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

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The primary purpose of this article is to provide additional information to help maximize your company’s ability to achieve PPP loan forgiveness. We hope that this up-to-date information can help your company navigate the conflicting stories you may hear regarding its ability to obtain PPP loan forgiveness. For specific advice on your situation, please do not hesitate to contact us at (480) 744-6621 or at request@counxel.com.

Do I Have To Give Back My PPP Funds

Many of you have heard about Shake Shack, Ruth’s Chris Steak House, and other large companies that have returned the PPP funds they received after receiving some pressure to do so. Many people are asking, “Do I need to give my PPP funds back too?” In its recently released FAQs, the SBA gave additional guidance to this issue (click here for the FAQs). 

Here are the key takeaways:

1) If your company (including its affiliates) received less than two million dollars in PPP funds, then you are automatically deemed to have certified in good faith at the time of applying for the loan that the “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” This means that a company receiving less than two million dollars in PPP Funds does not need to return the PPP funds they received. The SBA’s resonating for this safe harbor is as follows: 

SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

2) The SBA clarified that it will only hold borrowers accountable for the rules, guidance and orders that existed at the time they applied for the loan and not for the rules, orders and guidance that came later.

3) The “CARES Act” suspends the ordinary SBA requirement that the borrower must be unable to obtain credit elsewhere, which means companies were not required to look or apply for loans elsewhere before applying for the PPP funds. 

4) The FAQs reinforce that a PPP borrower was only required to certify in good faith at the time of applying for the loan that the “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” To that point, FAQ #31 states, “[F]or example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.” In FAQ #37, it goes on to imply that businesses owned by private companies should expect the same treatment. 

All PPP borrowers must still meet the CARES Act and SBA requirements in order to obtain loan forgiveness.

How Do I Maintain My Full-Time Equivalent Employee Number?

As discussed previously, a company must maintain the same or higher number of full-time equivalent (“FTE”) employees in order to obtain full loan forgiveness (this is different from the requirement that a company must maintain employee pay at no less than 75% of their previous pay). Because a primary purpose for the PPP loan is to incentivize companies to keep their employees employed, it is not surprising that this requirement exists.

So how do you make sure your company meets this requirement? 

The method provided to determine if a company maintained the same number of FTE employees is as follows:

1) Determine the average number of FTE employees a company had for the 8-week period following its initial loan disbursement

2) Determine the average number of FTE employees a company had from either February 15, 2019 to June 30, 2019 or January 1, 2020, to February 29, 2020.

Take the FTE employee number you calculated in A and divide that by the FTE employee number in B(1). Do the same with the FTE employee number in B(2). Take the largest number you obtain. If you get a number equal to or larger than “1,” then you successfully maintained your FTE employee number, and you meet this requirement to obtain full loan forgiveness. If you get a number smaller than “1” then you did not maintain your FTE employee number, and the portion of your forgivable loan will be reduced proportionately. 

Since math is easier to follow with actual numbers, here are some examples:

Example 1: A business receives a $100,000 PPP loan.

A – Average FTEs during the 8-week period was 21.

B(1) – Average FTEs between February 15 – June 30, 2019, was 25.

B(2) – Average FTEs between January 1 – February 29, 2020, was 20.

Take the number from A and divide it by the number in B(1): 21/25 = .84.  Do the same with B(2):  21/20 = 1.05. Because the number from B(2) equals more than “1” then this company will be eligible for complete loan forgiveness (if they meet the other criteria as outlined here).   

Example 2: A business receives a $100,000 PPP loan.

A – Average FTEs during the 8-week period was 21.

B(1) – Average FTEs between February 15 – June 30, 2019, was 35.

B(2) – Average FTEs between January 1 – February 29, 2020, was 30.

Take the number from A and divide it by the number in B(1): 21/35 = .6.  Do the same with B(2):  21/30 = .7.  Because neither of these numbers equals “1” then this company will not be eligible for full loan forgiveness. 

However, they are still eligible (if they meet the other criteria as outlined here) to receive loan forgiveness in an amount equal to the percentage that is closest to “1.” In this case, this company has the potential to receive loan forgiveness up to 70% of its loan. 

What Are The Exceptions To The FTE Employee Requirement

There are currently two exceptions to the FTE Requirement in order to obtain loan forgiveness. 

First, any reductions that happened between February 15, 2020, and April 26, 2020, will not reduce the loan forgiveness amount if the company brings back its FTE employee number by June 30, 2020, and has removed any reduction in wages to employees by June 30, 2020. 

Second, if 1) a company makes a good faith written offer to rehire furloughed or laid-off employees and 2) the employee rejects that offer in writing, then this will not be counted against the company’s FTE employee number. It should also be noted that seasonal employers are afforded a different method of calculating their FTE employee number.

Can I Use PPP Funds to Pay for Employer Side Payroll Taxes? 

FAQ #16 directly answers this question. While a company can use PPP funds to pay for employee-side payroll taxes, a company cannot use PPP funds to pay for employer-side payroll taxes. In other words, PPP funds used for employer-side payroll taxes will not be forgivable. 

The answer to FAQ #16 says, “[F]or example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute.”

What Else Should I Know? 

The SBA has (and will continue to) issue Interim Orders and FAQs that answer some questions for lenders and borrowers. You can find this information on the SBA website (click here). Also, Governor Ducey is allowing the “Stay At Home Order” to expire in Arizona on May 15, 2020, and is replacing it with a “Stay Healthy, Return Smarter, Return Stronger” Executive Order. You can review that Executive Order here.  

Contact Counxel Legal Firm

We are here to help business owners get 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!

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