every two weeks or more frequently, then you can start counting the 8-week period from the start of the next pay period. (See pg. 1, Instructions.) They call the 8-week period the "Covered Period" and the one that starts later the "Alternative Payroll Covered Period." If you furloughed employees and are planning to bring them back over the coming weeks, the Alternative Payroll Covered Period will likely be more favorable, but if you choose to use it, you must be consistent throughout the application. It has also been clarified that you may use the funds for items that were incurred OR paid during the Covered Period.

So, let's get started. The application consists of a "Calculation Form", a "Schedule A" and a "Worksheet" for Schedule A. (There is also an optional demographic form).

If you have employees, start with the worksheet. Table 2 is for employees who earned over $100,000 per year. Table 1 covers all others. Note that for the purposes of this application, owners are not counted as employees (see pg. 7, Table Instructions). Add up the Full Time Equivalents. You can count the hours each person worked and divide by 40. The maximum for any employee is 1.0 (in other words, if a person worked more than 40 hours, they would still be counted as one full time). An alternate method you can use is to count 1 for each employee who worked 40 hours or more, and .5 for each employee who worked less than 40 hours, but if you have multiple employees who work few hours a week, doing the full calculation may be more favorable.

Calculate your FTE for the pay period that included Feb. 15, 2020. If you furloughed employees between Feb. 15 and April 26, but you are back up to this number by June 30, then you qualify for the "Safe Harbor", meaning the amount you are asking to be forgiven will not be reduced due the reduction in the number of employees.

There are calculations that must be made if you reduced how much you paid employees, but I am going to assume that does not apply to most businesses.

Next, complete Schedule A. At the bottom is a calculation that could reduce the amount of the loan that is forgiven if you have fewer employees on the payroll on June 30 than you did at the beginning of the year or the same period last year. You choose the reference period, either Jan. 1, 2020 to Feb. 29, 2020, OR Feb. 15, 2019 to June 30, 2019. (See pg. 5, Instructions for PPP Schedule A.). You calculate the average FTE as you did for Table 1, then divide that number by the number of employees you are seeking loan forgiveness for and get a FTE Reduction Quotient. The potential forgiveness amount may be reduced by this quotient (see pg. 3, line 8).

For example, if I had 10 FTE employees in Jan. and Feb. 2020, and I used my PPP loan proceeds to bring back 6 FTE, my FTE Reduction Quotient would be .6. On the Loan Forgiveness Calculation Form, the total amount I had paid out would be multiplied by .6. So, if I used $50,000 to pay those employees, myself, rent and utilities, $30,000 of that would be forgiven.

Also, please note on page 2, the instructions for line 11 states that "if applicable, SBA will deduct EIDL Advance Amounts form the forgiveness amount remitted to the Lender."

My biggest take-away is this: if your Full Time Equivalent on June 30 is up to what it was on Feb. 15, 2020, then the amount that would otherwise be forgiven will not be reduced, even if the average FTE for the Covered Period would be lower. This means that if you are going to use these funds to ramp up, make sure you are back to full employment levels by June 30.

This is a quick review to get this information out there. Follow me on Facebook at Christina Schenk-Hargrove and Dog Trainers Umbrella for developing information.

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