Are you applying for loan forgiveness on your Paycheck Protection Program (PPP) loan? Learn about safe harbor provisions and coverage period restrictions.
Note: Please visit the Small Business Administration's PPP website for the most current details.
As of July 14, American businesses had received more than 4.9 million loans through the PPP. All of those loans — some $518 billion worth — are eligible for forgiveness under certain circumstances. Make sure you understand the requirements.
Payroll and Salary Criteria
Initially, the PPP stipulated that 75% of any loan had to be dedicated to payroll costs. But recent legislation revised that figure to 60%.
That's just one of many adjustments. The government's latest Loan Forgiveness Application revision, which has two application forms and two corresponding instructions, can be confusing. We will try to summarize the changes by focusing on a few key provisions.
Coverage period definitions and restrictions: Businesses that received their PPP loan by June 4 can still choose an eight-week period for their loan. However, just like post-June 4 borrowers, they may also elect to use a 24-week period. Among other things, choosing the 24-week option effectively increases the maximum amount you can pay any individual employee with PPP funds from $15,385 to $46,154 (prorated based on a $100,000 cap on annual salary).
The revisions are also intended to prevent businesses from being penalized if the actual conditions on the ground during their designated coverage period differ from what they anticipated upon applying for the loan. These circumstances may include state or local restrictions, such as social distancing requirements, that prevented them from reopening at full capacity, which in turn reduced the number of staff members needed and/or their hours. Or, some employees may have requested reduced hours or chose not to return to work at all.
Please note: As the instructions for the Forgiveness Amount Calculation Form explain, business owners must maintain "Documentation regarding any employee job offers and refusals, refusals to accept restoration of reduction in hours, firings for cause, voluntary resignations, written requests by any employee for reductions in work schedule, and any inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020."
In other words, keeping good, thorough financial records is crucial.
Forgiveness amount calculations: There are four key calculations for determining loan forgiveness.
The first involves adding up all payroll costs incurred or paid during the Covered Period or the Alternative Payroll Covered Period and seeing if the total constitutes at least 60% of your loan. That may prove to be not so simple.
Second, you must monitor where you are spending the rest of your loan. The Forgiveness Amount Calculation Form includes lines where you can list your business mortgage interest, rent or lease payments, and utilities. But as the instructions also note, "You are not required to report payments that you do not want to include in the forgiveness amount." So unless you absolutely have to use your loan for those expenses, you might be better off not doing so because it could unfavorably skew the payroll percentage.
Third, there are the calculations regarding reductions in employee compensation that you might not have foreseen when you applied for your loan (the section in the PPP revision labeled "Salary/Hourly Wage Reduction"). Basically, this means the terms of your loan require that you pay your employees during the Covered Period or the Alternative Payroll Covered Period at least 75% of the amount that you were paying them before — that is, during the first three months of 2020.
If you were satisfying the above employee compensation criteria, then you are in great shape. If not, then what? That depends.
- If your specific employee's annual salary or hourly wage as of February 15 is equal to or greater than the average annual salary or hourly wage between February 15 and April 26, then you have the chance to go to "safe harbor."
- If you restore this employee's salary level on December 31 or the date this application is submitted to the same or a higher salary level than during the payroll period of February 15, then you have met the salary/hourly wage reduction safe harbor. That means you will incur no penalty on the employee compensation portion.
Finally, there is the full-time equivalency (FTE) calculation, which is a restriction on the employee headcount or working hours reduction (line 7 of the PPP Loan Forgiveness Calculation Form).
There are two safe harbors when calculating the FTE reduction:
- The first applies to business owners who were unable to operate at the same level during the Covered Period "due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020, by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19."
- The second essentially grants business owners who reduced employee number or working hours after February 15 a grace period. During this period, they can restore employee headcount or working hours to previous levels by December 31 or the date this application is submitted to achieve compliance. Please note: The precondition is that the borrower's total average FTE between February 15 and April 26 must be equal to or lower than the borrower's total FTE in the borrower's pay period inclusive of February 15. (See steps 1 to 4 under the subhead, "FTE Reduction Safe Harbor 2" on page 4 of the Forgiveness Amount Calculation Form for more details.)
If you cannot meet these two safe harbors, you must do the required calculation to determine whether you will be penalized. Use total average FTE during the Covered Period or the Alternative Payroll Covered Period to divide the Average FTE during your chosen reference period. If the quotient is equal or greater than 1, you are all set. Otherwise, you will risk not having the loan fully forgiven. (See step 5 under the subhead, "FTE Reduction Safe Harbor 2" on page 4 of the Forgiveness Amount Calculation Form for more details.)
Professional Bookkeeping Services Can Help
Given the importance of having your PPP loan forgiven, and the level of complication involved in the calculations, it is vital that you have capable bookkeeping support to help you compile whatever documentation you need.
You Can Still Apply for a PPP Loan
Did you miss the application deadline? Don't worry — the Paycheck Protection Program Extension Act moved the application deadline to August 8. Learn more about applying for a PPP loan and managing cash flow on our Business Continuity resource page.