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What You Need to Know About PPP Loan Forgiveness for Your Small Business

We hope this newsletter finds you well. Many of you have received loan funding from the Paycheck Protection Program (PPP) and have requested that we provide additional guidance for those of you who seek to apply for loan forgiveness after the eight week period from the date of funding ends. We’ve summarized our response to the most commonly asked questions below.

Loan forgiveness is based on payment of certain expenses over an eight week period. When does that period start?

The eight week “covered period” begins on the date the lender makes the first disbursement of the loan.

What costs are eligible for loan forgiveness?

A small business can use the PPP proceeds for: (1) payroll costs (more than 75% of the proceeds must be used for payroll costs over the eight week covered period to be forgiven); (2) costs to continue group health care benefits during periods of sick, medical or family leave and insurance premiums; (3) mortgage interest payments; (4) rent payments; (5) utility payments; and (6) interest payments on any other debt incurred before February 15, 2020. The term “payroll costs” include salaries & wages, vacation, parental, family, medical or sick leave, payments for retirement benefits, and state or local payroll taxes. Payroll costs do not include payments to an independent contractor, compensation in excess of $100,000, the employer’s share of federal payroll taxes, or qualified sick leave for which credit is allowed under the Families First Coronavirus Response Act (FFCRA).

What Are the Limitations on Loan Forgiveness?

  1. Not more than 25% of the loan forgiveness amount can be attributable to non-payroll costs.

  2. Proceeds from any advance up to $10,000 on an Economic Injury Disaster Loan will be deducted from the loan forgiveness amount.

  3. The loan forgiveness will be reduced if the business has reduced its full-time equivalent employees (FTE) or has reduced the salaries and wages of certain employees based on the formula discussed below AND the business fails to cure the reduction by June 30, 2020.

What is the Formula for Reduction in FTE Employees: The loan forgiveness amount is subject to reduction by multiplying it by the following fraction:

  1. Numerator: Average number of full-time equivalent employees per month employed by the borrower for the eight week period beginning on the date the lender makes the first disbursement of the PPP loan;

  2. Denominator: At the Election of the Borrower, either:

    1. The average number of full-time equivalent employees per month employed by the borrower during the period beginning 2/15/2019 and ending 6/30/2019;

    2. The average number of full-time equivalent employees per month employed by the borrower during the period beginning 1/1/2020 and ending 02/29/2020.

What is the Formula for Reduction in Wages: The loan forgiveness amount is subject to reduction by an amount determined as follows:

  1. Step #1: identify all employees, who did not receive during any single pay period in 2019, wages or salary at an annualized rate of pay of more than $100,000 each;

  2. Step #2: Compare each covered employee’s wages or salary during the eight week period beginning on the date the lender makes the first disbursement of the PPP loan to his or her wages or salary during the first quarter of 2020;

  3. Step #3: For any covered employee whose wages or salary during the covered period decreased by more than 25%

    1. Multiply the first quarter wages or salary by 75%.

    2. Subtract the product from the covered period wages or salary.

  4. Step #4: Add all amount computed under number three above. The aggregate dollar amount calculated as set forth above will reduce the loan forgiveness amount unless the borrower eliminates the reductions by 06/30/2020 (as discussed above).

In the event you have any questions, comments, or concerns, please do not hesitate to reach out.

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