Now that many small businesses have received their Payroll Protection Program loans, the next question becomes: "How much of my loan is eligible for forgiveness?"
The below guide provides an overview of the steps to determine the amount of loan forgiveness an entity is eligible for under the Paycheck Protection Program. The information below is subject to change as additional details emerge around how the loan forgiveness will be implemented.
The loan amount will be forgiven in its entirety as long as the following conditions are met:
- The loan proceeds are used for permissible costs (i.e. payroll costs*, mortgage interest, rent, utilities, etc.) paid and incurred over the 8 week covered period, which begins on the date the lender makes the first disbursement of the PPP loan to the borrower. Note: Mortgages and leases must have been in place by February 15, 2020. Payroll costs in excess of $100,000 annual salary for an employee are not eligible for forgiveness.
- Employee headcount is maintained.
- Compensation levels for employees earning less than $100,000 per year are maintained.
- Not more than 25% of the forgiveness amount is used for non-payroll costs.
If these factors are not fully satisfied, a portion of the loan will not be forgiven and must be repaid. In order to determine the amount eligible for forgiveness, the following three-step analysis should be followed.
*Payroll costs are defined as the sum of payments of any compensation with respect to employees that is a salary, wage, commission, or similar compensation; payment of cash tip or equivalent; payment for vacation, parental, family, medical, or sick leave; allowance for dismissal or separation; payment required for the provisions of group health care benefits, including insurance premiums; payment of any retirement benefit; or payment of State or local tax assessed on the compensation of employees. Payroll costs does not include the compensation of an individual employee in excess of an annual salary of $100,000 or any compensation of an employee whose principal place of residence is outside of the United States. Payroll costs also doesn't include any qualified sick leave wages or qualified family leave wages for which a credit has been allowed under the Families First Coronavirus Response Act.
Multiply the amount of loan which qualifies for forgiveness by the following fraction:
Subtract a dollar amount computed as follows:
- Identify all employees earning less than $100,000 who are still employed during the 8 week covered period.
- For each of those employees, take their wages/salary rate during the 8 week covered period and compare it to their wages/salary rate for the most recent full quarter during which the employee was employed before the covered period.
- For any of those employees whose wages/salary rate dropped by more than 25%, take the wages/salary rate for the most recent full quarter during which the employee was employed before the covered period multiplied by 75% and subtract the amount the employee received during the 8 week covered period.
- Combine all salary reduction amounts and subtract from the loan forgiveness amount.
Correct decreases from Step 1 or Step 2 as follows:
- Restore any reduction in FTEEs for the period between February 15, 2020 and April 26, 2020 before June 30, 2020.
- Restore any reduction in wages/salary rate to the rate employees were earning as of February 15, 2020 by
June 30, 2020.
NOTE: Records to substantiate all amounts must be maintained.
We understand that this is a complex calculation. Additionally, lenders are still waiting for clarification from Treasury on many aspects under the loan forgiveness formula. You should work with your lender to ensure that you are compiling accurate information to ultimately determine the amount of loan forgiveness under this program.