FAQS on Paycheck Protection Program Loans

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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

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.

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.

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. 

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.

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.

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. 

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.

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.