Now that borrowers are beginning to receive proceeds from the Paycheck Protection Program (PPP) loans, we are hearing many questions regarding appropriate use of the loan proceeds and inquiries regarding the details of loan forgiveness.
The below information is based on guidance as of April 15, 2020. The SBA has indicated more guidance on loan forgiveness will be provided, and the Coronavirus Aid, Relief, and Economic Security (CARES) Act obligates the SBA to issue regulations within 30 days of enactment of the law, or by April 26, 2020. This article is focused on small businesses, which are not sole proprietors or self-employed individuals. To read about special rules for self-employed individuals, please visit this insight.
Use of PPP Loan Proceeds
PPP loan proceeds can be used to pay for the following costs:
- Gross salary, wage, commission, and similar compensation of employees;
- Covered benefits for employees including health care, retirement, and state taxes imposed on employee payroll paid by the employer;
- Rent payments on leases dated before February 15, 2020;
- Utilities under service agreements dated before February 15, 2020; and
- Payments of interest on mortgage obligations and other debt obligations incurred before February 15, 2020.
Misuse of the PPP funds can result in the SBA requiring immediate payback of the loan; if knowingly being misused, the borrower can be subject to additional penalties.
While obtaining a separate bank account is not required for the PPP loan proceeds, it is recommended if the borrower has a “sweep” account which automatically applies excess cash to pay down line of credit balances. This payment on a line of credit balance could be deemed as a misuse of the PPP funds.
PPP Loan Forgiveness
The amount of the PPP loan that is forgiven will depend on the amount spent over the eight-week period following the first disbursement of loan proceeds, including:
- Amount of gross salary, wages, and tips, up to $15,385 per individual ($100,000 annualized);
- Covered benefits for employees including health care, retirement, and state taxes imposed on employee payroll paid by the employer (not subject to the $100,000 limitation);
- Rent, utilities, and interest on mortgage and debt obligations relating to agreements dated before February 15, 2020.
Forgiveness must consist of at least 75% payroll costs (including self-employment income and benefits) and a maximum of 25% non-payroll costs. Any loan amounts not forgiven will have a maturity of two years, with a one percent interest rate. Payments are deferred for six months, but interest does accrue during the deferral period.
To the extent the full loan proceeds are not spent within the eight-week forgiveness period, the borrower must still spend the loan proceeds on the allowable costs described above after the eight-week period.
Limitations on Loan Forgiveness
The amount of principal and accrued interest forgiven on the PPP loan is reduced if either of the following apply:
- Change in headcount: Multiply the forgivable portion of the loan by the following ratio. If the ratio is greater than or equal to one, the forgiveness is not limited.
- Numerator: The average number of full-time equivalent (FTE) employees of the borrower during the eight-week forgiveness period
- Denominator: The lower of
- The average number of FTE per month from February 15, 2019 through June 30, 2019; or
- The average number of FTE per month from January 1, 2020 through February 29, 2020.
- Change in wages: A reduction in forgiveness may also be needed if the salary or wages of an employee earning less than $100,000 is reduced by greater than 25 percent of what the employee was earning in the most recent quarter before the loan was disbursed. This limitation results in a dollar for dollar reduction in the amount of loan forgiveness. To calculate the reduction, compare 75 percent of the amount of wages the employee would have received for the eight-week period based on the pay rate in the most recent quarter before the loan was disbursed to the amount the employee actually received during the eight-week period.
Preliminary guidance indicates there are exceptions to the above reductions in loan forgiveness if an employer restores the FTE headcount and restores any substantially reduced wages to the February 15, 2020 levels before June 30, 2020. Further guidance is needed to determine the impact of restoring FTE headcount and wages on the loan forgiveness.
Speak with an Expert
There are special planning considerations when attempting to maximize the PPP loan forgiveness. Please contact your financial advisor to help you navigate this loan program.