Updated May 18, 2020
When is the 8-week measurement period for PPP expenditures?
What We Know For non-payroll costs, the 8-week 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 much of my PPP loan can be forgiven?
What We Know Forgiveness is up to the full amount of the PPP loan plus interest accrued up to your potential forgiveness date. PPP loans can be partially forgiven. Forgiveness will be reduced if 75% of proceeds are not used toward defined “payroll costs.” Forgiveness could alsoe 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).
What else can PPP funds be used for during the 8-week period and be forgiven?
What We Know No more than 25% of PPP loan proceeds may be used for mortgage interest, utilities, rent and certain other interests that were established (contract in place) as of February 15, 2020.
How do I determine headcount for comparison?
What We Know 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 8 week period is lower than the comparison period, you will have until 6/30/20 to restore headcount and not have forgiveness reduced.
The SBA published the loan forgiveness application on May 15, and the application’s Schedule A worksheet provides the formula for the full time equivalent reduction calculation.
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. The maximum for each employee is capped at 1.0. A simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the Borrower.
I’m behind on rent and utilities. Can I use PPP to catch up those outstanding expenses?
What We Know All eligible expenditures must be during the 8-week measurement period (cannot “reimburse” company for expenditures outside of this measurement period).
What We Expect Utilities relating to the 8-week measurement period will be eligible for forgiveness, therefore pre-payments or payments in arrears will not be eligible.
What defines a “utility” for PPP purposes?
What We Know 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.
Is the 8-week period of expenditures measured on a cash or accrual basis of accounting?
What We Know Guidance indicates that the PPP loans should be used for expenditures over the 8-week period starting with loan funding. 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.”
For PAYROLL COSTS only, borrowers with a biweekly (or more frequent) payroll schedule e may elect to calculate eligible payroll costs using the eight -week (56 day) period that begins on the first day of their first pay period following their PPP loan disbursement date. 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, “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 8-week period and count it as payroll expense?
What We Know Guidance indicates that the PPP loans should be used for expenditures over the 8-week period starting with loan funding. Cash compensation is limited to an average annual salary of $100,000 (or $15,385 during the “Covered Period”), so presumably a cash bonus is allowable to the extent not disallowed based on annual salary limitations.
What are the repercussions for misuse of PPP funds?
What We Know 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 is subject to liability such as charges for fraud.
What We Don’t Know 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.
What We Expect FD recommends using the funds as intended and returning the portion that cannot be utilized according to program guidelines. FD has developed a model that allows us to use the borrower’s anticipated costs over the 8-week 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?
What We Know PPP funds are tax free. IRS Notice 2020-32 indicates that expenditures paid with PPP funds will not be deductible.
How do I forecast my forgiveness amount?
What We Know The SBA published the loan forgiveness application on May 15, 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.
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?
What We Know The Treasury Department issued an update on May 13th regarding this topic. 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 that keep the loans instead of returning them by the May 18 “safe harbor” deadline, 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