We’re in the middle of May now and many companies are half way through the 8 week period during which they are hoping to gain full forgiveness on their PPP loan. We knew there were some quirks but heck, 75% on payroll costs if staffing remains the same and no more than 25% on allowable expenses, this should all be pretty easy…just need to be pretty organized with all the documentation.

Not so fast…last Friday (May 15), the SBA finally released the PPP Forgiveness Application. For sure, It does bring some clarity on some points but we’re still missing the full picture and, even though it’s only 11 pages long, it’s also throwing up more questions.

Based on the Forgiveness Application and guidance in the same document, we have created a fictitious company – ABC LLC to walk through their mock payroll analysis prepared to apply for forgiveness.

Before we look at their accounts, a quick recap on what is and isn’t allowed:
Payroll Costs

  • Included – salaries (up to $100,000), wages, commissions, tips, vacation, sick and paid leave, healthcare and retirement benefits along with employer state taxes
  • Not included – compensation for any salary in excess of $100,000, compensation for any employee that is not a US resident, any qualified sick leave that is covered under the Family First Coronavirus Response Act

Other allowable expenses

  • Business rent, utilities, interest on a business related mortgage and interest on business debt incurred during the covered period (i.e. 02/15/20 to 06/30/20) as long as it was active prior to 02/15/20

So, how’s this going to translate onto the Forgiveness Application form?

ABC LLC need to pass 3 tests to quality for forgiveness on their payroll expenses and a failure in any of these will reduce the amount that will be forgiven.

  • Test 1 – 75% of funds are used for payroll costs
  • Test 2 – Full Time Equivalent employee (FTE) comparison test
  • Test 3 – 25% Compensation test

*There will be more guidance on these calculations coming from the SBA and the following examples are based on our understanding of the application form as shared on May 15

ABC LLC Overview
ABC received a PPP Loan of $100,000 and, during their 8 week covered period, the funding was spent in the following categories:

  • Payroll costs = $65,000
  • Business rent = $25,000
  • Utilities = $10,000

The whole funding was spent on allowable expenses so that’s a positive but let’s look at the Payroll cost analysis for forgiveness. As mentioned above, we’re going to walk through the 3 tests:

Test 1 Example – 75% of funds are used for payroll costs
ABC LLC actually fails at the very first test as they have only spent 65% of the funding on payroll costs so at Test 1, they have lost 10% or $10,000 of possible forgiveness and, before we look at the other tests, their maximum forgiveness is now at $90,000.

Test 2 Example – Full Time Equivalent employee (FTE) comparison test
Here’s where the complexity starts so, before looking at their (fictitious) payroll data, let’s just run through some of the definitions that come into play under Test 2:

  • FTEs are classified as employees that work 40+ hours per week. We can also combine part time workers, e.g. 1 worker does 25 hours week and another 15 hours so combined these people equal 1 FTE. Additionally, instead of adding them everyone up on the % of hours worked, we can also take anyone who has worked less than 40 hours and call them ½ FTE and see if that allows you to reach your forgiveness. It seems that you can use either option for your part time workers and use the option that works best for you. So what does that look like?
    forgiveness chart01

    The FTE Calc. is a straight calculation of the hours worked divided by 40, capped at 40 hours per week, and there is absolutely no benefits to the forgiveness calculation from Jonny working 50 hours per week for the FTE calculation.

    The FTE Simplified method allows us to assume that if people do not do work 40 hours per week, we can assume each employee is a ½ FTE.

    The thing to note is that, unless all your employees are FTEs, you will want to run this calculation both ways before filling out the form and see which option gives you the best result – as you have the option to chose either and you’ll see why this is important shortly!

  • Covered period 8 (56 days) weeks beginning on the date that your funding landed in your bank account
  • Alternative Covered Period – note this just came out with the Forgiveness Application – so say you were in the middle of your pay period when you received the funding, you can take the next first day of your pay period and call that the start of your covered period for the payroll calculations. Just to illustrate the point, say you received the funding on April 25 and your pay period started on May 1, you can take May 1 as the start date of your covered period to determine your payroll costs (but this does not cover your non payroll costs which are still applied from the date funding lands in your bank)
  • Base Period. And here’s where the confusions starts…this is the period that you are going to use to compare your current employees to what you had previously to see if you have brought them back to the levels you had before.
    • Option 1 – February 15, 2019 to June 30, 2019
    • Option 2 – January 1, 2020 to February 29, 2020
    • Option 3 (for seasonal businesses only) – select 12 consecutive weeks between May 1, 2019 and September 15, 2019 and select the weeks that make the most sense for your business

Key to forgiveness is that employee levels must have been maintained so the SBA is asking us to compare FTE’s during the Covered Period to a Base Period – any reduction during the Covered Period will reduce loan forgiveness.

OK – got all of that? So how does that help you with your FTE Comparison Test?

ABC LLC had been successfully growing through 2019 and into 2020, with headcount steadily increasing – which was great but, in terms of forgiveness, if they were to use Jan & Feb 2020 (Option 2 per the Forgiveness App) for the base period to compare our current headcount, this will show them as down by 20% and bring with it a reduction in the amount that can be forgiven. Fortunately for them, their headcount using Option 1 which is the period Feb 15 2019 to June 30 2019, we can demonstrate an increase so, baselining to Option 1 is going to be the best route for the Forgiveness Application.
forgiveness chart02

The Forgiveness Application does give you 2 more options should you show a reduced number but, as we feel that more guidance will be forthcoming in that area, we wanted to highlight that the key, when you are preparing your documents, is to explore all areas given to you by the SBA.

The good news for ABC LLC is that they have passed Test 2 so their maximum forgiveness (at this stage) remains at $90,000.

Test 3 Example – 25% Compensation test
The final test on payroll expenses is whether the business has reduced compensation by more than 25%. Reading through the Forgiveness Application, it appears that ABC LLC will need to consider this at an individual level and not as a summary total though it is likely we will receive more guidance on this test shortly.

In the following table, we have taken ABC LLC’s salary payments pre COVID and prorated these to an 8 week period to arrive at the baseline then compared this to the salary payments that were made in total during our Covered Period.

The Act itself allows employers to have reduce the salary payments by up to 25% but anything beyond that amount will not be forgiven.
forgiveness chart03
What we need to do is to look at Salaries and Wages pre the disaster then pro-rate these to an 8 week period. We then compare this to the actual payments made in the 8 week qualifying period. As long as these payments are at least 75% of the amounts paid prior to this, then they would receive full forgiveness. Unfortunately, Guy Berryman has actually been paid only 30% of his previous salary so, as per the forgiveness rule, ABC LLC will not get forgiveness for the difference between the -25% and the $3,000 that he was actually paid, i.e. Amount Paid – (Prorated 8 week salary*.75).

So ABC have a fail on Test 3 that reduces the amount of forgiveness by a further $4,500.

To summarize the fictitious ABC LLC’s loan forgiveness position, they started with a funding of $100,000 but only spend $65,000 on payroll so they lost $10,000 in forgiveness by failing Test 1. We analyzed the data for Test 2 and found that we have no deduction there as we are reporting an increase in employee numbers, using the preferred option for the base calculations. In Test 3, the salary payment paid to Guy Berryman was more than 25% lower when compared to the past which removed a further $4,500 from the forgiveness amount.

At the end of all this, ABC LLC should have $85,500 of their $100,000 loan forgiven (based on current guidance) and $14,500 will transfer to a loan at 1% repayable over the next 2 years.

In summary, if you haven’t maintained your full payroll levels, there is work to be done if you are trying to forecast your future position. The SBA are giving businesses all opportunities to secure the intent of the Cares Act and have forgiveness granted by putting your employees back contributing to your business so you are ready to thrive once we find our new normal.

Key to joint success is leveraging these benefits that are being offered so you can successfully pivot your business model and be ready to grab new opportunities that are fast showing themselves as we prepare ourselves for the upcoming phases of reopening.

There will be more updates coming but please reach out if you have any questions or need any assistance navigating through these times – that’s what we are here for.

Stay safe and speak soon!

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AllCents Consulting, LLC,
Phone: (310) 465 9248
Email: jackie@allcentsconsulting.com