For many business owners, the top questions of the hour all revolve around Paycheck Protection Program (PPP) Loan forgiveness. The PPP Loan is a loan intended to assist small businesses to keep their employees on payroll during the COVID-19 pandemic. The Small Business Administration (SBA) will forgive these loans if the employees are kept on the payroll for the “Covered Period”, and the money is used for select things such as eligible payroll and non payroll costs.
How can I use the loan?
Most of the money, at least 75%, that is received in the PPP loans must be used for employee costs. These costs are gross wages (incurred AND paid), state unemployment, local and state employer taxes. They also include employer portion of health insurance from group health plans and retirement contributions. The funds are NOT available for Social Security Tax or Medicare.
The remaining portion of the loan, up to 25% of the loan total, can be spent on utilities, rent, lease payments, mortgage interest and interest on debt incurred after February 15, 2020. You’ll want to keep detailed records of these, including cancelled checks, invoices and other details to present during your loan forgiveness. H.R. 7010 adjusts the percentages to 60/40.
How does the Full Time Equivalent number get calculated?
The first question you’ll need to ask to determine what amount of PPP you can be expected to be forgiven for is “What are my FTEs?” An FTE is a measurement of the number of full-time hours being completed at your business. For these PPP loans you can utilize one of two methods.
The first method is Average FTE. For the covered period you have this loan, you would count every employee that worked 40 hours/week or above as “1”. This means that even if your business has a policy that 35 hours/week equates a full-time employee, those employees are not considered a Full Time Equivalent. Employees that work less than 40 hours/week are considered a “0.5” for the calculation.
If you have a multitude of employees that work under 40 hours/week, using a more in depth calculation may be the way you want to go to receive a greater forgiveness level. In this calculation you would take the average hours they work in a week and divide them by 40. So if an employee works an average of 36 hours, you would take 36/40 making them a “0.9” FTE.
Whichever method you choose, you must use the same method for every employee.
At the end of the PPP period you need to see if there was a drop in your FTE number. If there is a drop, it could affect your forgiveness. That means the part not forgiven is now a loan or you can pay it back immediately. There are some important exceptions though. If an employee refuses to come back, voluntarily resigned, you fired them for cause, or they asked for a reduction in their hours your FTE count would be restored.
When does my PPP loan period start?
As of today, June 2, 2020, the SBA is saying that the PPP loan period starts 8-weeks from the day your funds are given to you. The passing of H.R. 7010 could expand the covered period.
Can I give my employees bonuses or hazardous duty pay?
We’ve heard many employers ask if they could give their employees bonuses or hazardous duty pay for the employees that did come back and work during this period where many were quarantined. The answer is yes, but it is capped at $100,000 annualized compensation, which equals to $15,385 for the 8 week period.
Owners, however, may not be able to give themselves bonuses. So if you’re a Subchapter S and you take a wage from your company, you’re going to be limited to 8/52 of your 2019 wages. For example, if your 2019 wages were $75,000, you’re only going to get forgiveness on $11,538, or 8/52 of $75,000. If you made over $100,000 your cap would be $15,385. This cap does include health insurance and retirement contributions made by the owner.
FTEs for Schedule C are based on your Schedule C that you filed for 2019, which you included in your application. Partners will use their Form K-1: Self Employment Income. This would just be your earnings, without including any health insurance or retirement plan contributions.
In addition, the expenses incurred in relation to the PPP forgiveness are not a deductible expense for tax purposes. However, there is a bill that was introduced to allow for the deduction.
What are we still waiting for clarification on?
There are elements of the CARES ACT that we’re still waiting for clarification on or to pass Congress. The passing of PPP forgiveness in HR 7010 will bring potential changes outlined below.These include:
- The 8-week period previously described as your opportunity to use your PPP, may be expanded to a 24-week
- period, giving business owners more flexibility in using it when more businesses are open.
- The period to reinstate employees up to 100% has moved from June 30, 2020 to December 31, 2020.
- The 75/25 split we discussed may shift to a 60/40 split.
- The 2-year loan is slated to move to a 5-year loan for any PPP loan funds that are not forgiven.
- Availability to defer payroll taxes when having a PPP Loan.
Please continue to follow Faw Casson via social media for updates on the PPP loan forgiveness as they occur.