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Paycheck Protection Program: Frequently Asked Questions

Updated July 2, 2020

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When does the measurement period for PPP expenditures begin?

For non-payroll costs, the covered period starts the day you first receive loan proceeds. HOWEVER, for payroll costs, you have the election of choosing either the date of loan funding or the “Alternative Payroll Covered Period” which begins on “the first day of the first pay period following the PPP disbursement date.”

How long is the loan forgiveness period?

Although the loan forgiveness period (the “Covered period”) was originally 8 weeks, the PPP Flexibility Act of June 5th expanded the covered period for borrowers to 24 weeks from loan funding, but not beyond 12/31/2020.

Beginning on June 5th, Borrowers MUST use a 24 week covered period. Borrowers with loans originated (i.e., with loan numbers assigned) before June 5th still have the option to use the original 8-week covered period. This change is expected to help businesses, especially those subject to mandatory closures who were slow to re-open, achieve loan forgiveness.

How much of my PPP loan can be forgiven?

Forgiveness is up to the full amount of the PPP loan, plus interest accrued up to your potential forgiveness date. The amount of forgiveness will be reduced if less than 60% of loan proceeds are used toward defined “payroll costs.”

Forgiveness may further be reduced if full time equivalents (“FTEs”) are reduced (relative to comparable periods) or if individual compensation for employees earning less than $100,000 per year are reduced by 25% or more.  There are certain safe harbor exceptions to FTE reductions (discussed below) to avoid reductions in a borrower’s forgiveness.

What else can PPP funds be used for during the covered period and be forgiven?

No more than 40% of PPP loan proceeds may be used for “covered” mortgage interest, utilities, rent and certain other interest payments that were established (contract in place) as of February 15, 2020.

How do I determine headcount for comparison?

One of two comparison periods will be used to calculate reduced headcount (2/15/19 – 6/30/19 OR 1/1/20 – 2/29/20), whichever is lower.  If Full Time Equivalents (“FTEs”) during your covered period is lower than the comparison period, you will have until 12/31/2020 to restore headcount and not have forgiveness reduced. This timing was initially 6/30, but it was extended by legislation passed in early June.

The PPP guidance and the PPPFA provide for certain exemptions to the headcount restoration requirements, and should be reviewed if you have calculated a penalty in forgiveness due to a headcount reduction.

How do I calculate a full-time equivalent?

The PPP forgiveness application instructions state the borrower has to calculate for each employee the average number of hours paid per week during the referenced period and divide by 40, and round to the nearest tenth. There is also a simplified method which borrowers may elect to use.

The SBA updated the loan forgiveness application on June 16, and the application’s Schedule A worksheet provides the formula and instructions for the full-time equivalent reduction calculation. Application instructions are available on the treasury website here.

I’m behind on rent and utilities. Can I use PPP to catch up those outstanding expenses?

Current guidance allows you to use PPP funds for expenses “paid” or “incurred” during your covered period.

Reasonable expenditures that fall immediately before or after the covered period are examples provided in the guidance as appropriately considered for PPP funds.  The SBA and Treasury OIG will be reviewing the legitimacy of PPP expenditures looking for fraud and abuse.

What defines a “utility” for PPP purposes?

The loan forgiveness application language issued on May 15th has helped clarify this aspect of forgiveness, stating that you may include “business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

The “transportation” inclusion supports the 4/14/20 IFR issued that listed gas you use driving your business vehicle. NOTE that security systems or credit card processing is NOT included, nor is waste removal. CAM charges are also excluded, but presumably a detailed analysis of CAM charged to a lessee would allow for inclusion of certain eligible utilities.

What if my loan period doesn’t align with my pay periods?

In explaining the calculation of eligible payroll and non-payroll costs, the instructions indicate to include eligible costs “incurred OR paid” during the covered period. Instructions state that “costs incurred but not paid during the Borrower’s last pay period of the Covered Period are eligible for forgiveness if paid on or before the next regular payroll date.”

This means for PAYROLL COSTS only, borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the loan coverage period that begins on the first day of their first pay period following their PPP loan disbursement date.

Here is an 8 Week Example:

  • April 20: PPP loan funded
  • April 26: First day of first pay period following PPP loan disbursement
  • April 26: First day of Alternative Payroll Covered Period
  • June 20: Last day of Alternative Payroll Covered Period

For non-payroll expenses the “cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.”

Can I pay all of my annual bonus in the loan coverage period and count it as payroll expense?

Guidance indicates that the PPP loans should be used for expenditures over the loan coverage period starting with loan funding. Cash compensation is limited to an average annual salary of $100,000 (which equates to $15,385 during an 8 week “Covered Period” or $46,154 for a 24 week “Covered Period” for employees), so a cash bonus is allowable to the extent not disallowed based on annual salary limitations.

What are the repercussions for misuse of PPP funds?

Funds not spent according to program guidelines must be immediately returned. Knowing misuse of funds will trigger an immediate repayment and a shareholder, member and partner may be subject to further legal liability.

While Treasury Secretary Mnuchin has indicated the SBA will conduct a full review of loans greater than $2 million before forgiveness is granted, no guidance has been provided of what that review will consist. The OIG has been allocated $100 million to investigate fraud in the PPP, which may be allocated to these reviews or may encompass borrowers less than this threshold as well.

FD recommends using the funds as intended and consider returning the portion that cannot be utilized according to program guidelines if they are concerned with complete forgiveness. FD has developed a model that allows us to use the borrower’s anticipated costs over the loan coverage period to provide help in planning for the maximum forgiveness amount under various scenarios.

Can I deduct expenditures that were covered by PPP forgiven funds on my tax return?

PPP funds are tax free. IRS Notice 2020-32 indicates that expenditures paid with PPP funds will not be deductible. A bill has been introduced in the Senate that would allow PPP expenditures to be tax deductible, and FD is following this development to inform borrowers of any changes based on new legislation.

How do I forecast my forgiveness amount?

The SBA updated the loan forgiveness application on June 16, and the application’s Schedule A worksheet provides the forgiveness calculation for borrowers who had a pay reduction of more than 25%. Schedule A also includes the formula for the full-time equivalent reduction calculation.  The instructions released with the updated application will assist borrowers in salary and wage calculations.

For more in-depth modeling and comparison of various scenarios, Frazier & Deeter has developed a model that will help the borrower achieve maximum cash flow and maximum PPP forgiveness under multiple circumstances.

Please contact our PPP team to see if this model is right for you.

I have heard that PPP loan recipients may have to document they didn’t have access to other sources of funds, outside of the PPP program, to help the business remain open. Does this apply to my company?

The Treasury FAQ indicates that any borrower that received a PPP loan with an original principal amount of less than $2 million is deemed to have applied for the loan in good faith. The certification of need that was included in the loan application that the business was in need of funds will be adequate.

For those borrowers with loans over $2 million, the SBA will perform a review of the loan and determine if they agree with the borrower’s need for funding.  If the SBA deems that the borrower lacked an adequate basis to make the certification, the SBA will inform the lender that the borrower is not eligible for forgiveness and that the outstanding amount of the loan must be repaid in full.  If the borrower repays the loan, the SBA will not pursue administrative action

What if I try but cannot rehire my former employees?

A borrower’s loan forgiveness isn’t negatively impacted by employees who decline a good faith written offer to restore hours at the same salary. Under this scenario the borrower must maintain records of the offer and report the rejected offer to the state unemployment office within 30 days. Borrowers can also exclude from the calculations employees who are fired due to performance issues or who voluntarily reduce their hours or resign. These three scenarios would enable the borrower to reduce the FTE number that must be reached by December 31, 2020.

PPP Flexibility Act also allows the borrower to avoid a forgiveness reduction due to lower headcount if the borrower can document that they were unable to either rehire the furloughed employee or to hire another individual that was “similarly qualified”. If borrowers can document their inability to return to pre-pandemic business activity levels due to a need to comply with governmental orders/requirements/ guidance for shut down or significantly limited gatherings, the forgiveness reduction due to a reduced headcount is likewise waived.

When can I apply for loan forgiveness?

You can apply at the end of the covered period or earlier, if you have used up the funds in an appropriate manner. According to new guidance in late June, a borrower may submit a loan forgiveness application any time on or before the maturity date of the loan – including before the end of the PPP covered period – if the borrower has used up all of the loan proceeds for which the borrower if requesting forgiveness.  Forgiveness applications must be filed before the maturity date of the loan, and payment deferrals are only for 10 months after the end of the borrower’s covered period.

Please note that if PPP funds are exhausted before the end of the covered period, you may want to consider applying for forgiveness as soon as possible. A borrower should consult his/her bank and advisor in this situation.Who can use the new EZ form to apply for forgiveness?

This new streamlined application is available for borrowers who are:

  • self-employed and have no employees; OR
  • did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees; OR
  • experienced reductions in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of their employees by more than 25%.

Still have questions? Reach out to Frazier & Deeter’s PPP team at ppp.info@frazierdeeter.com.

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