Update #4 – How Do I Qualify for Maximum Loan Forgiveness of the PPP Loan?

Loan Forgiveness Clipboard on Desk

We hope you enjoyed your Memorial Day! 

The SBA issued its latest Interim Final Rule regarding loan forgiveness last Friday, May 22, 2020 (click here). This guidance, along with the SBA loan forgiveness application (click here), dives further into how to perform certain calculations in order to obtain loan forgiveness. 

Below are some key takeaways:

1) Owner Employees Compensation

Owner employees are allowed to pay themselves payroll compensation with PPP funds, but only in an amount that is the lessor of 8/52 of an owner employees’ 2019 compensation or $15,385. For individuals and limited partnerships, the SBA explains that “schedule C filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit,” while “general partners are capped by the amount of their 2019 net earnings from self-employment … (multiplied by .9235).”

As a simple example, if an owner employee earned $80,000 in 2019 compensation, then he/she cannot receive compensation of more than 8/52 of $80,000 ($12,307.69) from the PPP funding.  

2) Payroll Costs Can Be Incurred or Paid During 8-Week Covered Period

There was general confusion as to whether payroll costs must be incurred and paid in the eight-week period after funding of the loan, as opposed to during the eight-week period after. 

The new guidance states that forgiveness is available for payroll costs incurred or paid in the eight-week covered period, which relieves a huge mathematical headache for companies.

However, the SBA has stated that if you have a payroll cycle that spans each side of the eight-week covered period, you should not use PPP funds to cover any payroll expenses that occurred outside the covered period. For example, if your payroll cycle runs from June 1st – June 15th and your eight-week covered period ends June 10th, you should not use PPP funds to cover any payroll expenses between June 11th and June 15th.     

3) Alternative Payroll Covered Period

Initially, borrowers had only the eight-week covered period from the date of funding to use the loan funds (if they wanted loan forgiveness). However, now, there is an alternate payroll-covered period available for companies who use a bi-weekly or more frequent payroll cycle This alternate payroll covered period is the eight-week period starting the day after the first payroll cycle following funding of the loan. 

For easier understanding, the SBA gives the following example:

A borrower has a bi-weekly payroll schedule (every other week). The borrower’s eight-week covered period begins on June 1 and ends on July 26. The first day of the company’s first payroll cycle within the covered period is June 7. The borrower may elect an alternative payroll-covered period for payroll cost purposes that starts on June 7 and ends 55 days later (for a total of 56 days) on August 1.

Payroll costs paid during this alternative payroll covered period are eligible for forgiveness. In addition, payroll costs incurred during this alternative payroll covered period are eligible for forgiveness as long as they are paid on or before the first regular payroll date that occurs after August 1. Payroll costs that were both paid and incurred during the covered period (or alternative payroll covered period) may only be counted once.

4) Full-Time Equivalent Employee Count

When comparing the number of “full-time equivalent employees” for the covered period and the company’s selected reference period, the SBA guidance gives companies two ways to run this calculation. First, a company can calculate the average number of hours that a part-time employee worked each week during the covered period and divide it by 40. 

For example, if an employee worked 10 hours a week on average during the covered period, then 10/40 = .25. If an employee worked 45 hours on average, then his/her FTE employee count is just one. Second, a company can simply allocate a half a point to each part-time employee (anyone who works less than 40 hours a week on average) and a one to anyone that works 40 hours a week or more. However, you can only choose one way to calculate this FTE employee number for all of your employees for both the covered period and the company’s selected reference period.  

5) Additional Requirements For Exception To Employee FTE Count Reduction

One way to obtain a reduction to your FTE employee count for forgiveness purposes is to offer re-employment to employees who were laid-off or furloughed. However, the SBA has provided a few other requirements for this exception. These requirments are as follows:

• The borrower made a good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or the alternative payroll covered period;

• The offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;

• The offer was rejected by such employee;

• The borrower has maintained records documenting the offer and its rejection; and

• The borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.

6) Forgiveness Determination

Lenders are the ones who will first determine whether borrowers qualify for PPP loan forgiveness, and they will have 60 days from the date of receipt of a completed loan forgiveness application to make a determination. The SBA has the final say in this matter. Loans that are not forgiven (whether in whole or in part) have a two-year repayment deadline.

7) Record Retention

Borrowers have the duty to keep all documents relating to the loan (whether forgiven or repaid in full) for up to six years. 

Contact Counxel Legal Firm

We are here to help you through this interesting time. If needed, please contact us at (480) 744-6621 or at request@counxel.com. Don’t forget to check out the good things that others are saying about the services they received from Timothy Coons on Google.

This article is intended for informational purposes only and does not constitute legal advice for your specific situation. Use of and access to this article does not create an attorney-client relationship between you and Counxel Legal Firm. Please contact request@counxel.com or (480) 744-6621 to request specific information for your situation.

*Conveniently located off the 101 Freeway and the US 60 in the middle of Phoenix, Scottsdale, Tempe, Chandler, Gilbert, Mesa, and Queen Creek!

Let’s Connect for a Free Business Analysis

Tailored legal strategies for your business

Skilled risk assessment & management

Proactive solutions for legal challenges

Partnership for legal peace of mind

Latest Articles

The Essential Guide to Protecting Your Business Ideas in Tempe

Safeguard your business ideas in Tempe with expert guidance from a copyright attorney in AZ....

Navigating the Complex World of Copyright Laws in Tempe, AZ: A Guide for Entrepreneurs

Navigate Tempe, AZ's copyright laws with ease - consult our guide for entrepreneurs on understanding copyright laws with a copyright...

Get a Free Business Legal Evaluation

Skip to content