Some of you have already received SBA loans under the Paycheck Protection Program (PPP) and may now be wondering how the loan forgiveness provisions will work.
PPP loans may be forgiven, as determined by the Maximum Allowable Forgiveness Amount (MAFA), which represents the sum of the allowable costs incurred during the 8-week period after the loan is funded and cannot exceed the borrowed amount.
Allowable costs are defined as either payroll costs or non-payroll costs:
Eligible Payroll Costs
These include salaries and wages, in addition to other compensation as detailed below. For individual employees whose compensation is over $100,000 annually, the amount above and beyond an annualized $100,000 is excluded from the calculation. Your MAFA will also be reduced if you decrease wages by more than 25% for any employee who made less than $100,000 annualized for the most recent full quarter versus the 8-week covered period. In order for PPP to be forgivable, 75% of the loan must be used to cover eligible payroll costs.
Eligible payroll costs also include the following amounts paid to employees:
• Cash tips or equivalent
• Parental, family, medical, or sick leave
• Allowance for dismissal or separation
• Provisions of group health care benefits, including insurance premiums
• Employer-paid retirement benefits
• State or local tax assessed to employers on the compensation of employees
Non-Eligible Payroll Costs
• The compensation of an individual employee in excess of $100,000, as prorated for the covered period
• Taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code during the covered period
• Any compensation of an employee whose principal place of residence is outside of the United States
• Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act
• Qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act
Eligible Non-Payroll Costs
No more than 25% of the loan proceeds may be used for eligible non-payroll costs.
Eligible non-payroll costs include:
• Interest on mortgage obligations incurred in the ordinary course of business (principal excluded) with origination prior to February 15, 2020
• Rent on written lease agreements with terms beginning prior to February 15, 2020
• Payments on utilities (electricity, gas, water, transportation, telephone, or internet) with service started prior to February 15, 2020
Once the MAFA is determined, the next step is to assess if it will be reduced based on employment levels.
If there’s a reduction in staff, loan forgiveness will be reduced by the percentage reduction in full-time equivalent (FTE) staff over the eight-week period after the loan is received.
Note: The definition of full-time equivalent may vary by lender, so it’s important to consult with legal counsel and your lender as to the agreed-upon definition. The American Institute of Certified Public Accountants (AICPA) recommended in a publication dated April 28, 2020, that FTEs should be in line with the definition under the Affordable Care Act of 30 hours per week.
To calculate the amount, the average FTE over the eight-week period is divided by the lesser of the following periods below:
• Average FTE per month between February 15, 2019, and June 30,2019
• Average FTE per month between January 1, 2020, and February 29, 2020
This gives you a percentage that’s then applied to the MAFA to determine the forgiveness amount. There are additional special provisions for seasonal businesses that aren’t addressed here.
In addition, as previously noted, salaries / wages of individual employees cannot be reduced by over 25%.
The SBA has not yet written final guidance on obtaining loan forgiveness; however, we do know that a written request must be made, supporting documentation must be included, and the borrower must certify both the truth and accuracy of such documentation, and that the amount of loan proceeds for which forgiveness is being requested was indeed spent to retain employees and on other eligible covered expenses.
Note that the SBA has announced it will audit all PPP loans in excess of $2 million, and any others it believes necessary and appropriate to review following the submission of loan forgiveness requests.
As of today’s date, the SBA has not specified a time-frame or limitation on when a request for loan forgiveness must be submitted, but please be in touch with us and / or your lender, as documentation for requesting forgiveness of PPP loans should be available in the near future.
Stay tuned for further developments, which are certain to arise.
If you have questions on the PPP, please click here to email us directly – we are here to help.
Until next Wednesday –