How to avoid a reduction in PPP loan forgiveness

May 01 , 2020

Four Events can trigger a reduction in loan forgiveness:

1. Reduction Based on Use of Funds
2. Reduction Based on Employee Headcount
3. Reduction Based on Employee Payroll
4. Reduction Based on Advance Payment

#1 Reduction Based on Use of Funds

At least 75% of the loan proceeds must be used on payroll costs. Borrowers may only spend only up to 25% of the loan proceeds on qualified non-payroll expenses. If non-payroll costs comprise more than 25% of the use of PPP Funds, the total forgivable amount will be reduced accordingly.

Example 1

• Loan amount $100,000
• Amount spent on payroll costs = $75,000
• Amount spent on rent = $15,000
• Amount spent on utilities = $10,000
• Total Amount Spent = $100,000

Payroll costs of $75,000 represent 75% of the total qualifying expenses ($100,000) and as a result, there is no need to reduce the forgiveness request based on the 75/25 cost rule.

Example 2

• Loan Amount $100,000
• Amount spent on payroll costs = $60,000
• Amount spent on rent = $20,000
• Amount spent on utilities = $20,000
• Total Amount Spent = $100,000

Payroll cost of $60,000 represents 60% of the total qualifying expenses. There must be a reduction in loan forgiveness. Since only 75% of the forgivable amount must be payroll costs.

Forgiveness is limited to $60,000/ .75= $80,000.

This would mean that $60,000 in payroll costs and $20,000 in non-payroll costs would be forgivable.

#2 Reduction Based on Employee Headcount

Loan forgiveness will be reduced if you decrease your average full-time employee (AFTE) headcount in comparison to one of the two measurement periods before the shutdown.

The two pre-shutdown measurement periods are:

1. February 15, 2019, and ending on June 30, 2019, or
2. January 1, 2020, and ending on February 29, 2020.

Option 1:

• # AFTEs during 8 weeks/ # AFTEs during 2/15 to 6/30 = ___%
• 5 AFTEs (employees) during 8 weeks/ 7 AFTEs (employees) during 2/15 to 6/30
• 5/7 = 0.7 = 70%

In this scenario, 30% of the loan is not forgiven.

Option 2:

• # AFTEs during 8 weeks/ #AFTEs during 1/1 to 2/29 = ___%
• 5 AFTEs (employees) during 8 weeks/ 10 AFTEs (employees) during 1/1 to 2/29 =
• 5/10= 0.5= 50 %

In this scenario, 50% of the loan is not forgiven.

#3 Reduction Based on Employee Wages

Loan forgiveness will also be reduced if you decrease wages by more than 25% for any employee that made less than $100,000 annualized in 2019.

• Determine the total salary and wages for Quarter 1 of 2020 for each employee
• Exclude any employee that made more than $100,000 per year, they do not count as part of the calculation
• Determine the salary and wages for the 8-week cover period for each employee
• Determine whether the employee’s salary and wages decreased during the 8 week cover period by more than 25% of the salary and wages in Quarter 1 of 2020
• Add up the total amounts that were in excess of 25%

Wage Reductions Examples

• Employee 1: Employee’s salary and wages for 2019 were over $100,000, This employee is excluded from the calculation.
• Employee 2: Employee’s salary and wages in Q1 $20,000; had a 40% pay reduction of $8,000 during the 8-week period. The amount in excess of the 25% is 15% or $3,000
• Employee 3: Employee’s salary and wages in Q1 $15,000; had a 30% pay reduction of $4,500 during the 8-week period. The amount in excess of 25% is 5% or $750
• Employee 4: Employee’s salary and wages in Q1 was $10,000; had a 25% pay reduction of $2,500 during the 8-week period. There is no amount in excess of 25%.
• Then amounts in excess of 25% are added up -> $3,000 + $750= $3,750

This amount is reduced dollar for dollar from the amount of the PPP loan eligible for forgiveness.

You have until June 30, 2020, to restore your full-time employment and salary levels for any changes made between February 15, 2020, and April 26, 2020.

#4 Reduction Based Advance Payment

Lastly, if you received a grant from the SBA’s Economic Injury Disaster Loan (EIDL) program this amount will be deducted from the loan forgiveness amount.

The SBA has been offering grants of $1,000 per employee up to a max of 10 employees. If you acquire that grant AND get the PPP, then you must subtract the EIDL grant from the PPP loan amount and reduce the forgivable amount further.

Only use loan proceeds for authorized expenses

Authorized expenses include:

1.Payroll costs including benefits

• salary, wages, commissions, or similar compensation
• cash tips or equivalent
• Group health insurance
• vacation, parental, family, medical, or sick leave
• retirement benefit
• state or local tax assessed on the compensation of the employee

“Payroll Costs” do not include the following:

• compensation of any individual employee in excess of an annual salary of $100,000 as prorated for the period February 15 to June 30, 2020;
• federal payroll taxes, railroad retirement taxes, and income taxes;
• any compensation of an employee whose principal place of residence is outside the U.S.;
• qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (“FFCRA”); or
• qualified family leave wages for which a credit is allowed under section 7003 of the FFCRA. The FFCRA was passed on March 18, 2020.

2. Interest payment on a mortgage that originated prior to February 15, 2020.

• A covered mortgage interest obligation specifically must be both: (a) a liability of the borrower; and (b) a mortgage on real or personal property on a security interest in personal property.

3. Interest payment on a debt that originated prior to February 15, 2020.

• May include interest on auto loans or other business assets.

4. Payment of rent on a lease that began prior to February 15, 2020.

• No prepayments on future rent

5. Payment on any utility for which service began before February 15, 2020.

• Utility payments include payments for the service of electricity, gas, water, transportation, telephone, and internet access.

Follow Lender’s Guidelines & Keep Detailed Records

It’s important to know how to properly account for loan expenditures to apply for loan forgiveness. You must keep an accurate account of expenditures and provide documentation to lenders to maximize loan forgiveness.

Open a separate bank account to track funds

It’s crucial to maintain a detailed account of how the loan is spent. It may be in your best interest to segregate funds in a separate bank account. Otherwise commingling the loan with other funds will make it very difficult to track and to document its use. If for any reason you are unable to pay from the PPP bank account for the eligible cost for forgiveness then you may pay from the main account and then reimburse the main account from the PPP bank account.

Understand your lender’s set of guidelines

Borrowers must provide required documentation that verifies the proper use of funds. It’s important to verify what documentation the lender will require for the application of loan forgiveness, they may have additional requirements. The list of required documentation can include but not limited to:

• Documentation verifying the number of full-time equivalent employees and relevant pay rate, including state and federal payroll and unemployment filings;
• Documentation verifying covered payroll, interest on debt obligations, leaves, and utility payments (such as canceled checks, receipts, and account statements);
• A certification from the recipient that all documentation presented is true and correct and the amount for which the forgiveness is requested was used for permissible purposes; and,
• Any other documentation as required by the SBA and lender

Loan Amounts Not Forgiven

For covered loans that have a remaining balance after the loan forgiveness reduction, the remaining balance is guaranteed by the SBA, the loan will have a maximum maturity date of 2 years from the application of loan forgiveness, and the interest rate cannot exceed 1%.