Top 10 FAQs on PPP Flexibility ActJune 23, 2020
The Paycheck Protection Program Flexibility Act raises many questions for businesses...we shed light on answers to some of your frequently asked questions here.
Please note this information is accurate as the date it was published but may become outdated over time. It is best to reach out to your KLR Partner for updated information.
As we covered in a recent blog, House and Senate Pass Paycheck Protection Program Flexibility Act of 2020, a new act modifies the PPP and gives extra time for PPP borrowers to spend funds and have those expenses be eligible for forgiveness. This new act has brought many questions to the table, which we shed light on below.
If you missed our webinar on the topic, take a look at our recording, PPP Loans: New Rules and Calculation Review.
Top 10 FAQs
- How much will be forgiven and is it taxable?
Any amount of the loan that is forgiven is not taxable as forgiveness of debt income. The expenses you pay with the loan are not deductible for tax purposes. We expect between now and the end of the year some additional guidance will be released on if these expenses will be deductible. Something to keep an eye on, for sure!
- What are eligible payroll costs?
Generally speaking, payroll costs include salary (up to an annualized $100,000 rate), wages, cash tips, state and local taxes assessed on payroll and employee benefits including employer paid health insurance and retirement benefits.
- Can I pay bonuses or hazard pay?
Yes, during the covered period (8 or 24 week period). Keep in mind the 100k cap is still in place.
- Any flexibility on when my 8 or 24 week period begins?
Yes! Borrowers with a bi-weekly or weekly payroll can elect to have their 8 or 24 week covered period begin on the first day of the first payroll period after the date their loan proceeds were disbursed to them. Thankfully they did take a practical approach in giving us an alternative payroll period. Essentially, a PPP borrower, can delay the start of their 8 or 24 week period to the first day of the first payroll period following the date they receive the PPP funds. The key here is, the alternative payroll period does not apply to non-payroll costs. For example, if the Borrower received its PPP loan proceeds on Monday April 20 and the first day of its pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20, 2020 if an 8 week period is selected.
Note: Alternative period does not apply to non-payroll costs. Might actually have two different time periods when calculating the loan forgiveness.
- Accrual vs. Cash?
With the extension of the period from 8 to 24 weeks, this is not as critical when maximizing loan forgiveness. Remember, you received a loan that's worth 2.5 months of average monthly payroll. Now you're getting essentially 6 months to spend this money. For most businesses, you'll spend most of this money before some of these ancillary costs, including retirement contributions come into play. For example, the question regarding annual retirement contributions made at year end and their possible inclusion during the forgiveness period.
- Eligible payroll costs?
Costs including those paid and incurred during the 24 week period are eligible for forgiveness. They are considered paid on day paychecks are distributed or when ACH is originated. They are considered incurred on day pay is earned and must be paid before next regular pay date.
- Non-payroll costs?
As an example let’s look at the month of July's electric bill. Say your 8 week period ends in July but you don't get the July bill until August, and you pay it in August on your regular paid date, it's still eligible for forgiveness. Non-payroll costs must be paid during the covered period or incurred during the covered period and paid before the next regular billing date. Proration is possible. You can't prepay expenses though! So don’t try and prepay 6 months of rent to maximize forgiveness and as a result of the 24 week period, it may not matter.
- What is a full time equivalent employee?
Previously, the only definition was from the Affordable Care Act which held that any employee who works 30 hours was considered full-time. The loan forgiveness application gave us a definition – 40 hours, rounded to the nearest tenth. FTEs are calculated by dividing the total hours paid for each employee during the covered period (or alternative covered period) by 40, rounded to the nearest tenth. Each employee is limited to a value of 1.0. If you have an employee who works more than 40 hours; they're not going to go above 1.
- What is the Alternative Method for FTE?
Borrowers can elect to assign each employee who regularly works 40 hours or more a value of 1.0 and .5 for employees who work regularly less than 40 hours. The alternative FTE method is important because for many borrowers it will neutralize the effect of hour reduction of part-time employees when calculating any reductions in forgiveness.
For example. A borrower has an employee who works 30 hours a week. That employee would be a .8 for baseline FTE purposes. During the 8 or 24 week period, that employee only works 10 hours a week, so that employee would count as .3.
Under the regular method, that's a .5 reduction in workforce whereas under the alternative method, there is no decrease.
Note: Important to note - when it comes to salary and wage reductions for hourly employees, as long as an hourly worker's hourly wage doesn’t decrease by more than 25%, you have no reduction in your forgiveness formula. The formula goes by hourly wage amount and not total annual wages paid to an employee.
- Will there be a penalty if I don’t need to have the same level of staffing due to government restrictions?
Clarification from the Flexibility Act - If a borrower cannot return to previous staffing levels due to COVID-19 health and safety restrictions (as an example - hospitality industry), a borrower will not be penalized for not returning to pre-COVID 19 employment levels.
Questions on the PPP? Contact us.