The loan forgiveness aspect of the Paycheck Protection Program (PPP) is definitely the silver lining for business owners in 2020 and across the entire Covid Pandemic. Navigating the ins and outs of the PPP can be tricky, so it is good to stay informed and forewarned to ensure that forgiveness is met in full so your business isn’t on the hook for the loan. We have compiled a set of tips about PPP Loan Forgiveness offered to business owners through the CARES Act to help continue the navigation of the program.
‘Full-Time Equivalent Employee’ According to the Paycheck Protection Program
The amount of a PPP loan that is forgiven is generally reduced if the borrower cuts back on the number of “full-time equivalent” (FTE) employees during the 24-week covered period. However, the CARES Act does not define an FTE employee. Since this is an important omission, the SBA has determined that an FTE employee is an employee who works 40 hours or more, on average, each week.
For employees who were paid for less than 40 hours per week, borrowers can choose to calculate the full-time equivalency in one of two ways. First, borrowers can calculate the average number of hours the worker was paid per week during the 24-week covered period and divide the number by 40. For example, if an employee was paid for 30 hours per week on average during the 24-week period, the employee would be an FTE employee of 0.75. Second, a borrower can elect to use a full-time equivalency of 0.5 for each employee who on average worked less than 40 hours per week during the 24-week period. Borrowers can select only one of these two methods and must apply it consistently to all their part-time employees.
Exception to Wage or Salary Reduction Rule
There’s another way that loan forgiveness can be limited – by a reduction in paid salaries or wages of more than 25%. However, there’s an exception to this rule.
If there are salary or wage reductions of greater than 25% between February 15 and April 26, 2020, the borrower is exempt from the loan forgiveness reduction rule if the salary or wage reductions are restored by December 31, 2020.
Covered Periods for Alternative Payroll
Since the 24-week covered period doesn’t always align with a business’s payroll cycle, the SBA is offering an “alternative payroll covered period” for borrowers with a biweekly or more frequent payroll schedule. As a result, borrowers may calculate eligible payroll costs using the 24-week period that begins on the first day of the pay period after loan disbursement, rather than the first day of disbursement.
Example of the Paycheck Protection Program in action:
If a nail salon & spa received its PPP loan begins on Monday, June 8, and the first day of its 1st pay period following the PPP loan disbursement is Sunday, June 14, the first day of the alternative payroll covered period is June 14 and the last day of the alternative payroll covered period is Sunday, November 29.
Retention of Documents
The SBA announced that it can review PPP loans of any size at any time. Borrowers must retain their PPP documents for at least six years after the date the loan is forgiven or paid in full.
Hopefully these tips are helpful in your further understanding of the Paycheck Protection Program so that your business can weather the pandemic storm a bit more comfortably. Stay safe!