PPP Loan Forgiveness Factors

There is a logical problem inside the PPP Loan Program given what is actually happening in reality. The program is based upon employing workers when many businesses are fully or partially shut down. How can you possibly get your loan forgiven if you have no need for workers in the first place?
I would like to thank our Sister up north in the Window Coverings and Upholstery business for suggesting this topic. We have had several similar questions in the past week, so I thought that this would be of interest. Additional information on this can be found from The Treasury at
PPP Loan Inception Date
Loan forgiveness under the program depends on the borrower’s payroll costs over an eight week period. The question is if you don’t have anyone or very few workers right now, and only need people when you reopen, can you determine the actual date that the loan begins to coincide with reopening?
The CARES Act stipulates that the eight week period of forgiveness begins on the date that the lender makes the first disbursement of the PPP Loan to the borrower. No matter what that date happens to be, that is when the period begins by law. This has nothing to do with your actual payroll periods. Further, The Act stipulates that the lender must make the first disbursement of the loan no later than ten calendar days from the date of loan approval.
This sort of throws out the concept of deciding exactly when to get the loan to meet your needs for forgiveness. Most of our customers did not wait to get the loan, assuming that there was only so much money available in the first place. Also, you can’t ask the lender to hold off on sending it to you either, given the ten calendar day rule.
Staffing Requirements
In order to maintain forgiveness on the loan you must maintain the number of employees on your payroll. This is calculated in the following manner. First you must determine the number of Full-Time Equivalent employees that you had for
A – The eight week period following your initial loan disbursement
B – from February 15, 2019 – June 30, 2019
C – From January 1, 2020 – February 29, 2020
Now take A and divide through by B. Do the same with C. Take the largest number you obtain. If you are a seasonal employer, you must divide through by B.
– If you get a number equal to or greater than 1, you have maintained your headcount and met this requirement.
– If you get a number less than 1, then you have not met the requirement and your forgivable expenses will be reduced proportionately.
A New Exemption for Re-Hiring Employees
What happens if you offer to rehire an employee, and they choose not to come back because they are making more money on unemployment than when you were paying them? If the employee rejects your offer to re-employ them, you may be allowed to exclude this employee when calculating forgiveness of The PPP Loan. To qualify
– You must have made a written offer to hire them in good faith
– You must have offered to rehire them at the same salary or hourly pay with the same number of hours as before
– You must have documentation of the employee’s refusal to work
All of this begs a reasonable question. In what form should this be presented or documented in order to exclude this employee from loan forgiveness? There is no answer, given the fact that this is a new rule that just came from The SBA and The Labor Department. More on this should follow.
Further, if this happens to you, the worker is probably not entitled to continued unemployment benefits. How does this work? Get your information to The Department of Employment Security. They should reopen the file and decline further benefits under your number.
Loan Forgiveness and Pay Requirements
In order to receive forgiveness on the loan, you must pay at 75% of the total salary or wages paid in the most recent quarter when they were employed. If this occurs, the eligible amount for forgiveness will be reduced by the difference between their current pay and 75% of their original pay.
Rehiring Grace Period
You can rehire any staff that was laid off and reinstate any pay that was decreased by more than 25% of the requirements for forgiveness if you do it by June 30, 2020. Please don’t ask me exactly how this works. By definition this is a conundrum. It’s just a rule that they put into The Act that no one knows how to enforce. This is what happens when you have lawyers writing tax law. Further information should follow once The SBA figures this out for themselves.
Headcount Reductions in Loan Forgiveness
Let’s say that you had 5 employees and you were paying all of them $10,000 per month. That would qualify you for your monthly payroll of $50,000 X 2.5 or a $125,000 PPP Loan. But you only hire back three people at their original amount of pay while maintaining your non-payroll operating expenses. What would still be eligible for forgiveness?
You’re paying three people $10,000 per month or a total of $60,000 plus the overhead of $25,000 for a total of $85,000 which is eligible to be forgiven.
But wait…there’s more.
Since you only hired back 3/5ths or 60% of your workforce, the $85,000 which is eligible must be multiplied by the percentage that you hired back to get the actual amount to be forgiven of $51,000.
Sorry. I know how much this hurts. These are the rules, and nothing can be done to change them.
Pay Reduction in Loan Forgiveness
Let’s use a similar example. You have five employees that you paid $10,000 per month to and you received the same $125,000 PPP Loan. This time you hired all five of them back, but you only paid them $7,000 per month individually.
Pay reduction forgiveness is based upon a standard of paying workers 75% of what they were making before this all began. Any reduction below that, reduces the amount which can be forgiven. 75% of the monthly $10,000 wages are $7,500 per month per worker. You are paying them $7,000 per month, or $500 per worker, per month below the standard. As such, the amount available for forgiveness is reduced by five workers X $500 X 2 months or a total of $5,000.
What can you do?
Not much if you expect the amount to be forgiven. Let’s remember that The PPP Loan Program is not a long term lending solution. These are two year loans where the first six months of payments are deferred. This means that any amount not forgiven would need to be repaid over an eighteen month period.
Think about the math. If you borrowed $100,000 and only $40,000 was forgiven, then you will need to repay $60,000 over 18 months. This means that your monthly payment would be in excess of $3,300 per month. That’s a large monthly payment for a $60,000 loan.
If you know that a portion of your loan will not be forgiven, then be smart enough to save that portion for repayment.
Do some math now. I have given you all of the tools that you will need. Figure out where this thing should land in the next eight weeks, and put the rest of the money on the side. Act like you don’t have it, and repay whatever isn’t forgiven in a timely manner.
I’m not going to talk about what is fair, right, or reasonable. We’re talking about taxes here. Don’t look for logic. What is happening and how it is being forgiven is by definition irrational. No one asked us how to do this. No one will ever care about our opinions.
These are the rules. You need to follow them to win the game.
Let me leave you with this one thought…
Somewhere in the middle of this thing it went from being a sprint to a marathon. We’re going to be at this for a while.
Those of you that are new to Entrepreneuring need to take on a whole new attitude. Patience is required. If you have been at this almost thirty years as I have, then this is probably how you manage naturally. If you are newer to this, or have not yet developed persistence and self-control, you are going to need all of that and probably more.
In the middle of this, with no end in sight, it has occurred to me that getting through this is mostly a game of patience.
What I am asking isn’t easy. Entrepreneurs are aggressive by nature. That natural aggressiveness is one of the things that distinguish us from our employees. But that natural militancy must be tempered by patience, diligence, and composure. Without those qualities, we will never finish this race.
We need to treat our employees with restraint and moderation. Remember that they are just as scared as the rest of us. They need that steady hand at the wheel, in order to do their jobs effectively.
We need to handle our customers with diligence and poise. Nothing stops a client from wanting to buy from you like anxiety and angst in an uncertain future. Why would they place an order with you, if they begin to question your ability to deliver?
And we need to handle our families with tolerance and composure. Your spouse is probably more concerned than ever before in an uncertain future. Your kids might not even know what is happening in the first place. Be that calm in the storm that they all need to get through this and persevere.
Be the leader that you were born to be. Screw on a happy face and get it done. Like it or not, that’s the job. But always remember that we are with you, every step of the way.
Accounting Solutions Ltd. stands ready to complete its mission and purpose of protecting you, your family, and your business. If there is ever anything that you need, anything at all, please don’t hesitate to contact us. If you are not a client and need assistance, I would love to hear from you. I stand ready, and remain,
Sincerely yours,
Chris Amundson
Accounting Solutions Ltd.
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