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PPP Loan Forgiveness Updates

PPP Loan Forgiveness Updates

Originally published: https://blog.club.capital/ppp-forgiveness-updates

Will the coverage period get extended? What do I need to know about FTE Headcount? How does Reduction in Compensation over the covered period work?

These questions sound familiar? Read on to find out the latest updates on PPP Forgiveness Guidelines. (Tweet this!)


The House on May 28, 2020 and the Senate on June 3rd, passed the Paycheck Protection Program Flexibility Act to relax some of the terms of the original program outline under the CARES Act. on the 

Highlights of this new legislation:

  • Proposes more time to use the funds. Would move the 8-week period to utilize the PPP funds to qualify for loan forgiveness to 24 weeks.
  • Change the 75/25 rule. Instead of having to use 75% of the loan on payroll costs to be eligible for any loan forgiveness, this bill proposes a new 60/40 split.

The nearly unanimous vote (417-1) in the House (and quick subsequent approval in the Senate) shows that Congress is willing to pass piecemeal fixes to the Payroll Protection Program that will have an immediate impact on small business owners. Initially, these PPP-specific fixes were part of the recent $3 trillion aid package that passed the House, but that bill does not currently have enough bipartisan support to pass the Republican-majority Senate.

This is still subject to a Signature by the President but that is expected at any time.

Takeaways on the PPP Loan Forgiveness Application

On May 15, 2020, the SBA published the Paycheck Protection Program Loan Forgiveness Application (SBA Form 3508). The Application clears up several of the outstanding questions that borrowers have had regarding eligibility requirements but there are certainly questions left unaddressed.

Below are the biggest takeaways that the Club Capital team drew from the Application.1

PPP Loan Forgiveness Application Takeaways:

1. Alternative Payroll Covered Period

For borrowers with payroll schedules that are biweekly or more frequent, the Application allows them to choose an eight-week (56-day) period that begins on the first day of the first pay period that begins after disbursement of PPP funds (the “alternative payroll covered period”).

But if a borrower chooses an alternative payroll covered period, they must apply this pay period to wherever there is a reference to “the covered period or the alternative payroll covered period” but must use the covered period where only the covered period is referenced.

2. Payroll Costs (paid versus incurred)

The Application states that “borrowers are generally eligible for the payroll costs paid and payroll costs incurred” during the appropriate period. Based on this language, it appears that the SBA will be allowing both payroll paid in the appropriate period for work performed just prior to the covered period and for payroll accrued within the eight weeks, even if paid after the covered period, provided that proof of payment is submitted.

This means that borrowers may be forgiven for more than the eight weeks of payroll originally anticipated, although individuals will still be capped at $15,385 based on an annualized $100,000.

3. Non-payroll costs (paid versus incurred)

The allowable non-payroll costs do not seem as clear at the payroll costs, but it can be read in a similar manner. The Application states, “An eligible 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 cycle.”

4. Payroll Reduction Clarification

The baseline comparison period for evaluating whether there is more than a 25 percent reduction for each employee is Jan. 1, 2020, and March 31, 2020. Given that the baseline salary is 13 weeks and the covered period is eight weeks, the salaries need to be normalized. The Application has provided some clarity on this issue. For hourly employees, it appears that the comparison is based on an hourly rate comparison. For salaried, the comparison is based on the annualized salary for each of the period as prorated for the covered period.

5. Personal Property Included

There were many questions surrounding the initial meaning of “rent” with regards to approved uses of PPP funds. The Application clears up that ambiguity. The Application includes “lease agreements for real or personal property in force before Feb. 15, 2020.” This may open the door to include leases for personal property such as vehicles and office machinery.

6. Defining FTE

Many of the common questions from borrowers revolved around the definition of a full-time equivalent. The Application uses a 40-hour workweek as the standard for an FTE and rounds to the nearest tenth. It also allows for 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.” Borrowers should calculate using both methods to see which is more advantageous.

7. Baseline FTE

There was an assumption by some that the baseline FTE calculation would involve calculating the FTE for each pay period in the chosen baseline period and taking the average of all of the pay periods. The methodology outlined in the Application appears to be easier. Here is the methodology for calculating the baseline FTE for forgiveness reduction purposes.

First, for each hourly employee, add up the number of hours worked in one of the chosen baseline time periods. Salaried full-time employees are one FTE. Borrowers can choose from the following options:

  • Baseline 1: Feb. 15, 2019, through June 30, 2019
  • Baseline 2: Jan. 1, 2020, through Feb. 29, 2020
  • Baseline 3: For seasonal employers, any consecutive 12-week period between May 1, 2019, and Sept. 15, 2019

Then, divide each employee’s hours by the following:

  • Baseline 1: 768 hours (19 weeks + 1 day x 40 hours per week)
  • Baseline 2: 344 hours (8 weeks + 3 days x 40 hours per week)
  • Baseline 3: 480 hours (12 weeks x 40 hours per week)

Finally, average the calculated FTE across all employees. The maximum FTE per employee is 1.0. The simplified method described above can also be used.

8. Potential Number of FTE Calculations

An interesting aspect of the Application is the number of FTE calculations that may be required including the following:

  • FTE for employees during the covered period making less than $100,000 during 2019
  • FTE for employees during the covered period making more than $100,000 during 2019
  • FTE for baseline FTE (one of three possible time periods)
  • FTE at time of loan application
  • FTE at time of forgiveness application
  • FTE from Feb. 15, 2020, through April 26, 2020
  • FTE at Feb. 15, 2020
  • FTE at June 30, 2020

9. FTE Safe Harbor

There is a forgiveness reduction should the average number of FTEs in the covered period (or alternate) fall below the baseline average FTE. A borrower need not calculate the reduction if both the following safe harbor conditions are met:

  • FTE for the period between Feb. 15, 2020, and April 26, 2020, is less than the total FTE in the borrower’s pay period that includes Feb. 15, 2020; and,
  • The borrower’s FTE as of June 30, 2020, is greater than or equal to the total FTE in the borrower’s pay period inclusive of Feb. 15, 2020.

What's to come for PPP Forgiveness? What isn't answered here?

  • Economic Injury Disaster Loan overlap: Currently, the amount of PPP forgiveness will be reduced by any EIDL advances received. But what if you received an EIDL? Can you pay down if you received the EIDL after application for the PPP? How does the EIDL paydown affect the 75 percent payroll requirement, especially when the loan proceeds included repayment of an EIDL?

Stay tuned for more on the updates to PPP Loan Forgiveness. Also for any insurance agents looking for help planning for loan forgiveness, our friends at Club Capital provide consulting services for insurance agents.

Click here to learn about Club Capital’s PPP Forgiveness Consulting Services.

Source: Accounting Today

1Note that this piece represents an opinion and an attempt to summarize the recent Paycheck Protection Program legislation. It should not be a substitute for companies' own analysis or consultation with relevant professions.

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Topics: Featured, Insurance Strategies, COVID-19

About the Author Micah Cannon, COO, Club Capital

Picture of Micah Cannon, COO, Club Capital

Micah is currently COO of Club Capital (a financial services firm focused on serving insurance agents) and has seven years experience in management consulting, where he led the development, strategy and implementation of custom information technology platforms. With additional background in industry benchmarking, Micah also focuses on the development of Club Capital's financial analytics and benchmarking platform.

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