A GENERAL GUIDELINE FOR SMALL BUSINESSES & LENDERS ON CALCULATING, DOCUMENTING & APPLYING FOR THE AMOUNT OF LOAN FORGIVENESS FOR PPP LOANS

A GENERAL GUIDELINE FOR SMALL BUSINESSES & LENDERS ON CALCULATING, DOCUMENTING & APPLYING FOR THE AMOUNT OF LOAN FORGIVENESS FOR PPP LOANS

PPP Loans can be forgiven in whole or in part. The actual amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest. PPP Loan proceeds used to actually pay certain permissible payroll costs and non-payroll costs during the eight-week covered period can be forgiven, if:

  1. PPP Loan proceeds are spent on forgivable payroll costs and forgivable non-payroll costs.
  2. Over the exactly eight (8) week covered period following the date the PPP Loan was funded;
  3. At least 75% of the PPP Loan proceeds are used for specified payroll costs;
  4. Not more than 25% of the PPP Loan proceeds are used for non-payroll costs;
  5. Full-Time Equivalent Employee headcount is maintained; and
  6. Salary/wage levels for employees earning less than $100,000.00 per year are not reduced by more than 25%.

There will be a reduction in the amount of the PPP Loan that will be forgiven (and correspondingly there will be an amount that becomes a loan that must be repaid) to the extent portions of the PPP Loan money are spent outside the eight-week period and/or on non-forgivable costs and expenses, and to the extent, the Percentage Test, Employer Headcount Test and Salary/Wage Level Test are not met. Unfortunately, although most SBA PPP Loans have already been funded (and each borrower's eight-week period is now running), the SBA has not issued final regulations on calculating the amount of loan forgiveness, on what should be included in the Application for loan forgiveness, nor the process by which Lenders should evaluate and confirm the amount of loan forgiveness applied for by a business.*

This General Guideline was prepared by Kurt L. Sundberg, Esq. of the law firm Marsh Schaaf, LLP. As of the date of the production of this General Guideline, the SBA has issued only limited regulations and answers to FAQ's with regard to PPP Loans. The SBA has not issued final regulations with regard to calculating the amount of loan forgiveness for a PPP Loan, nor final regulations with regard to the Application for PPP Loan Forgiveness. Accordingly, this Guideline is based on the wording of the CARES Act and the limited SBA regulations issued to date. As new regulations are issued with regard to PPP Loan calculations and forgiveness, as well as filing Applications for PPP Loan forgiveness, this General Guideline, and sample forms will be updated, supplemented and revised. In the meantime, this Guideline and sample forms should be considered for informational purposes only, and businesses and lenders should work directly with their legal counsel for legal advice and direction with their accountant for tax advice when disbursing PPP Loan funds and applying for PPP Loan forgiveness.

Amounts of the PPP Loan spent outside the eight-week period or on categories of costs that are not approved payroll costs and non-payroll costs are not forgivable and will have to be repaid. The following payroll costs and non-payroll costs are eligible for loan forgiveness:

PAYROLL COSTS THAT CAN BE PAID WITH PPP LOAN FUNDS INCLUDE:

  1. The gross amount of employee wages, salaries, commissions, and average cash tips paid during the eight-week covered period. Note it is the gross amount of each employee's salary and wages that can be paid out of the PPP Loan proceeds.  The normal employee withholdings, such as the employee's share of federal, state, and local income taxes, must still be withheld and paid over to government entities. Also, employee salary/wages in excess of $100,000.00  per year, are not to be paid with PPP Loan proceeds. Accordingly,  employees with salary or wages in excess of$ I 0 0,000.00 per year can only be paid a maximum of approximately  $15,385.00  per each such employee over the eight weeks (or the equivalent of$ 1,923.08 per week or $3,846.16  per bi-weekly pay periods). Independent contractors paid by the business do not count as employees and should not be paid with PPP Loan funds.
  2. State and local income taxes paid by the employer that are assessed on employee compensation. However, the employer's side of federal payroll taxes (such as the employer's share of FUTA and FICA) are not to be paid with PPP Loan proceeds.
  3. Retirement Contributions for Employees (such as the employer's share of 40 I k contributions for each employee for each paycheck).
  4. Group Benefits paid for employees (such as paid vacation, parental, family, medical or sick leave) and Group Health Insurance Premiums paid for employees. Note, however, health insurance premiums paid for owners/partners cannot be paid out of PPP Loan proceeds.
  5. Owner/Partner Compensation Replacement. The business's owner(s) or principal(s) can pay themselves with PPP Loan proceeds over the eight-week period as a payroll expense. Owners or principals of the business generally include a sole proprietor, all partners of a general partnership or LLP, and owners of 20% or more of a corporation or LLC. The business's owner(s)/partner(s) can pay themselves based on each owner's/partner's 2019 Form 1040 Schedule C or 20 I 9 Form K.-1. Owner/partner compensation replacement is also capped at a maximum of $100,000.00. For example, if an owner's/partner's 2019 Form  1040 Schedule  C net income/profit or 2019 Form K.-1 income was $120,000.00, that owner/partner can receive compensation replacement of $1,923.08 per week or $3,846.16 bi-weekly for a total of no more than $1 5,385.00 over the eight-week period. (e.g. $100,000.00 + 52 weeks = $1,923.08 per week times 8 weeks equals $15,385.00 maximum compensation replacement over the eight weeks). If, however, the owner's/partner's 20 I 9 income was $74,984.00, that owner/partner can receive $1,442.00 per week or $2,884.00 bi-weekly for a total of no more than $11,536.00 over the eight weeks. (e.g. $74,984.00 + 52 weeks = $1,442.00 per week times 8 weeks equals $11 ,536.00 maximum compensation replacement over the eight weeks).

The borrower/business has to document all PPP Loan proceeds used for payroll costs and provide this documentation to the Lender at the end of the eight weeks with an Application requesting forgiveness of all or part of the PPP Loan. The CARES Act provides such documentation shall include documentation verifying payments to employees on payroll for the eight-week period, along with payroll tax filings rep01ied to the IRS and state income payroll and unemployment insurance filings. Accordingly, it is strongly recommended that every borrower/business put all PPP Loan proceeds in a new separate bank account and pay permissible payroll costs out of the new PPP Loan bank account as a means to help document the use of the PPP Loan proceeds. In addition, each borrower should create spreadsheets and/or charts with attached employee paystubs or payroll summaries to document employee wages/salaries, the employer share of state and local taxes, employer's retirement contributions, group health insurance premiums paid for employees, and owner/partner compensation replacement paid with the PPP Loan proceeds.

It would be a good idea to move the gross amount of employee payroll each week from the new PPP Loan bank account to the businesses' payroll account and then handle employee tax withholdings, ACH transfers of net paycheck amounts to employees, etc., as the business customarily does each week or bi-weekly. If the borrower uses a third-party payroll service, the account history for the new PPP Loan bank account combined with the payroll documentation from the payroll service and the bo1Tower's spreadsheets should be sufficient documentation. It would be proper to transfer gross amounts of employee compensation and owner/partner compensation replacement from the PPP Loan account to a payroll account each pay period.

Another reason to set up a separate new bank account for PPP Loan funds is for annual accounting and income tax purposes. Pursuant to the CARES Act, the amount of the loan forgiven will not constitute income to the business. However, the permissible payroll costs and non-payroll costs paid with the forgiven amount of the PPP Loan probably cannot be taken as a  business expense or deduction on the businesses' 2020 income tax return because of IRC §265, which disallows the deduction of expenses relating to tax-exempt income. Accordingly, the business should essentially run a separate "set of books" or "QuickBooks" for the PPP Loan funds and not co-mingle the receipt and disbursement of the PPP Loan proceeds with the businesses general operating account. The businesses'  tax accountant will appreciate it next year when completing the businesses' 2020 tax returns. This will also make the Lender's review of the Application for  PPP Loan forgiveness easier.

NON-PAYROLL COSTS (OVERHEAD/OPERATING COSTS) THAT CAN BE  PAID WITH PPP LOAN FUNDS INCLUDE:

  1. Payments of interest on business mortgage obligations on real estate or personal property that were incurred before February 15, 2020. Accordingly, the interest portion of a mortgage payment secured by real estate and/or secured by a security agreement and  UCC financing statement on business assets can be paid with  PPP Loan proceeds and be forgivable.  It is the interest-only portion that is forgivable, the principal portion of any mortgage payment should not be paid with PPP Loan proceeds. Although the CARES Act also provides PPP Loan proceeds that can be used for "interest on any other debt obligations", SBA regulations note that such interest paid is not eligible for PPP Loan forgiveness. Accordingly, if the accrued interest is for an unsecured line of credit loan, payment of this interest would not qualify as a use of PPP Loan proceeds eligible for forgiveness and, therefore, avoid the use of PPP Loan proceeds for interest payments on unsecured loans.
  2. Rent payments on a lease agreement in force prior to February 15, 2020.
  3. Business Utility Payments. Business utility payments include gas, electric, water, sewer, telephone, and internet service.

Just like permissible payroll costs, this permissible non-payroll (overhead/operating) costs should be paid directly out of the new bank account to which the borrower/business has placed the PPP Loan proceeds as a way of documenting the proper and permissible use of the loan proceeds. The CARES Act requires that, with the Application for loan forgiveness, the business must submit to the Lender at the end of the eight-week period canceled checks, payment receipts, transcripts of accounts, and other documentation verifying payments from the PPP Loan proceeds. Accordingly, additional documentation that should be included with the borrower's application for forgiveness and spreadsheets include the account history for the new PPP Loan account with canceled checks and/or ACH transfers for the account, copies of mortgage statements, the portion of the lease agreement showing monthly rent payable, and utility bills paid. If certain bills/invoices are paid by ACH transfer out of the business's general operating account and the ACH transfer is not temporarily moved to the new PPP Loan bank account, the business should write a check out of or transfer money out of the PPP Loan bank account to the general operating account for the exact amount of the bill/invoice being paid and note/memo on the check or transfer what is being paid (e.g., $250.00- gas service, $523.21- mortgage interest, $5,000.00 rent).

AS A REMINDER, THE MAXIMUM POSSIBLE AMOUNT OF LOAN FORGIVENESS IS BASED ON THE SUM OF PERMISSIBLE PAYROLL COSTS AND OVERHEAD EXPENSES  (MORTGAGE  INTEREST,  BUSINESS  RENTAND UTILITIES) PAID OVER THE EIGHT-WEEK PERIOD FOLLOWING THE DATE OF LOAN DISBURSEMENT. THE ACTUAL AMOUNT OF PPP LOAN FORGIVENESS DEPENDS ON A SERIES OF TESTS. 

1. The 75%/25% Rule and Test. In order for all amounts of the PPP Loan spent on eligible payroll costs and non-payroll costs over the eight-week covered period to be forgiven, at least 75% of the amount forgiven must be attributable to eligible payroll costs and no more than 25% of the amount forgiven must be attributable to eligible non-payroll  (overhead/operating) costs. Provided no less than 75% of the loan proceeds are used to pay eligible payroll costs and no more than 25% of the loan proceeds are used to pay eligible operating or overhead costs (such as business mortgage interest, rent, and utilities), all such amounts paid will qualify for forgiveness. The forgiveness calculation is a simple comparison of the sum of all eligible payroll costs paid and eligible operating costs (plus any ineligible costs) paid over the eight-week period with PPP Loan funds.

For example: If $80,000.00 was paid toward eligible payroll costs and $20,000.00 was paid towards eligible overhead/operating costs, the full $100,000.00 would be forgivable (assuming properly documented). If, however, $68,000.00 was used for eligible payroll costs and $32,000.00 was used for eligible operating costs, then the ratio was 68%/32% and violated the 75%/25% Rule by 7%. Therefore, 7% of the $100,000.00 spent ($7,000.00) would become the loan amount and $93,000.00 of the $100,000.00 PPP Loan funds spent would be forgivable. Similarly, if $5,000.00 of the PPP Loan proceeds were used towards non-forgivable payroll costs (such as the employer's share of federal income taxes) and/or non-forgivable overhead/operating costs (such as payment of mortgage principal), then that $5,000.00 would not be forgivable and would become a loan. Caution: The SBA regulations state that if a borrower/business knowingly uses PPP Loan proceeds for unauthorized purposes, the borrower/business may be subject to additional liability, such as charges for fraud. 

There is some uncertainty in the following situation because the SBA has not yet issued regulations or guidance. Take our example above where $80,000.00 of PPP Loan proceeds were spent on permissible payroll costs and $20,000.00 was spent on permissible operating costs, so the 75%/25% test was satisfied. If the PPP Loan amount was $125,000.00 and only $100,000.00 was spent, what happens to the remaining $25,000.00 of unspent PPP Loan money? It is a very likely scenario there will be unspent loan proceeds over the eight-week period because stay at home orders will prevent a large number of businesses from calling back all their employees and getting them on the payroll for several weeks of the eight-week period. In addition, the amount of the PPP Loan was based on 2.5 x the average of two (2) full months of payroll. However, the PPP Loan covered period is based on only eight (8) weeks, which is almost a full week short of two  (2) months (56 days versus 61 days). In addition, many of the CARES Act's formulas and tests discussed in this Guideline are based on annual or monthly amounts. The general consensus of commentators is that any extra unspent loan funds (in our example  $25,000.00)  will simply become a loan amount that has to be repaid and it will not be counted in the 75%/25% test, because the CARES Act rules and tests are clearly geared towards the PPP Loan funds actually spent. In addition, the CARES Act states the amount of the loan forgiveness will be "in an amount equal  to the sum of" the permissible payroll costs and non-payroll operating costs paid from the PPP Loan funds over the eight-week period, and the SBA "shall remit to the Lender an amount equal to the amount of forgiveness." The CARES Act also anticipated loan balances as it expressly sets forth provisions with regard to the remaining balance of a covered loan after deducting the forgiveness amount, including provisions regarding interest rate, deferment, and sales on the secondary market.

There are also two (2) tests that must be met in order to prevent a reduction of the amount of the PPP Loan that will be forgiven. Even if the business only uses PPP Loan proceeds for eligible payroll costs and eligible operating/overhead costs, and the amount spent on payroll costs exceed 751% of the PPP Loan proceeds used and the amount spent on permissible operating/overhead costs are less than 25% of the PPP Loan proceeds used, the total of these amounts to be forgiven can be reduced if the borrower's full-time equivalent employee headcount decreased or salaries and wages of any employees that make less than $100,000.00 decreased by 25% or more during the eight-week covered period.

2. Full-Time Equivalent Employee Headcount Rule and Test. The amount of loan forgiveness will be reduced if there is a reduction during the eight (8) weeks in the average full-time equivalent employee headcount. In order to determine whether there is a reduction in the amount of loan forgiveness based on the Headcount Test you take the total dollar amount of the  PPP Loan that qualifies for forgiveness based on the 75%/25% Test above and multiply it by the factor which is the average number of full-time equivalent employees per month for the eight weeks + either by the average number of full-time equivalent employees the business had per month from February 15, 2019, to June 30, 2019, or the average number of full-time equivalent employees the business had per month from January 1, 2020, to February 29, 2020  (or for seasonable employees, you divide by the average number of full-time equivalent employees per month from February 15, 2019, to June 30, 2019). The words  "full-time equivalent employee"  is not defined in the CARES Act. However, other SBA regulations treat a full-time employee as any employee who is employed on an average of at least 30 hours per week and a full-time employee can also be a combination of employees each of who is not full-time because they do not work at least 30 hours per week, but who, in combination, are counted as the equivalent of a full-time employee. Accordingly, the formula or test reads as follows:

Reduction in Headcount Test

Multiply the total dollar amount of the PPP Loan that qualifies for forgiveness by the following fraction:

  • Numerator:  average number of full-time employed by the equivalent employees business  (FTEs) per month employed by the business during the eight-week period; 
  • Divided by
  • Denominator: the lesser of (i) the average number of full-time equivalent employees (FTEs) per month employed by the business during the period from February 15, 2019, through June 30, 2019, or(ii) the average number of FTEs per month employed by the business during the period from, January 1, 2020, through February 29, 2020.

The total dollar amount of PPP Loan that qualifies for forgiveness  (X) Average Number of FTEs Per Month for the 8-Week covered period:

Option 1:

  • The average number of FTEs per month from February 15, 2019, to June 30, 2019

Option 2:

  • The average number of FTEs per month from January 1, 2020, to  February  29,  2020

For Seasonal Employers:

  • The average number of FTEs per month from February 15, 2019, to June 30, 2019

For example: Using our prior example that $80,000.00 was paid toward acceptable payroll costs and $20,000.00 was paid towards acceptable overhead/operating expenses, we have $100,000.00 of the PPP Loan that qualifies for forgiveness. Assume the business had a monthly average of eleven (11) employees from January 1, 2020, to February 29, 2020, being eight (8) full-time employees and three (3) part-time employees.  The three (3) part-time employees work  16 hours, 15 hours, and 10 hours per week, respectively. Accordingly, the first two part-time employees are combined to total 31 hours and constitute one (I)  full-time equivalent employee, and the third part-time employee is ignored for the Headcount Test (because the employee only works 10 hours per week and cannot be combined with any other part-time employees to reach 30 hours per week). So the business has nine (9) full-time equivalent employees from  January  1, 2020, through February 29, 2020. Assume  that during the eight-week  PPP Loan covered  period;  the number of these FTEs working are as follows:

 

Week#

 

2

3

4

5

6

7

8

Number of FTEs working

4

6

8

9

9

9

9

9

 

Add up the total of FTEs working each week and divide by eight (8) weeks to get the average number of FTEs working during each pay period of the eight (8) weeks (63+8 weeks= 7.875/week- round up to average eight (8) FTEs per week).  Note:  This example calculates average FTEs on a weekly pay period basis, rather than monthly. The Headcount Test is another area that needs clarification by future SBA regulations because the eight-week period totals only 56 days (8 weeks x 7 days per week = 56 days). However, the CARES Act states the test is based on monthly averages instead of weekly averages. Two months is 61 days and almost a full week more than the number of days in eight (8) weeks. In addition, the Re-Hire Exemption (discussed later) may result in several weeks of time being ignored for FTE averaging calculations. In any event, in our example the test works as follows:

$100,000.00 x 8/9 = $88,888.89 (new forgivable loan amount)

Because the employer only averaged a full-time equivalent employee headcount of eight (8) during the eight weeks, when the average FTEs in January and February of 2020 was nine (9), the forgivable loan amount of $100,000.00 is reduced to $88,888.89.

3. Maintain Level of Wages/Salary Rule and Test. The CARES  Act provides there is also a potential reduction of the amount of loan forgiveness if there was a reduction in the total amount of wages/salary paid to each employee during the eight (8) weeks by more than 25% when compared to the total wages/salary paid to each employee making less than  $100,000.00 annualized during the pt qualifier (January 1 - March 31) of 2020. This test is obviously flawed because it requires the comparison of salary and wages paid over unequal time periods. Obviously, the total amount paid to an Applicable Employee over eight (8) weeks is going to be more than 25% less than the total amount paid to that Applicable  Employee over three (3) months during the 1 st quarter of 2020, even if the employer paid the employee at the exact same weekly or bi-weekly rate over both time periods. Accordingly, almost every employer will fail the test. SBA regulations will have to correct this problem and probably will do so as follows: For this test, the CARES Act provides employees with annual salary/wages in excess of $100,000.00 in 2019 are ignored. In addition, it appears you do not include employees who in 2019 had a variable pay arrangement (such as paid on commission). A comparison should be made between what each employee (who made less than $100,000.00 and not paid on commission)  made in the  1stquarter of 2020  to what is paid to each Applicable Employee during the eight weeks. For each Applicable Employee, take that employee's total wages/salary paid during the eight-week period and compare it to that employee's total average wages/salary rate for eight  (8)  weeks during the  1st   qualifier of 2020 (January 1, 2020, to March 31, 2020). That is, take the employee's total wages/salary for the 1 st quarter of 2020-:- by 13 weeks to= weekly average wage/salary for 1st quarter, then multiply it by 8 to get the total average wages/salary rate for eight (8) weeks in 1st quarter of 2020.  To compute the non-forgiveness amount,  take 75% of each employee's average total wages/salary for eight  (8) weeks of the 1st quarter of 2020 and subtract the number of total wages/salary the employee actually received for the eight-week PPP Loan period. Then add up all of the employees that had a reduction in their wages/salary of more than 25% over the eight-week period, and the total of this dollar amount becomes non-forgivable. As a reminder, you are only making this calculation for employees whose wages/salaries were less than $100,000.00 during 2019. Again, spreadsheets will have to be made comparing the compensation for all Applicable Employees. The formula for the test is as follows:

Reduction in Wages/Salary Test

  • Exclude from this test all employees making more than $100,000.00 in 2019 or paid on a variable pay arrangement (such as commission);
  • Identify all employees earning less than $100,000 and not paid on a variable pay arrangement (these are "Applicable Employees");
  • Make a four (4) column chati or spreadsheet with the names of all identified Applicable Employees listed down the left side;
  • In the 1st column, for each Applicable Employee, put the total average wages/salary paid to that employee over eight (8) weeks for the 1 st qualifier of 2020 [(Total of pt quarter wages/salary-:- 13 weeks) x 8];
  • In the 2nd column, for each Applicable Employee, multiply the total in the pt column by 75%;
  • In the 3rd column, for each Applicable Employee, put the total amount of wages/salary paid to the employee during the eight-week PPP Loan period;
  • Compute the dollar difference between 75% of what each Applicable Employee received in 2020 1 st quarter salary/wages (Column #2) by subtracting the total amount of wages/salary the employee actually received for the eight-week period (Column #3) and the resulting amount goes in the 4th column (Note: if the employee received more total wages/salary in the eight-week PPP Loan period then the 75%
  • Add up all the dollar amounts for the more than 25% reduction amounts for all of the Applicable Employees during the eight-week period itemized in Column #4.
  • This aggregate dollar amount father decreases the amount of the PPP Loan that is the forgivable amount in Column #2, then just enter -0- in Column #4; you cannot enter a negative number);

For Example:

-

COLllMN #I

COLUMN #2

COLUMN 113

column 114

 

TOTAL AVERAGE WAGES/SALARY OVER 8 WEEKS IN JST QUARTER

75% OF 1st QUARTER TOTAL AVERAGE 8 WEEKS WAGES/SALARY

TOTAL WAGES/SALARY PAID IN 8-WEEK COVERED PERIOD

DOLLAR AMOUNT OF WAGES/SALARY REDUCED BY MORE THAN 25%

Employee A

$4,800.00

$3,600.00

$4,500.00

-0-

Employee B

$4,800.00

$3,600.00

$3,000.00

$600.00

Employee C

$5,000.00

$3,750.00

$3,500.00

$250.00

Employee D

$6,000.00

$4,500.00

$6,000.00

-0-

Employee E

$7,000.00

$5,250.00

$6,100.00

-0-

 

 

 

 

$85_9-'" 1l Total amount by which PPP Loan forgiveness is reduced

 Example:   Assume  Employee  A made an average of $600.00  per week during the 1st quarter of2020 for an 8-week average total of$4,800.00 (Column #1).  75% of $4,800.00 is $3.600.00 (Column #2).  As long as Employee  A was paid $3,600.00  or more during the 8 weeks of the PPP Loan, there is no reduction in the loan forgiveness.  Employee  B made the same amount as Employee  A in the 1st quarter of 2020.  However,  because of stay at home orders and the employee's inability to work from home during the eight-week PPP Loan period, Employee B was only paid $3,000.00 (Column #3). Accordingly, Employee B was paid only 62.50% of the average salary/wages over 8 weeks when compared to the pl quarter of 2020 ($3,000.00 + $4,800.00   62.50%). Employee B's total wages/salary decreased by more than 25% (it reduced by 37.50%).  To simplify the calculation, take 75% of the total average 8 weeks pl quarter pay for Employee B of $3,600.00 (Column #2) and subtract the total wages/salary paid to Employee B over the eight-week PPP Loan period of $3,000.00 (Column #3) to get the $600.00 amount (Column #4). This $600.00 is added with all other Applicable Employee dollar amounts that fall below the 75% threshold and the total dollar amount of all these Applicable Employees become non-forgivable (which is then subtracted from the total PPP Loan that qualifies for forgiveness so as to reduce the forgivable loan amount).

4. Exemption for Re-Hires. Do not count on the Exemption for Re-Hires Test being a safe harbor for the Employee Headcount Test and the Reduction in  Wages/Salary Test. The section of the CARES Act that sets forth the Employee Headcount Test and the Reduction in Wages/Salary Test for purposes of limiting the amount of PPP Loan forgiveness has a subsection entitled "Exemption for Re-Hires" that provides "the amount of loan forgiveness under this section shall be determined without regard to a reduction in the number of full-time equivalent employees of an eligible (business) or a reduction in the salary of 1 or more employees of the eligible (business), as applicable, during the period" between February 15, 2020 and April 26, 2020, if there was a reduction in the number of full-time equivalent employees between February 15, 2020 and April 26, 2020 as compared to the number of FTEs on February 15, 2020 and not later than June 30, 2020, the employer, re-hires all such FTEs and any decrease in wages between February 15, 2020, and April 26, 2020, is reinstated by June 30, 2020. Some commentators have indicated this subsection of the CARES Act constitutes a safe harbor to the Headcount Test and the Reduction in Wages/Salary Test. That is, their interpretation is that as long as an employer restores full employee headcount by June 30, 2020, and restores full employee salaries and wages by June 30, 2020, there will be no reduction in the forgivable PPP Loan amount even if the Headcount Test and Reduction in Wages/Salary Tests are not met. To read this subsection as a safe harbor appears to be incorrect. The entire purpose of the PPP Loan Program is for employers to use the PPP Loan funds to get as many employees back on the payroll and receiving their full wages/salary as soon as possible. The quicker an employer gets as many employees back on the payroll and at full wages/salary, the more of the PPP Loan used for payroll purposes will be forgiven. It does not make sense to provide if an employer can get back to full employment and full wages by June 30, 2020, that the tests designed to get as many employees back to work and at full compensation within the eight-week PPP Loan period can be ignored. Especially given the fact the June 30, 2020 deadline is several weeks after almost every employer's eight-week PPP Loan period has expired. Rather, the Exemption for Re-Hires provision provides that if part of a business' PPP Loan period falls before April 26, 2020, then those weeks before April 26, 2020, are ignored for the Headcount Test and the Reduction in Wages/Salary Test if the employer restores full employment and full wages/salaries by June 30, 2020.

For example, in our above example of the Headcount Test, the employer only had four (4) FTEs back to work in week one and six (6) FTEs in week two (of a possible 9 FTEs). If the employer's PPP Loan was founded on April 12, 2020, the two weeks before April 26, 2020, can be ignored and not included in the average FTEs calculation for the reduction in Headcount Test and Reduction in Wages/Salary Test provided the employer does in fact restore all FTEs and all wages/salaries by June 30, 2020. In our above example,  if the first two weeks are ignored because of the Re-Hires Exemption, the employer's average number of FTEs for the next six  (6)  weeks would be nine (9) (rather than eight (8) as set forth in the example).  Accordingly,  there would be no reduction in the forgivable loan amount because the employer's average number of  FTEs for each pay period during the six-week period would be nine (9) (which would match the average number of FTEs during January and February of 2020) because the two (2) weeks before April 26, 2020, are ignored. Similarly, in calculating the Reduction in Wages/Salary Test, pay periods before April 26, 2020, can be ignored and effectively turn the test into a comparison of six (6) or seven (7)  week total wages/salary comparisons between the 1st quarter of 2020 and the eight-week PPP Loan period.

At the time the CARES Act was signed into law on March 27, 2020, most stays at home orders were due to expire April 30, 2020. The Re-Hires Exemption subsection appears to be an effort not to penalize employers that received  PPP Loan funds prior to April  26, 2020, that could not get all employees back on the payroll and at full compensation until after  April  26,  2020, because of the stay at home orders. However, the stay at home orders in many states has been extended beyond the end of April 2020, which has the ability of employers that received  PPP Loan funds prior to April 26, 2020, to maximize loan forgiveness. The Re-Hires Exemption subsection has no effect on the Headcount Test or Reduction in Wages/Salary Test for an employer who received PPP Loan funds after April 26, 2020.  However,  any extended stay at home orders into the third and fourth week of May 2020 will result in the Headcount Test and Reduction in Wages/Salary Test adversely affecting numerous employers' ability to use PPP Loan funds to restore full employee headcount and pay full wages/salaries. Accordingly, while the SBA has not issued any regulations or provided any answers to FAQs with regard to this subsection, employers should not count on the Exemption for Re-Hires subsection being a safe harbor to the  Headcount Test and the Reduction in Wages/Salary Test as purposed by some commentators.  Rather, borrowers should use PPP Loan money to get as many employees back on the payroll at full wages/salary as soon as possible or run the risk of a reduction in PPP Loan forgiveness.

REQUESTING LOAN FORGIVENESS.  A  borrower seeking loan forgiveness is required to submit an application for loan forgiveness to the Lender. The form of Application has not been developed by the SBA and it is not clear when or if such a form Application will be provided to Lenders.  However, the CARES Act provides the borrower  must submit the following  to the Lender with the Application requesting loan forgiveness:

  1. Documentation verifying payments to employees on payroll during the 8-week covered period.
  2. Documentation verifying the number of full-time equivalent employees on payroll (Full-time employees plus combined part-time employees).
  3. Documentation verifying full-time and PMI-time employees for the first number of 2020 as well as total pay for the quarter of 2020.
  4. Documentation verifying amounts paid for retirement contributions, group benefits, and group insurance premiums during the 8-week covered period.
  5. Documentation verifying the amount of owner/partner compensation replacement paid during the 8-week covered period.
  6. Documentation verifying the amount paid for permissible non-payroll expenses (mortgage interest, rent, and utilities) during the 8-week covered period.
  7. Payroll tax filings filed with the IRS.
  8. State income payroll and unemployment insurance filings.
  9. Financial statements verifying payment on debt obligations.
  10. Canceled checks, payment receipts, transcripts of accounts, invoices, and other documentation verifying payments made with PPP Loan proceeds.
  11. Any other documentation that the SBA requires by regulation.
Again, it is strongly recommended borrowers place all of the  PPP  Loan proceeds in a separate bank account (and not the business' general operating account) in order to provide additional documentation evidencing PPP Loan proceeds were used and disbursed for eligible purposes. Also, provide spreadsheets and chai1s to itemize all payroll costs and non-payroll costs paid from the PPP Loan funds. Following this Guideline is an example of a weekly spreadsheet for employer eligible payroll costs and non-payroll costs.  Also, is an example of how the Application for PPP Loan Forgiveness may be framed by the SBA or Lenders for purposes of calculating the amount of loan forgiveness.

PPP LOAN Example  Download  PPP LOAN Application