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PPP: 3 Steps to Calculate Your Loan Forgiveness Amount

April 14, 2020

We have our Paycheck Protection Program loan proceeds, now what? As of April 13, 2020, here’s how the Forgiveness Formula and Provisions are supposed to work.

KLR has been at the forefront of assisting clients impacted by the economic effects of the Covid-19 virus spread by committing countless hours of reading and re-reading every official rule and paragraphs of guidance that the US government has issued. We have consistently taken a practical approach with our interpretation of the rules when consulting with our clients. We have stressed intent as opposed to the text of the bill.

In this blog we examine how the forgiveness formula and provisions are set to work based on information included in the Coronavirus Aid, Relief, and Economic Security Act (CARES) as well as the Interim Final Rules and the Frequently Asked Questions (FAQs***) posted on the US Department of the Treasury website.

Picture this

After many stressful days, you check the company bank account and see a large deposit of your Paycheck Protection Program (PPP) loan funds. The eight week window has now begun with this disbursement into your account to track allowable expenses and calculate what percentage of the PPP loan funds will be forgiven. You do not need to set up a separate bank account to track the allowable expenses, just to know what they are and how to account for them. Important to note that the Federal Deposit Insurance Corporation (FDIC) insurance level is limited to $250,000 per bank, per customer across all accounts, so based on your risk tolerance you may be inclined to open accounts at separate banks to deposit $250,000 fund increments.

How do we calculate forgiveness of this loan?

It’s a 3 step process!

You track the following costs over the corresponding eight week period and split them into 2 buckets of inputs:

A. Payroll costs – generally speaking payroll costs consist of all GROSS*** compensation paid to employees not to exceed a $100,000 annual rate cap per employee; employer payments for health care coverage, employer retirement plan contributions and payment of state and local taxes assessed on compensation of employees.

B. Non-Payroll Costs – generally speaking non-payroll costs consist of payments of interest on mortgage obligations (on real or personal property) incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020.

Please note the way the CARES Act reads is “costs incurred and payments made during this eight week period” for these expense inputs. I am better with numbers then words, so I don’t know if the word “and” in the Act’s sentence means one or the other or both must be present to satisfy the requirement. Additionally for forgiveness purposes the CARES ACT further references “any payment” preceding interest, rent or utility payments and doesn’t reference scheduled, monthly or in the normal course of business when describing the non-payroll costs.

Step #1 – Total Allowable Costs

To calculate the first forgiveness formula limitation, Take Bucket A and divide it by 75%. This amount you have calculated is the dollar value of the Maximum Allowable Expenses eligible for the forgiveness formula under the PPP. If the total of bucket A and B added together exceeds this amount, you must reduce the amount of Bucket B such that when added to bucket A, the balance does not exceed this total Maximum Allowable Expenses amount eligible to be forgiven. You now have arrived at your Eligible Forgiveness Amount under the PPP

Step #2 – Headcount Reduction

For non-seasonal companies, you must take the refined dollar value total of your Eligible Forgiveness Amount under the PPP and multiply it by a percentage (not to exceed 100%). This percentage is calculated by taking the average number of full-time equivalent employees per month during this 8 week window (numerator) and dividing it by your choice of either the average number of full-time equivalent employees per month during the period February 15, 2019 through June 30, 2019 or the period January 1, 2020 through February 29, 2020. Upon completing this calculation, you have arrived at your Potential Loan Forgiveness Amount under the PPP

Important to note, “full time equivalent employee” has not been defined in either the CARES Act or any guidance issued by the SBA. Many companies will use either a standard 40 hour work week or a 30 hour work week as defined under the Affordable Care Act (ACA).

Step #3 – Salary Reduction

To determine your Actual Loan Forgiveness Amount you must extract from your payroll records for the eight week period all employees whose compensation for 2019 was less than $100,000. For these employees you must also extract from payroll records their compensation earned for the quarter ended March 31, 2020 and multiply their individual compensation from this quarter by 75% (“Base Amount”). You must compare the individual employee’s compensation earned during the eight week period to this base amount and for every dollar that the base amount exceeds their compensation for the eight week period, you must reduce your Potential Loan Forgiveness Amount by a dollar to arrive at you Actual Loan Forgiveness Amount.

We recognize that this process appears to be complicated to arrive at your Actual Loan Forgiveness Amount and we expect that the SBA will issue additional guidance on loan forgiveness in the near term. We are ready to assist you and will prepare additional communication as the updates are released.

Navigating through all of the information and programs available to impacted businesses may be overwhelming. KLR advisors are available to assist you navigate the best path forward during this unprecedented crisis. With a completely remote workforce our advisors are always available.

Visit our Coronavirus Resource Center for more information.

*** US Department of the Treasury FAQs #16 appears to address the gross versus net issue we covered in a prior blog whereby it says:

16. Question: How should a borrower account for federal taxes when determining its payroll costs for purposes of the maximum loan amount, allowable uses of a PPP loan, and the amount of a loan that may be forgiven?

Answer: Under the Act, payroll costs are calculated on a gross basis without regard to (i.e., not including subtractions or additions based on) federal taxes imposed or withheld, such as the employee’s and employer’s share of Federal Insurance Contributions Act (FICA) and income taxes required to be withheld from employees. As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of payroll tax.

There is even a footnote #2 attached to the FAQ #16’s answer to support the position that gross payroll is the input in the forgiveness formula as opposed to net. One could be curious as to why such a material item was addressed in a document that has the following disclaimer: “This document does not carry the force and effect of law independent of the statute and regulations on which it is based.”

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