5 NEW Things You Need to Know About Your PPP Loan Forgiveness

#1 thing to know before we get started – this is based on my current understanding of the rules on 5/29/2020.  These rules are changing regularly, and my comments here are not meant as professional advice related to your situation.  You need to read the rules and consult your accounting advisor to make sure you understand exactly how these apply to your situation.

  1. Forgivable wages for owner-employees and self-employed individuals is limited

We’ve always known that payroll was limited to an annualized amount of $100,000. The rules spell out that for the 8-week covered period, no employee can have wages of more than $15,385 forgiven.
BUT — we did get some additional limitations beyond that.

The rules have spelled out that for owner-employees and self-employed individuals, the forgiveness related to payroll for those individuals has an additional limitation – it can not be more than 8-weeks worth of last years earnings.

For owner-employees that are getting a W-2, that would be the W-2 wages + Simple IRA or 401k deferrals that were pretax times 8 weeks/52 weeks.

For self-employed individuals, this is based on the 2019 net profit and general partners are limited based on the amount of their 2019 self-employment income.  What this means – those folks really need to get their 2019 tax returns completed prior to filing for PPP loan forgiveness.

One other important comment about payroll costs that was clarified – the interim final rules also state that bonuses, hazard pay, and commissions are allowed as forgivable payroll costs, as long as it doesn’t push anyone over the two limits we discussed above.

  1. The 8-week covered period for payroll now has options

You now have some choice over the 8-week period you want to use for your forgiveness calculations.The standard covered period for payroll is the 8-weeks starting with the date your loan was funded.
BUT — the SBA has now offered an alternate period.

This alternate period allows you to align your 8-week period with your payroll cycle.  For example, if you run a bi-weekly payroll, you are allowed to start your 8 weeks for the payroll period beginning with the first payroll cycle after you received your loan funds.

This gives you a little more flexibility in determining the best outcome for your company

Please note that they have also added the ability to include payroll costs incurred during the covered period and paid on or before the next regular payroll date.

For example, let’s say your covered period ends June 6th.  If you pay wages weekly, and the next paycheck is issued on June 12th for the pay period May 31 – June 6th, this language indicates that you would be able to include wages earned May 31 – June 6, but not paid until the next regular payroll cycle on June 12th.

  1. There are simplified methods for the FTE calculation

I think that the FTE calculations may be the biggest time commitment for businesses when dealing with loan forgiveness.There are a lot of options around this – and making the best selection here for your company is important as this directly affects how much loan forgiveness you will receive.Currently, the SBA is indicating they expect that the loan forgiveness application will take about 3 hours to complete.  Other accountants are indicating 3-5 hours, but I believe it will be very dependent on how many employees you have and how complicated your FTE calculations will be.

As a reminder, these FTE calculations matter because the goal of this loan was to keep people on payroll.

Loan forgiveness is reduced by the % decrease you show in FTEs, unless you can restore in full by 6/30/2020.

The act allows you to select one of three different base periods, and allows you to compare to your FTE’s over your covered period (the original OR the alternate), and then again at 6/30/2020.

There are a lot of potential calculations to determine what is best for your business:

First choice – what base period is best for your company – you want to pick the one with the lowest FTE count.  You can choose from 2/15 – 6/30/2019 OR 1/1/2020 – 2/29/2020 OR if you are seasonal, you have a third choice – any 12 weeks of your choosing between the dates of May 1, 2019 – Sept 15, 2019.

Second choice – what 8-week period is best for your company – the 8 weeks starting on the date your loan was funded?  Or the alternative 8 week period starting with your next payroll cycle?

Third choice – will you use the 40 hour a week base calculation by dividing the hours worked in a week by 40 to get an exact amount – for example someone who worked 30 hours – you would take 30 and divide by 40 to get .75

Will you use the simplified method where each part time employee counts as .5 and each full time employee counts as 1.

  1. There is an application out now – but it might change

The current document is 11 pages — 8 pages of instructions and 3 pages of actual data you need to complete. Again, the current estimate to complete this is 3 hours, but accountants doing test applications are reporting up to 5 hours or more to complete all the necessary calculations.We’ve also heard reports that people should expect changes, and that this is likely not the final application.  Remember how many versions of the loan application there were? I think we’ll see this again with the forgiveness application as well.

  1. The rules may change (again)

Both the Senate and the House have been talking about ways to modify this program to make it more friendly to small business owners.

Yesterday, the House passed the PPP Flexibility Act, which if it became law would allow small businesses 24 weeks to spend their PPP funds, would lower the 75% payroll cost requirement down to 60%, and use a reference date of 12/31/2020 instead of 6/30/2020.

This would potentially give businesses more time to apply for the loan, more time to rehire to full levels, more time to spend the money, and more flexibility in how it was spent.

BUT – its not a law yet.  And PPP borrowers are running out of time quickly to plan their spending.  In fact, borrowers that got funded on 4/3/2020 have already used up their 8-week period.

Hoping our friends in Washington DC can get this straightened out ASAP – because it’s no fun, and it’s not fair to be playing a game only to have the rules changed at t