6 Lessons Learned From The Latest PPP Loan Forgiveness Rules (Online-Only Article)
June 2020Practice Management Financing
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Originally published May 21, 2020
On May 15, the Small Business Administration (SBA) released the application form you must submit when requesting forgiveness of your PPP loan. While the release of the application form was expected to be accompanied by the final comprehensive rules for calculating loan forgiveness, that was not the case.
While the application release answered a few questions, it left several others unresolved. Here’s what we do know:
- Loan forgiveness isn’t “all or nothing” – Supposed you receive a $200,000 PPP loan, but spend only $120,000 on payroll costs during the following 8-week period. Since you did not spend at least 75% of the proceeds on payroll costs as required, does this mean that NONE of your PPP loan will be forgiven?
Fortunately, the answer is NO. Rather, the rules force you to “work backwards” to calculate the loan amount that can be forgiven. You simply divide the amount spent on payroll costs ($120,000) by 75%, resulting in a maximum loan forgiveness amount of $160,000, assuming you spent the other $40,000 on qualifying expenses (rent, interest, utilities).
- Restore your staffing levels and pay rates by June 30 to maximize forgiveness – The PPP rules contain another threatening limit on loan forgiveness. If you cut your staffing levels, or any staffer’s pay, by more than 25%, after February 15, 2020, your loan forgiveness amount may be further reduced.
Fortunately, the new rules make clear that if you restore your staffing levels (full-time equivalent employees - FTEs) and each staffer’s pay back to their February 15, 2020 level, on or before June 30, you’ll dodge the cut-back to your loan forgiveness amount.
- Staffers who refuse your written offer to return to work, who resign, or who are fired for cause, don’t count against you – Assume you have 10 FTEs on February 15, 2020, prior to the pandemic. When your practice reopened in early May, you followed our advice by providing a written offer to rehire each furloughed employee back at their regular pay. In response, one staffer refused to return, another voluntarily left, and you fired another for misconduct, leaving you with only 7 FTEs at June 30. While your FTE count is down from your February 15th level (from 10 to 7), you do not have to be concerned about any further cut-back in your loan forgiveness, since none of these will count against you.
- Delay the start of your 8-week period using the Alternate Payroll Covered Period – Under the original rules, all PPP funds must be spent during the 8-week period beginning on the day the proceeds are deposited into your bank account. However, if you pay weekly, or bi-weekly (every 2 weeks), the revised rules allow you to delay the start of the 8-week period (for payroll costs only) to the start of your next pay period following disbursement, for administrative convenience.
- You can’t increase your pay to boost PPP loan forgiveness – PPP rules limit the amount of compensation eligible for forgiveness to no more than $100,000 per employee, or $1,923 a week. The new rules add a further test. If your compensation was less than $100,000 in 2019, you cannot increase your pay rate in 2020 in order to boost your loan forgiveness amount.
- You can rest easy certifying your loan necessity – The PPP application form required doctors to certify in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations.” If you’re an orthodontist whose production dropped dramatically, but collections kept rolling in on contracts receivable, could you sign this certification in good faith? Or would doing so subject you to an SBA audit, a forfeiture of the loan, and possibly even criminal prosecution? Many doctors and their advisors were very concerned about this.
Fortunately, the Treasury Department recently laid this concern to rest. In FAQ #46, it provides a safe harbor if your PPP loan is less than $2,000,000, you will be deemed to have made the required certification concerning the necessity of the loan request in good faith.
Future Changes Coming
More favorable changes should be coming shortly. We believe that some, or all, of the following will be allowed:
- Increasing flexibility for using PPP funds by reducing the percentage that must be spent on payroll costs below the current 75% limit.
- Extending the 8-week period for payment of covered PPP expenses out to at least 12 weeks, and possibly longer.
- Allowing your practice the option to defer the start of the 8-week period for using PPP funds until you are allowed to operate at full capacity by your local government.
- Allowing all PPP expenses forgiven to be deducted for federal income tax purposes.
The PPP loan forgiveness application states it will be governed by the rules and regulations published up until the date the application is submitted. Accordingly, stay tuned to The McGill Advisory newsletter and our webinars for the latest guidance.
The McGill Advisory content is provided for informational purposes only and does not constitute legal, accounting, or other professional advice.
Copyright © 2020 John K. McGill & Company, Inc.