For the loan amount to be considered forgivable, no less than seventy-five percent (75%) of the loan must be spent on payroll and payroll related costs. If this marker is not met, it is possible that none of the loan will be considered forgivable.
How does the CARES Act define payroll and payroll related costs?
- Salaries and wages incurred and paid to employees, including cash tips or equivalents, paid time off and termination allowances, not to exceed $15,385 ($100,000 annualized) per each employee during the 8-week time period.
- Group health insurance.
- Retirement benefits.
- Employer state and local payroll taxes.
What Payroll Costs are Excluded from the Calculation?
- Cash compensation paid to an employee that is in excess of an annualized salary of $100,000 (this includes any housing allowances)
- Workers’ compensation
- Payments made to independent contractors
- Federal payroll taxes paid by the employer (federal taxes withheld from the employee’s paychecks are not excluded from the calculation)
- Qualified sick leave wages paid that are allowable as a credit under the Families First Coronavirus Response Act (FFCRA) section 7001
- Qualified family leave wages paid that are allowable as a credit under the FFCRA section 7003
- Compensation paid to any employee whose principal place of residence is outside of the United States
The amount of loan forgiven can be reduced by payroll and employee calculations, even though 75% of the loan was used on payroll and payroll related costs. These calculations are based on reductions in annualized salaries and a ratio of average full-time equivalent employees during the 8-week time period.
The following are a few of the calculations funded businesses will need to include on the PPP Forgiveness Application:
Ratio of Average Full-time Equivalent Employees (FTEEs)
The CARES Act requires funded businesses to determine a ratio of current average FTEEs compared to the average FTEEs during the time period from January 1, 2020 through February 29, 2020 or from February 15, 2019 through June 30, 2019 (seasonal businesses have to use the time period from February 15, 2019 through June 30, 2019).
If the current average FTEEs is less than either of the time periods considered, the loan forgiveness amount is reduced by the percentage difference of this ratio.
How is the average FTEEs determined?
Each employee that works an average of 30 hours or more per week is considered a full-time employee. For those employees that work less than 30 hours, these employees are combined until an average of 30 hours is reached. For example, if two employees work 15 hours a week, then they are combined and considered as one employee for this calculation. If the total current average FTEEs is 8 and the total comparable average FTEEs is 10, then the loan forgiveness amount is reduced by 20% of the total loan.
The salary reduction is determined for each employee whose annualized rate of pay did not exceed $100,000 for any single pay period during 2019. If the employee’s pay rate during the 8-week period decreased by more than 25% from the previous full quarter, then the forgivable amount is reduced by that amount exceeding the 25%.
Other Eligible Costs
There are the other costs that can be paid and qualify for loan forgiveness so long as the costs are paid and incurred during the time period along with the service and agreement occurring prior to February 15, 2020.
- Mortgage interest on real or personal property
- Rents paid under a leasing agreement
- Gas and electric
- Water and sewer
- Telephone (including cell phone)
- Transportation – the CARES Act allows for transportation costs. The only SBA guidance given on this point is for self-employed individuals. This guidance states that gas used for driving a business vehicle is a forgivable use of PPP loan proceeds. This suggests gas expenses and expenses from the standard mileage allowance may be permitted, but more definitive guidance is needed.
Some common Frequently Asked Questions Regarding PPP Forgiveness
Can a business eliminate the impact of average FTEE and/or salary reduction?
Yes, if the company hires employees at the same comparable average FTEE and restores salary and wage amounts by June 30, 2020 then the reduction amounts as identified above are eliminated. Understand, that if the employee count or salary and wage amount are not restored at the beginning of the 8-week period, the company has the potential of not meeting the 75% spending requirement on payroll and payroll related costs; thus, causing the loan amount to be considered unforgivable in its entirety.
Can a business prepay any of the eligible costs?
No, all costs must be paid and incurred during the 8-week period. Companies may want to consider changing their pay periods to ensure that all payroll costs are paid during the time period.
Can costs incurred for a home office be considered eligible for loan forgiveness?
Yes, mortgage interest, rent, and utilities used for a home office are eligible for loan forgiveness. The amount is determined as the percentage of square footage used for the home office compared to the total square footage of the home.
For other questions or calculation advice, feel free to contact our office at (619) 696-0520.