Guidance on Calculating Maximum PPP Loan Amounts

May 19, 2020

Dear Clients and Friends,

We, at CJBS, understand the strain that debt can put on a business, even at the best of times. With many businesses now dependent on PPP loans to meet payroll costs, we know that the complex forgiveness calculation can feel overwhelming. That’s why we are on hand to help you manage the process and maximize the amount of your forgiveness.

An interim final rule was issued this past Friday, May 22nd, but the focus should be on the word “interim” not “final.” Of course, we will continue to monitor the situation and update you as it evolves. We recommend to not rush your application and to continue to keep detailed documentation of how you are using PPP funds.

Other key points to note are:

  • The funds available are not exhausted yet, so you can still apply up to June 30th as long as funds remain.
  • PPP funds forgiven are not counted as income, and current guidance state expenses included in the forgiveness cannot be deducted.
  • If you didn’t receive enough on a first application, you can apply for additional funding.

We are aware that many businesses were not fully operational during the stay-at-home order, which means funds were not utilized in some of the 8 week period. We are still waiting on a decision as to whether the government will extend that timeframe. The first businesses to receive PPP funding are now around their 7th week of spending and will have to rely on the guidance as it stands when filing their Loan Forgiveness Applications.

So, what do we know for sure?

We know what has been confirmed to be forgiven.

A piece of good news is that payroll costs include bonuses and hazard pay.  They also include tips, even though tips are paid by customers. Employers should keep detailed records of tips, if possible. Alternatively, they can record “a reasonable, good-faith, employee estimate of such tips.” There is also an alternative now to calculate payroll costs within the 8 week timeframe for companies with bi-weekly or more frequent payroll.

Certain non-payroll costs are also eligible for forgiveness if incurred before—and paid during—the covered 8 week period, or if they were incurred during that period and paid on or before the next regular billing date following that period. These are now confirmed to include lease payments for copiers, automobiles, servers, other personal property, mortgage and other interest for debt on real and personal property and utility expenses including electricity, gas, water, transportation, telephone, or internet access. (Note: Interest on debt cannot be prepaid.)  

There is currently a lack of clarity about whether a new limitation applies to shareholder compensation who earned less in 2019 than in 2020, which would mean higher earnings in 2020 would not be fully forgiven. We await further guidance on whether this should, in fact, only apply to self-employed individuals, as defined in our previous article.

The new rules do offer some relief to general partners, whose net earnings will not be reduced by certain expense deductions including section 179 expenses, un-reimbursed partnership expenses, or depletion from oil and gas properties. However, currently there is no forgiveness for retirement or health insurance contributions made for self-employed individuals or general partners.

As we mentioned in a previous article, it is possible to exclude employees from headcount if they refuse to be rehired. The new guidance requires that you notify the state unemployment insurance office within 30 days of the employee’s rejection. Borrowers will also not be penalized for changes to employee headcount initiated by employees themselves, whether they are fired for good cause, voluntarily resign, or voluntarily request a schedule reduction. If you do need to reduce an employee’s hours, we recommend you compensate for the reduction by hiring new employees to make up those hours.

Completing the Application

The application has three steps, and while that may seem easy enough, we are here to support you through the process of doing it yourself or completing it for you.

The first step is to calculate the amounts of payroll and non-payroll costs that can be forgiven over the covered 8 week period.

The second step is to reduce the forgiveness amount. The simple method for calculating this is to define full-time employees as working 40 hours or more on average per week and to consider all part-time employees to be working exactly 20 hours a week for the purposes of calculation. Also, you cannot reduce an employee’s salary by more than 25%; however, if you reduce their hours, and that is why their total salary was reduced by more than 25% it will not reduce the forgiveness amount. Basically, you can’t keep someone on payroll working the same amount, but making less. Their hourly rate should not decrease.

The third step is to conduct the 75% payroll cost test. At least 75% of the forgiveness request must be composed of payroll costs. Payroll costs not meeting that threshold will have the difference prorated against other expenses. For example, if you used your $100k PPP loan for payroll costs of $60k and non-payroll costs of $40k, you would be at 60% rather than 75%. That $60k is then divided by .75 to give $80k as the new forgivable total, effectively reducing the non-payroll forgivable costs from $40k to $20k. This is actually good news, because it means that if payroll costs are less than 75%, other costs are simply prorated rather than not being forgiven at all.

After submitting your application to your lender, they have 60 days to review it with your supporting documents and to issue a decision to the SBA regarding the amount to be forgiven. The SBA then has 90 days after receipt to review the loan forgiveness application. Borrowers must retain records for six years after the date their loan was forgiven.

Clearly, the essential thing is to keep accurate records throughout the process, so that whatever happens as this process evolves, you will be in a position to calculate and submit your application accordingly. As ever, we are here to help with any questions you might have.

Stay safe and healthy,
The CJBS Team