FAQS on Paycheck Protection Program Loans

We get an abundance of questions revolving around the Paycheck Protection Program (PPP). Our general counsel, Jeff King, has taken the time to answer them all and we have gathered them here. 

We are a little confused about the section 1 on the payroll loan program. Do the “monthly payroll costs” include rent, utilities, etc…or only employee payroll?

There has been a lot confusion over this issue. There is a difference in what is include in determining the amount of the loan and what the loan can be used for. The amount of the loans is based only on the average monthly payroll, which is defined as the following:

  • Salaries, wages, commissions, or similar compensation (up to $100,000 annual compensation as prorated for the covered period); 
  • Payment of cash tip or equivalent 
  • Vacation, parental, family medical, or sick leave; 
  • Severance payment; 
  • Health care benefits, including insurance premiums; 
  • Retirement benefits; 
  • State or local tax assessed on said compensation; and 

It does not include:

  • Payroll taxes; 
  • Federal incomes taxes; 
  • Paid sick or family leave provided under the Family First Coronavirus Response Act (FFCRA);
  • Payments of wages, commission, or similar compensation to any independent contractors; or
  •  Individual salaries over $100,000.    

 The loan can be used to pay:

  • Payroll costs; 
  • Rent;
  • Interest on mortgages and other debts; and
  • Utilities.
Do you believe they are starting not to include any of an employee’s payroll compensation in the loan calculation for someone making over $100K, or only the amount in excess of $100K?

Only the amount over $100k is excluded. The salary up to the $!00k is included in the calculation. 

Please advise of the items that can be used for Forgiveness of the PPP Loan

Full Question:

Please advise if there are other items that can be used for Forgiveness of the PPP Loan other than the following: “Forgiveness of the PPP Loan shall be based upon the these expenditures during the 8-week period following the date the funds were received into my bank account: Payroll, State Payroll taxes, Company-paid health insurance and 401K as applicable, Rent, & Utilities (Electric, Telephone & Internet-related costs, Vehicle payments, Fuel costs)”.

 

Answer:

You are correct regarding the items the loan can be used for, although there is some uncertainty over the lease and gas costs. Based on the CARES Act language and SBA’s rules for sole proprietors, lease, gas, and maintenance costs for business vehicle should be included. In addition, the loan can be used to pay interest on mortgages and business loans.

I’ve heard and read of different time periods that could or should have been used to calculate one’s PPP loan request. Does not the individual Lenders, with guidance from the SBA, dictate the terms of the loan?

The SBA has determined that the amount of the payroll cost used to calculate the loan is the 12 months before the loan is issued or last year (2019). I recommend that you follow your lender’s recommendation.

We have to reflect a payroll of at least 20 employees during the 8-week period to avoid some type of penalty of which I am still unclear as to how that is structured. Is this correct as you know it?

You are essentially correct To have 100% of the loan forgiven, you must:

  •  Use 75% of the PPP loan on payroll costs,
  • The average number of full-time employee equivalents paid during the 8 weeks will be compared to the average number of full-time employee equivalents paid during between February 15, 2019 and June 30, 2019 OR January 1, 2020 and February 29, 2020. You get to choose the comparison period.; and
  • Each employee’s pay during the 8 weeks must not be reduced by more than 25% of the employee’s pay during the most recent full quarter during which the employee was employed.

Your question concerns the second requirement. If you pay fewer full-time employee equivalents (FTE) during the 8-week period, the amount forgiven will be proportionately reduced. To determine the number FTEs you include part timers base on the amount they worked (e.g., 5 part timers working one 8 hour shift a week equals 1 full-time employee) The amount of reduction depends on the difference in the number of employees. For example, if you pay 18 FTEs during the 8 weeks as compared to 20 FTEs during the comparative period, than the amount of loan forgiven will be reduced by 10% (2 fewer FTEs ÷ 2O FTEs = 10%).

As to your second question, the employees do not have to be the same, but be careful that you do not run afoul the law regarding age discrimination and the Americans with Disabilities Act.

Any portion of the PPP that is not expended during the 8-week period would then become a loan at 1% interest . Is this correct as you know it?

You are correct on any amount not forgiven will become a loan for 2 years, at 1% interest with no payment due for 6 months. You can pay back the loan at any time before the 2 years without penalty.

If it exists, which is likely, what are the parameters of what the loan expenditure can be used for, if beyond the same parameters of the Forgiveness?

How the unforgiven amount can be uses is unclear. It is safest to use it on the same costs that are allowed in calculating the amount to be forgiven.

We are concerned about the new Treasury guidance issued 4/23 regarding self-certification of necessity of funding caused by economic uncertainty taking into consideration “access to other sources of liquidity...”.

We have secured two PPP loans. The first one for our retail business and was funded 4/15. It had a line of credit of $3 million at the time of the issuance of the loan. We had approximately half of that already used. The balance available exceeded the loan that was issued for $1.1 million. Our projections showed we would exceed the $3 million line of credit before the end of the year without the loan unless we laid off a large number of employees. We did not take that action because of the PPP loan. If we have to return it 5/7, we will have been damaged because we relied on it and did not cut payroll when we should have done so. The second PPP loan we secured on 4/27 (funded 4/29) was for a separate company, which is for commercial work only. This company is owned by my wife because it is signatory to the union, and we didn’t want to comingle it with the nonunion residential company. This company provides union labor for our retail business. It has no assets and we disburse money from the retail to commercial business. in the amount of the weekly payroll for the union employees. We felt it was justified to apply for the PPP loan for that company because under the rules we could not include that payroll without filing separately.

Do you think we have any reason to fear incurring severe penalties or criminal charges if we do not return the loans before May 7 as discussed in the new guidance?  

Answer:

I have just been reviewing the guides and FAQ from the SBA. The latest publication takes effect today (5/5). The simple answer to your concern is that there is not clear guidance on the issue, but access to a line term credit that would not allow you to keep all your employees should not be sufficient to claim your PPP loan certification was inaccurate.

The PPP loan application required all applicants to certify “in good faith” that the “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The issue is what does "necessary to support the ongoing operations” mean. Unfortunately, SBA has not provided much clarification on when a PPP loan is “necessary” or not. As you note, the most recent FAQ provides that a borrower must take “into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” This requirement must be read with the language in the CARES Act, which creates the PPP loans, that specifically waives that the normal small business loan requirement that the borrower show that it "is unable to obtain credit elsewhere …” 

Based on the facts that your retail business "would exceed the $3 million line of credit before the end of the year without the loan unless we laid off a large number of employees,” you should be able to show that you certified in good faith that the PPP loan was necessary. Without the PPP loan you would have been forced to lay off a large number of employees, and thus needed the loan to “support ongoing operations.” It is very important that you document, and keep the documentation, used to determine that the current line of credit was not sufficient to retain all employees and ongoing operations, along with any other analysis used to determine to file for the PPP loans. If you consulted any advisors on calculating the need for the loans, I would be sure to document that advice.

I did want to mention that SBA intend to audit all loans over $2 million upon the borrower’s application for forgiveness. That does not mean smaller loan will not be audited, but more likely on a random basis, not automatically audited. These audits could be several years from now, so be sure to keep all records to show both the need for the loan and how the loan was used.

There is another loan, of which I have not read all the rules about, for $10,000 that I believe is forgivable. How do I go about applying for it? Do you know the rules governing it? Where do I apply?

It is my understanding the SBA has essentially shutdown the Emergency Injury Disaster Loan (EIDL) program because it has been overwhelmed by applications. The SBA has limited the EIDLs to a maximum loan of $150,000 and I understand that it is allowing only agricultural interests to submit applications after pressure from some key Republican senators. I will keep checking to see if the EIDLs open up again and let you know.

I believe the PPP loan may still be your best option—part, if not all of it can be forgiven, the remainder is a 2 year loan at 1% interest (far better than the 3.75% on the EIDLs) and can be paid back early without penalties. If your concern is whether you can certify the need for the PPP loan, that is complicated. Unless your loan was for $2 million or more, it is unlikely to be audited, and the need probably can be justified based on the uncertainty of the current economic conditions.

Other than the PPP and EIDL loans, do you know of any other help that may be available to preserve our capital?

Most of the programs besides the PPP loans, are regular loans. Even the EIDL is a loan. It did include a $10,000 advance that was forgiven IF the loan was not ultimately approved. Tthere are a host of other SBA loans, including the  SBA’s Express Bridge Loan Pilot Program that allows small businesses who currently have a business relationship with an SBA Express Lender to access up to $25,000 with less paperwork, and SBA Access to Capital which provides a number of loan resources for small businesses to utilize when operating their business. In addition, the Federal Reserve recently created a brand new lending program known as the “Main Street Lending Program,” with loans of $500,000 to $25 million . These loans are for four years, at 1to 3% interest, with principal and interest payments deferred for one year.

I suggest you also look for state and local programs, which may include grants. You can go here and the site provides a state-by-state programs. You may also have some local programs in your area.

To qualify for the 100% PPP loan forgiveness, I am looking for clarity about the amounts of payroll that can be paid during the 8-week period.

Here are our circumstances (8 weeks is up June 20):

  • Washington State has a shelter in place until June 1st.
  • Our Store was allowed to open because of the Phase 1 construction restart.
  • We have 2 owners and 2 salespeople not on unemployment at this time.
  • I have asked the other employees to come back to work on May 18th, and to stop their Benefits.

If I use PPP for payroll in the second half of MAY, payable on June 5th. And then I pay my staff for June 1st -15th, on June 20th? This is only 4 weeks of payroll?\

Is there anything that says I can’t pay them for the entire 8 weeks here? Can I write an arbitrary amount to add up to the useable payroll amount?

Is there anything that says payroll must be incurred and paid in that period, and if so does the payroll have to mimic the Average wage per 2 pay periods?

Or do I use a rehire Bonuses, to justify overpaying people to get to me number?

Answer:

Your question raises several issues. The simple answer is that paying you employees for only 4 of the 8 weeks will impact the amount of the PPP loan that is forgiven. Let me explain.

4 Weeks v. 8 Weeks: To maximize the amount of the loan forgiven, the employer must meet three requirements:

  1.  75% of the PPP loan must be used on payroll costs;
  2.  Each employee’s pay during the 8 weeks must not be reduced by more than 25% of the employee’s pay during the most recent full quarter during which the employee was employed; and
  3.  The average number of full-time employee equivalents (FTEs) paid during the 8-week must be the same as the average number of FTEs paid between February 15, 2019 and June 30, 2019 OR January 1, 2020 and February 29, 2020. The employer gets to choose the comparison period. If you pay fewer employees during the 8-week period, the amount forgiven will be proportionately reduced. To determine the number of full-time employee equivalents you include part timers based on the amount they worked (e.g., five part-timer employees working one 8-hour shift a day equals one full-time employee).

It is the third requirement that will impact the amount of the loan forgiven. If you pay your employees for 4 of the 8 weeks, then the average number of employees paid during the 8 weeks will be cut in half, For example, if you paid no employees for the first 4 weeks and paid 10 employees for the second 4 weeks, the average number of FTEs would be 5 (10 FTEs X 4 weeks = 40, divided by 8 weeks = 5). If you paid an average of 10 FTEs during the comparative period (February 15, 2019 to June 30, 2019 OR January 1, 2020 to February 29, 2020), then the amount of the loan to be forgiven will be cut in half.

Employees on Unemployment: You may be able to eliminate this reduction in the amount of the loan forgiveness if your employees on unemployment refuse to come back to work. The Small Business Administration (“SBA”) issued new guidance that addressed this issue. The SBA stated that it will exclude “laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation” if the employee refused to come back to work. To have these employees excluded, the employer must make “a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented.” By refusing to come back to work, those employees may lose their unemployment benefits. Based on the primary purpose of the PPP loans—to maintain payroll—it is likely that 75% of the loan will still have to be used on payroll costs, whether or not there are the same number of employees.

Increasing Pay: I do not see any prohibition to increasing pay to the employees that come back to work to meet the 75% requirement. I also have not seen anything that would sanction this approach. It would be better to just pay your employees their standard amount. This is especially true if the amount of the loan forgiven will already be reduced because the average FTE is lower than the comparative period.

As an S Corporation, what expenses are forgiven for the PPP Loan?

Below are the expenses that are included:

  • Payroll costs (wages, salaries, commissions, healthcare premiums, retirement benefits and state and local employment taxes);
  • Rent;
  • Utilities (electricity, gas, water, transportation, telephone, and internet); and 
  • Interest on mortgages and other business debts.
I am confused by these new guidelines for PPP forgiveness. Under Table Instructions, it states, separately list each employee. Do not include any independent contractors, owner employees, self-employed individuals, or partners.

How can this be the case, when we applied for the PPP, we included 2 owner employees in the calculation, and we have paid 2 owners assuming we were normal employees? It also gives 56 days which doesn’t even cover 2 months bi-monthly payroll periods?

Answer:

The instructions and forms from the Small Business Administration (SBA) on applying for loan forgiveness are confusing and I am still reviewing them. We also anticipate further clarification from SBA on calculating the amount of the PPP loan to be forgiven.

 Based on my understanding of the instructions and forms, the section you quote deals only with calculating any reduction in the amount forgiven because you did maintain the same number of full-time employee equivalents (FTEs) or reduced pay to employees by more than 25%. Let me try to explain.

 Calculating Payroll Costs: The SBA separated the payroll into 3 categories:

  1. employees paid under $100,000 a year (Line 1);
  2. employees paid over $100,000 a year (Line 4); and
  3. “owner-employees/self-employed individual/general partners” (Line 9).

  Accordingly, business owners are included in the total payroll costs. Independent contractors are not included in calculating the amount of the PPP loan or the amount forgiven. Independent contractors can apply for their own PPP loans.

 Calculating Reductions in Amount forgiven: To have the full amount of the PPP loan forgiven, the borrower must meet three basic requirements

  • 75% of the PPP loan must be used on payroll costs; 
  1. Each employee’s pay during the 8 weeks must not be reduced by more than 25% of the employee’s pay during the most recent full quarter during which the employee was employed; and
  2. The average number of full-time employee equivalents (FTEs) paid during the 8-week must be the same as the average number of FTEs paid between February 15, 2019 and June 30, 2019 OR January 1, 2020 and February 29, 2020. The borrower gets to choose the comparison period.

In calculating any reduction because of a 25% reduction in pay to employees or a reduction in the average FTEs, the SBA appears to consider only employees and not “owner-employees, self-employed individuals, or partners.” The SBA assumes owners will continue to employ and pay themselves.

This is only my interpretation, but it appears to be the only way to reconcile the instructions and forms. We will continue to monitor any new development and send out update to all WFCA members.

What starting date should we use as the beginning of the 8 weeks covered under PPP? Should we use the date we closed at our governor's shutdown order, or the date we received the proceeds from our loan?

Answer:

As to your question, for a business with a biweekly or more frequent payroll schedule can elect to begin the 8 weeks either the 8 weeks begin either: (1) on the date the you receive the first disbursement of the loan, or (2) "on the first day of their first pay period following their PPP Loan Disbursement Date. Unfortunately, it can be used for prior pay or for pay after the 8 weeks

That could change, the new House of Representative’s bill on the COVD-19 crisis, Health and Economic Recovery Omnibus Emergency Solutions Act (H.R. 6800), includes modification to the PPP loans. The amendments include expanding the 8 weeks to 24 weeks. There has also been new stand along bill introduced in the House to extend the time to 24 weeks and a bill in the Senate to extend it to 16 weeks. It is unclear what  provision will survive in negotiations with the Senate, and whether the changes will be retroactive. At best, it is not anticipated that the new legislation will pass, if it passes, until June. 

Will PPP loans under $2M automatically be forgiven without SBA review?

Answer:

The SBA issued new Frequent Asked Questions (FAQs) today (5/13), which are designed to provide guidance on the PPP loan. The new FAQs include the quoted language in the email. This does not mean a PPP loan under $2 million will automatically be forgiven. Rather, the borrower must still meet the three requirements (75% on payroll costs, same average number of FTEs, and same pay within 25%).  

This new FAQ (No# 46) addresses the requirement that the borrower certify that the “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The SBA has previously provided (No# 31) that to satisfy this certification, a borrower had to show that it did not have the "ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” If a borrower cannot meet that requirement, it must pay back the full loan amount must be paid back with none of it forgiven. The new FAQ 46 means that for loans under $2 million the certification will be deemed to be made in good faith and these smaller borrowers will not have to show it did not have access to other funds such as a line of credit. 

The SBA has previously announced that all PPP loans of $2 million or more will automatically be audited, including proof that it needed the loan and did not have “other sources of liquidity.” Loans under $2 million will be subject random audits to prove how they spent the load proceeds and whether they can show they met the three standards to have the loan forgiven. Under the new FQA, they will not have to show they had access to other funds.

What are the dates for the 8-week period that the loans will be forgiven?

Answer:

As the law currently stands, the 8 weeks begin on the date the you receive the first disbursement of the loan. Under instructions just issued by the Small Business Administration (SBA), a business with a biweekly or more frequent payroll schedule can elect to begin the 8 weeks”on the first day of their first pay period following their PPP Loan Disbursement Date.

The new House of Representative’s bill on the COVD-19 crisis, Health and Economic Recovery Omnibus Emergency Solutions Act (H.R. 6800), includes modification to the PPP loans. The amendments include expanding the 8 weeks to 24 weeks. It is unclear whether this provision will survive in negotiations with the Senate, and whether the changes will be retroactive. At best, it is not anticipated that the new legislation will pass, if it passes, until late June. 

If we received over $2 million and we had access to a credit line and additional capital as well, does that mean we should not have applied and we need to return the PPP?

Answer:

Having a line of credit does not automatically mean you have “access other sources of liquidity.” First, the CARES Act, which creates the PPP loans, specifically waives that the normal small business loan requirement that the borrower show that it "is unable to obtain credit elsewhere …” Accordingly, the SBA’s requirement regarding other sources of liquidity must be read to be consistent with the statute. Second, if required to use a line of credit instead of the PPP loan, it could impact future operations, could limit available funds when needed, and, given the current uncertainty, could make the PPP loan necessary. Third, if you can show that you would not have paid the employees out of a line of credit, then the PPP loan was necessary to maintain payroll costs, a primary purpose of the PPP loans. I suggest you start documenting the need and any analysis used to determine the need for the PPP loan.

As to the owners putting up addition capital, that creates a different issue. The SBA originally was focused on publicly traded companies with reserves. The only example given was for “a public company with substantial market value and access to capital markets.” While it expanded the requirement to “private companies with adequate sources of liquidity,” it does not explain whether owners must invest additional funds or simply have adequate reserves. SBA is likely to look at each case individually and it is not clear whether it will make owners invest more into the company. I suggest you have documentation to show that these funds were not corporate money and the burden it would impose on the owners.

Finally, the risk of a determination that the loan was not necessary is minimal. if the SBA determined the PPP loan was not necessary, it will only require it to be paid back. If repaid, SBA will take no other action or consider the certificate of necessity made in bad faith. At worse, you will have had a short-term loan at 1% interest.

To reach the numbers of hired workers for loan forgiveness, can we replace low level workers who chose not to return, with different positions in different departments at higher rates?

You can replace employees who chose not to return. For furloughed employees, you may need to offer the same salary/wages and the same number of hours. However, I see nothing in the law or guides from SBA that requires you retain the same positions for furloughed employees or new hires.

Can you make a one-time profit-sharing bonus to the 401k for all employees with PPP?

The statute provides only that payroll costs can include “payment of any retirement benefit.” There is no other restrictions. Nonetheless, I do not want it to appear you are randomly paid a profit-sharing bonus to increase the amount of the PPP loan that will be forgiven.. You may want to discuss this item with your lender.

When we calculated the PPP Loan, we used one year of wages which included 4 quarterly pays of commission. Even if I pre-pay the commissions, our sale for the quarter have been so low, I wouldn’t spend it all.

There is no clear answer on this issue. You should be able to pay the average amount of commissions paid per week that you used to calculate the PPP loan. This would be consistent with the intent of the PPP loans to maintain payrolls.

As laid out in the updates sent by WFCA (Learn More Here), the amount of the loan forgiven will be determined by using 75% of the loan on payroll costs and maintaining the same number of employees near their pay level. If you pay less than 75% of the loan on payroll, the amount of the loan forgiven will be reduced proportionately. To have none forgiven would mean you paid no payroll costs.

Is it permissible to pay with PPP funds health insurance payments that are invoiced in the 8 weeks, but cover 12 or 16 weeks of health insurance? Is it based on when you pay or the coverage period?

Answer:

The CARES Act provides only “the costs incurred, and payments made during” the 8 weeks following the first disbursement of the loan are eligible for forgiveness. Accordingly, you should consider allocating the costs for the 8-week period

Can we give advances or increase without causing a problem? What about paying hazard pay? It that ok or will they not allow an increase over wages used to calculate PPP?

Answer:

I do not see anything that would prevent an increase in pay. I would be concerned, however, if you raised pay only for the 8 weeks and then went back to the original pay schedule. Also, you need to be aware that to have the full loan forgiven, you still need to maintain at least the same average number of full-time employee equivalents (FTEs) paid during the 8-week as were paid between February 15, 2019 and June 30, 2019 OR January 1, 2020 and February 29, 2020. You get to choose the comparison period. Accordingly, increasing pay to reach the 75% level will not eliminate the need to maintain the same average FTEs.

Paying advances raises a difficult question with no clear answer. The CARES Act, which establishes the PPP loans, provides that only “the costs incurred, and payments made during” the 8 weeks following the first disbursement of the loan are eligible for forgiveness. Advances are not “incurred” during the 8 weeks. Advances on commissions raise a different issue. If you normally prepay a portion of the commission, such as a base salary, then prepaying commissions to be counted against future earned commissions may be allowed. Since you will be working with your lender in calculating the amount of the loan that can be forgiven, you may want to discuss this issue with your lender.

Do payroll fees and life insurance premiums count?

The CARES Act, which establishes the PPP loans, specified what is included in payroll costs. Payroll fees and life insurance premiums are not included.

Do you have any guidance on how to use the Utilities for forgiveness?

For example, can we submit Utilities that were incurred before our 8-week period started, but are Due during the first week of our 8-week period?  Do the utilities have to be incurred AND due, during the 8-week period? Also, does a rental truck, or car, with a lease to the company, qualify as Rent? 

I wish I could give you clean answers to your questions, but the CARES Act is not clear, and the various regulations do not provide clear guidance.

  1.  Utilities: The CARES Act provides that the amount forgiven is for “costs incurred and payment made during” the 8-weeks after the loan has been issued. If read literally, the cost must be both be incurred in the 8-weeks and paid during the 8-weeks. If carried to its logical conclusion, a business would get to only use the PPP loan for one of two utility payments likely to be paid during the 8-weeks. I doubt the law will be interpreted that way. My suggestion is you keep record of both what you paid during the 8-weeks and what you incurred during the 8-week period. You may also want to check with your lender since you will be working with them to apply for the forgiveness of the loan.
  2.  Payment on Vehicle Leases: This is tough one too. First, utilities are defined in the CARES Act to include “electricity, gas, water, transportation, telephone, or internet access.” What transportation costs are covered is not defined, so it is unclear whether it covers only transportation provided by third-parties or also includes vehicle leases and costs.

In addition, the CARES Act refers to “rent (including rent under a lease agreement)” without defining what is included. The SBA’s interim rules on sole proprietors does address vehicle lease payments. These interim rules provide that a PPP loan can be used to pay “business rent payments (e.g. store business equipment or the vehicle you use to perform your business).” This would indicate that lease payments for vehicles used for business are covered by the PPP loan. This may not include gas and maintenance cost, unless covered under utilities, Again, I suggest you work with your lender to ensure they agree such payments are covered. 

What happens if some of our workers do not feel safe to return to work? What if I bring back our staff and they do not want to return because of the larger income on unemployment with the extra $600 per week they have been receiving?

I have applied & received funds from the PPP loan.  My question is about taking the funds or letting our staff stay on unemployment and returning some or all of these funds.  If I distribute these funds to our employees and we are not able to open for a month or more my fear is that there may not be enough business to keep us going and I may have to lay off some or all of our staff again.   If I could plan for the best situation, I would delay taking the funds for another several weeks until I can see an end to being closed.  This would give us a cushion that may help us get back to a more normal pace of business.

The rules for these funds are that they must be distributed within 8 weeks.  The funds were put into our account on Monday 4/19.  I have not used any of the funds yet.  I know from talking to our bank that these concerns are shared by many other small businesses.

Answer:

The simple answer to your question is that if you delay using the PPP loan it will likely impact the amount of the loan that will be forgiven. Let me explain the problems with delaying the use of the funds.

  1. Distribution: As you correctly note, the funds must be used during the 8 weeks following the first distribution of the loan. There are no new rules that extend or alter the requirement that the funds be used during the 8-week period. The CARES Act, which created the PPP loans, specifies that the funds must be used during the 8 weeks to be eligible to be forgiven. Accordingly, there will not be any change in the 8-week requirement absent a change in the law. Any amount not used during the 8-weeks becomes a loan at 1% interest for a 2-year term.
  2. Use of Funds Over Shorter Period: While I have not seen anything regarding using the funds over a shorter period, a delay may impact how much of the loan is forgiven. To have the loan forgiven, you must show both that:
    • 75% of the PPP loan was used to pay employees, and 
    • The average number of full-time employee equivalent paid during the 8 weeks is at least a large as the average number of full-time employee equivalent paid, at your election, between February 15, 2019 and June 30, 2019 or January 1, 2020 and February 29, 2020. If you pay on average fewer employees during the 8-week period, the amount forgiven will be proportionately reduced. (Full-time employee equivalent combines part-time employees. For example, it you have 4 employees working half time, that will count as 2 full-time employees equivalent).
  3. As a result, your delay in paying employees may reduce the amount of the PPP loan that will be forgiven since the average number of employees paid during the 8 weeks may be lower than the prior period.
  4. Unemployment Issues: If you pay your employees during the 8 weeks, they will not be eligible to collect unemployment. If you do not have the business to keep paying them after the 8 weeks, then they can go back on unemployment.
  5. Bring Staff In: Be aware that you do not have to actually require employees to come back into work during the 8 weeks; you just need to pay them.
  6. Employees Not Wanting to Come Back: Unfortunately, this has become a common problem. With the extra $600 that an employee can collect under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, an employee in NY collect $1,000 a week of unemployment benefits, which is often more than their regular pay. An employee offered his or her job back is not eligible for unemployment benefits. An employer can notify the state Department of Labor if an employee refuses to return to their job or the payroll, and the benefits can be rescinded. But that reporting is not mandated and some employers fear risking having to rehire an employee who is disgruntled because they lost an opportunity to make more money not working than on a payroll.

Unfortunately, not paying these employees can impact the amount of the PPP loan that is forgiven (you need to use 75% on payroll costs and have the same average number of full-time employee equivalent). It could also impact your unemployment insurance rates for next year.

Two potential solutions are:

  1. Offer to have them work part time. As I understand the rules in NY, the employee can still collect unemployment benefits if they work less than four days a week and earn less than $405 a week. The amount will be reduced by 25% for each day worked regardless of the number of hours worked each day, but the employee can collect unemployment for a longer time than the standard 26 weeks. If you hire new or temporary employees to fill in the remaining hours this scheme may not work.
  2. You can hire new employees to do the work and terminate the other employees. In that case, the former employee would have to show they were actively looking for new work. Given the likely failure of many businesses, it may not be difficult to find new employees when business picks up.
Can you please explain which payroll cost items are forgivable?

Answer:

Payroll costs under the PPP loan rules include:

  1. Salary, wages, commissions, tips or similar compensation;
  2. Payment for vacation, parental, family, medical, or sick leave;
  3. Payments for separation or dismissal;
  4. Payment for employee group health care coverage, including insurance premiums
  5. Payment into an employee’s retirement plan; and
  6. Payment of state and local taxes assessed on compensation of employees, which is usually unemployment assessment.

Excluded from payroll costs are:

  1. Any compensation of an employee whose principal place of residence is outside of the United States;
  2. The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary;
  3. Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act), and income taxes required to be withheld from employees; and
  4. Paid sick and family leave wages required under the Families First Coronavirus Response Act (you get a tax credit to cover these costs).

To give an example:

  • Health insurance premium - $600    
  • Employer retirement plan contribution- $ 200    
  • ER paid State/Local taxes on income (i.e. State Unemployment)- $240    
  • Gross Wages- $4,000  
  • Federal income tax withholding - $(500)  
  • Net Paycheck to employee- $3,500  
  • Total = $ 5,040  
What are the PPP loan forgiveness requirements regarding the comparison of the number of full-time equivalent employees (FTEs)?

I searched both the CARES Act and the SBA the regulations. I have found no reference to a 60-day period for comparison. Rather the CARES Act specifies that:

The amount of loan forgiveness under this section shall be reduced, but not increased, by multiplying the amount described in subsection (b) [the amount of the PPP loan] by the quotient obtained by dividing

  • (i) the average number of full-time equivalent employees per month employed by the eligible recipient during the covered period; by
  • (ii)(I) at the election of the borrower—
    • (aa) the average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February15, 2019 and ending on June 30, 2019; or
    • (bb) the average number of full- time equivalent employees per month employed by the eligible recipient during the period beginning on January 1, 2020 and ending on February 29, 2020.

CARES Act at § 1106(d)(2)(A). The covered period’’ is defined as “the 8- week period beginning on the date of the origination of a covered loan.”  Id. at § 1106(a)(3).

Accordingly, the amount of the PPP loan forgiven will reduced by the result of dividing the average amount of FTEs employed during the 8-weeks covered by the loan by the average FTEs employed between February15, 2019 and June 30, 2019, or employed between January 1, 2020 and February 29, 2020, at the borrower’s choice.

If our employees work night jobs we pay time and one half. If we pay 40 hours regular with PPP loan, their pay would be more than 25% less than the last full quarter worked. Should we pay time and one half to avoid reduction in the final forgiveness?

Answer:

The CARES Act which established the PPP loans, provides that the amount of the loan forgiven will be reduced is any employee’s salary is reduced by more than 25% from the amount they were paid during the most recent quarter before the loan funds were provided. As I read the law, you are required to match within 25% of the employee’s wages that they earned in the last three months. This would indicate that you can pay those employees at their normal time and a half rate. I saw nothing in the various interim regulations that would require a different result.

The PPP loan forgiveness for Utilities includes what expenses. I have seen some publications that list transportation as a utility. If transportation is included would that include leased vehicle payments and fuel cost?

This is tougher question, with not clear answer.

The CARES Act defines utilities payments to include “payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access.” In context, it is likely to cover paying another company to provide transportation cost, but not necessarily lease or gas costs.

These costs, however may be covered on “rent.” For LLCs, C or S corporations there is nothing addressing whether rent refers only to property rent or other lease payments like equipment and vehicles. The CARES Act simply refers to “rent (including rent under a lease agreement)” without defining what is included. The SBA’s interim rules on sole proprietors, however, does address vehicle lease payments. These interim rules provide that a PPP loan can be used to pay “business rent payments (e.g. store business equipment or the vehicle you use to perform your business).” This would indicate that these lease payments are covered by the PPP loan, at least for sole proprietors.

A fair reading would indicate that the lease and transportation costs would be covered either as a utility (at least for the gas) and/or under rent. I suggest you work with your lender to ensure they agree such payments are covered. 

Can you address my concern I have of the timing or window of 8 weeks from PPP loan funding, as I have been discussing with my SBA 7a Lender today? How do I use the PPP loan if most of my employees are not working?

I appreciate your confusion. The statute is an aporia full of inconsistencies and unclear language. Let me see if I can clear any of this up.

First, the PPP loans are primarily designed to pay employees. As a result, to have the loan forgiven, 75% of the loan must be used on payroll costs. In additon, the number of full time employees that are paid during the 8-weeks following the loan are compared to the number of full 6me employees you had either between February 15 to June 30, 2019, or (at your selection) January 1 to February 29, 2020. If the employees paid during the 8 weeks is lower, then the amount of the loan forgiven is proportionately lowered. For example. it you pay 6 of your 12 employees than only 50% of the loan will be forgiven

Second, if you do not meet these requirements of 75% and comparable number of employees, then you have the op6on of paying the difference back or taking it as a 2-year loan at 1% interest.

Third, since the loan is meant to assist you in paying your employees, you can pay the employees whether or not they actually come to work. If you are closed because of a shelter in place order or do not need all your employees because business is slow, you can pay all of then with the PPP loan proceeds in order to have the maximum amount forgiven.

Fourth, the eight-week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower. The 8 weeks are the immediate 8 weeks following the loan, and cannot be used intermitently.

The rules on PPP loans has me confused since I am still under a shelter in place state. Can I pay the employees once they come back to work?

The rules of the PPP loans are dense, somewhat inconsistent, and difficult to work through. See if this very brief synopsis helps:

They are dense, somewhat inconsistent, and difficult to work through. See if this very brief synopsis helps:

  • The PPP loan must be used for the immediate 8 weeks after receiving the loan funds.
  • The PPP loan must be used for payroll costs, rent, utilities, interest on business debts.
  •  The PPP loan could be used just for rent, utilities, interest on business debts, but then none of it will be forgiven. To have the PPP loan 100% forgiven, you must meet two tests:
    • 75% of the loan must be used for payroll costs, and
    • The number of full-time employees paid during the 8 weeks must at least equal the number of full-time employees you paid either from February 15 to June 30, 2019, or January 1 to February 29, 2020—it is your choice which period to pick.
  • You can pay your employees to meet these test whether or not they actually return to work.
  • The amount of the PPP loan forgiven will be reduced by how far off you are in meeting these tests, so if you use only 50% of the loan for payroll costs, then only 2/3rds of the loan will be forgiven (50% ÷ 75%).
  • Any amount of the PPP loan not forgiven must be paid back in 2 years at 1% interest.
  • Payment of the PPP loan is deferred so the first payment will be due 6 months after you receive the loan.

You need to document how the PPP loan is used to apply for forgiveness.

We were successful in applying for the PPP loan. We kept one full time employee on the books. Can we still take advantage of the Employee Retention Credit in any way for the one employee?

Unfortunately, the answer is no. The CARES Act specifies that an employer who receives a PPP loan “shall not be eligible for the credit” under the Employee Retention program. A business gets either one or the other.

Is trash considered a utility?

The CARES Act defines utilities payments to include “payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access.” Other costs are not included. However, rent usually includes common costs, such as trash collection, snow removal, maintenance, etc. At a minimum, I would keep detail records of all costs to use when seeking loan forgiveness and for any audits. Since you will be working with your lender in calculating the amount of the loan that can be forgiven, you also may want discuss this item with your lender.

I have a full-time employee that has just given me a week’s notice that he will be terminating his employment. How does this situation work with the PPP Loan forgiveness calculation?

This will take my employee count from 11 to 10.

Answer:

The Small Business Administration (“SBA”) issued new guidance this week that may addressed this issue if you have laid off the employee and have offered to rehire him. The SBA provided that it will exclude “laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation,” if the employee ] declines to come back to work. To have these employees excluded, the employer must make “a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented.” 

 

What is unclear is whether this will also apply to an employee who is working and then quits. Obviously, you can replace the employee to keep the number at 11. Alternatively, I suggest you argue that the idea behind the rehire rule described above should also apply to employees that quit the job. In both cases employers like you have made a good faith offer to retain the employee and it was the employee’s decision to quit. To argue this, you need to give the employee a written offer to stay on the job, and document his decision to quit. This can be a written response from the employee, such as an email, or an email from you verifying that the employee declined to stay.

We received the help of the PPP. One of our employees terminated himself. How will this affect us and PPP forgiveness?

There is new legislation signed last week by the President that addresses this issue. Under the original PPP, the amount of the loan forgiven would be reduced if the business failed to bring back the average number of full-time employee equivalents (FTEs). Congress recognized that some employees were not returning to work, so the PPP Flexibility Act has eased that requirement in two ways. 

First, the borrower is now given until December 31, 2020 to restore its FTE count to its February 15, 2020 level. Second, recognizing that some businesses will not be able to reach that level, the PPP Flexibility Act allows the PPP loan to be forgiven if the business: (1) could not rehire the prior employees or hire new similarly skilled employees to fill the positions by December 31, 2020; or (2) could not return to the same level of business activity as before February 15, 2020, due to compliance with requirements related to sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19 and established through rulemaking or guidance by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration. The business will need to document that it could not rehire the same number of employees to qualify under these exemptions. 

For the PPP loan forgiveness, does the 75% towards payroll need to be specified by hourly pay per employee?

As you know in this industry part of our payroll is paid by weekly labor/ per job and not hourly.  We were told we had to log the hours of each employee for loan forgiveness and want to know if this is true.

Answer:

First, the recently enacted Paycheck Protection Program (PPP) Flexibility Act has modified the forgiveness rules, including lowering the amount spent on payroll costs to 65%, increasing the time to use the loan from 8 to 24 weeks, and revising the rules on full time employees. You can access a summary of the new law on WFCA’s website.

The form to apply for PPP loan forgiveness does require you to determine the average number of hours paid per week for each employee during the 8 weeks covered by the PPP loan. It is not looking for the hourly rate, just the average weekly number of hours paid for during the 8 weeks whether paid a hourly rate, a salary, or piecework rates.

To put this requirement in context, the amount of the loan forgiven can be reduced by three factors:

  1. If less that 65% of the PPP loan is used on payroll costs;
  2.  If each employee’s pay during the 8 weeks is reduced by more than 25% of the employee’s pay during the most recent full quarter during which the employee was employed; and
  3. If he average number of full-time employee equivalents (FTEs) paid during the 8-week is less than the average number of FTEs paid between February 15, 2019 and June 30, 2019 OR January 1, 2020 and February 29, 2020. The employer gets to choose the comparison period. If you pay fewer employees during the 8-week period, the amount forgiven will be proportionately reduced. equals one full-time employee).

The average number of hours paid each week for each employ is used to determine whether the third factor—the average FTEs. Accordingly, the form requires you to list each employee with their “Average FTE.” To calculate the “Average FTE” you take the average weekly hours paid during the 8 weeks and divide it by 40. Every employee that averages 40 hour a week equals 1 FTE. For part time employees they will be counted as a part FTE. For example, if you have employees being paid an average of 10 hours a week, they will each equal 0.25 of an FTE. If you have 4 such employees they would count collectively as 1 FTE. You add up all the “Average FTE assigned to each employee to determine the total of FTEs paid during the 8 weeks. This is then compared to the total of FTEs you paid between February 15, 2019 and June 30, 2019, or January 1, 2020 and February 29, 2020, which ever you pick as the comparative period.

Congress recognized that some employees were not returning to work, so the PPP Flexibility Act has eased that requirement in two ways. First, the borrower is now given until December 31, 2020 to restore its FTE count or wages to its February 15, 2020. Second, recognizing that some businesses will not be able to reach that level, the PPP Flexibility Act allows the PPP loan to be forgiven if the business: (1) could not rehire the prior employees or hire new similarly skilled employees to fill the positions by December 31, 2020; or (2) could not return to the same level of business activity as before February 15, 2020, due to compliance with requirements related to sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19 and established through rulemaking or guidance by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration. The business will need to document that it could not rehire the same number of employees to qualify under these exemptions.

For employees that you pay at piecework rates, the law has always required you to keep record of the hours they worked to ensure each employee is paid minimum wage and all overtime due. To get more information on the requirements regarding piecework pay, WFCA published an article in Premier Flooring Retailer Dealer (November/December 2015). You can access the article here. Learn More Here.

The PPP loan my firm received will be 8 weeks old at the end of May. This leaves me with limited funds, but with about $150K of my loan available. Is it wise to gamble on the PPP extensions being retroactive to cover my beyond 8 week pay period?

My alternative is to pay wages out of my pocket or furlough some of my staff...which would leave me in a catch 22 since I will be allowed to open as of June 5th, but under the ‘yellow’ guidelines in my state.  I anticipate needing my RSA’s especially since one is pregnant (7 months) and I would be shorthanded anyway.

Answer:

I am highly confident that Congress will get a bill to President Trump at some point the first week of June that expads the spending window during which forgiveness is calculated from 8 weeks to at least 16 weeks, maybe even 24 weeks. The legislation will also very likely expand the minimum repayment schedule from 2 years to at least 5 years, which would make your monthly payment on any leftover portion of your PPP pretty manageable.

I am less certain what other changes will be made, such as extending the loan to 5 years, modifying the 75% rule, or allowing the funds to be used for other expenses. As the law now stands. the funds must be spent on payroll costs, rent, utilities, and interest on business mortgages and loan. For the time being, I would continue to use the PPP loan funds only for these costs, but it is likely the 8 weeks will be enlarged.

To keep up to date on all the latest information regarding PPP and other SBA loans, please refer to the "Loans and Grants" section of the "Resources and Useful Links" section of our website. Click Here.

NOTE:  The Paycheck Protection Program (PPP) Flexibility Act was enacted and increases the 8-week period to 24 weeks. Learn more.

What is the difference if you hire subs to install that do not put in for a PPP OR use employees?

It says you cannot use PPP Loans to pay independent contractors or sub-contractors, but that is not how most floor covering businesses operate.  Please allow the PPP LOAN to be used to pay anyone working for Small Business on jobs!!  

Answer:

I understand your frustration. Congress, in establishing the PPP loans, provided that independent contractors could also get PPP loans for themselves. To avoid both the retailer and the independent contractor from receiving PPP loans for the same payroll costs, the Small Business Administration (SBA) has determined that independent contractors (those that receive 1099s) cannot be included in the payroll cost of another business. They must apply for a PPP loan for themselves.

We will continue to explore expanding the coverage of the PPP loans.

We pay out payroll to independent contractors for labor on flooring who did not put in for the PPP Loan. Can we count that part of the 75% or 60% of forgiveness?

The PPP loan cannot be used to pay independent contractors, and payments to independent contractors cannot be counted in calculating that 60% of the PPP loan was used on payroll costs. The new law lowers the percentage to 60% and gives you 24 weeks to meet that amount. 

Congress is not willing to allow a business that uses independent contractors to include their payments under the PPP loan, since independent contractors can apply for their own PPP loans. We strongly recommend that all independent contractor apply for a PPP loan before the June 30, 2020 deadline. 

What forms do we have to submit within the 24-hour period to have the PPP loan forgiven?

What forms do we have to submit within the 24-hour period to have the PPP loan forgiven?  I certainly qualify for it to be forgiven, but do not know what paperwork they need to verify forgiveness.

Answer:

To ease your mind, you do not have to submit the application for loan forgiveness within 24 hours. Moreover, the form (which I have attached) that are currently published by the Small Business Administration (SBA) are likely out of date given the legislation passed by Congress and sign by the President this week. Click here to learn about the new rules and new forms.

The new legislation lowers the amount needed to be spent on payroll cost to 60%, extends the 8-week period to 24 weeks, and provides some relief on maintaining the number of employees and wages. It also provides that the application to forgive the loan must be filed within ten months of after the expiration of the of the 24 weeks. I have attached a copy of an update on the new legislation. Click here to learn more.