QA: Paycheck Protection Loans

Answers are interpretations of RDG + Partners CPAs and are not meant to be one-size fits all for every business. We recommend you consult with a member of the RDG team to apply guidance to your specific situation. We also expect further guidance to be issued by the SBA related to the questions below in the near future, especially as it relates to the forgiveness of the loans. The answers below are based on what guidance has been issued to date and are subject to change once further guidance is issued.

If you have additional questions that have not been addressed below reach out to RDG + Partners CPAs at (585) 673-2600 or at covid19@rdgandpartners.com. If you have a contact at the Firm, reach out to them directly.

We are an essential business and remain open and fully staffed. Am I eligible for this loan? 

Yes, you are eligible. You must, however, make a certification on the application that “Current economic uncertainty makes this loan request necessary to support ongoing operations”.

How Much Loan can I borrow?

Maximum loan amounts are 2.5x average monthly payroll costs, not to exceed $10 million.

What is the definition of "payroll costs" for purposes of determining the loan amount?

Payroll costs include the following:

  1. Salaries, wages, commissions, cash tips, or similar compensation
  2. Payments for vacation, parental, family, medical or sick leave
  3. Allowance for dismissal or separation
  4. Employer paid health insurance premiums for employees
  5. Employer paid retirement plan contributions for employees
  6. Employer state and local income taxes assessed on compensation of employees

What is NOT included in the calculation for payroll costs?

Payroll costs do NOT include the following:

  1. Salaries and wages in excess of $100,000 per individual (only the excess is not included)
  2. Employer payroll taxes
  3. Compensation paid to any individual whose principal place of residence is outside the U.S.
  4. Qualified sick leave or family leave wages under the Families First Corona virus Response Act, as these qualify for a 100%payroll tax credit under the Act.
  5. Amounts paid to independent contractors

What time period do I use to determine my average monthly payroll costs?

We recommend you check with your respective bank, but SBA guidance states you can use either the 2019 calendar year OR the past 12 trailing months.

How do we determine how much of the loan will be forgiven?

There are 2 steps in determining the amount that can be forgiven. Step 1 is to calculate the potential forgiven amount based on costs incurred / amounts spent on eligible costs in the immediate 8-week period following the loan. Step 2 is to review headcount and salary during the 8-week period as compared to the base period to determine if there will be a reduction in the amount forgiven calculated in Step 1.

What are eligible costs over the 8-week period for loan proceeds to qualify for forgiveness?

Eligible costs consist of the following:

  1. Payroll costs (using same definition as in the application process)
  2. Interest on mortgage and other debt obligations entered into before February 15, 2020
  3. Rent payments on leases dated before February 15, 2020
  4. Utility payments under service agreements entered into before February 15, 2020

What types of debt obligations qualify for the interest paid forgiveness?

Any mortgage or other debt obligation incurred prior to February 15, 2020. Only the interest paid is eligible for forgiveness. Repayment of principal does not qualify as an eligible cost.  Based on current guidance, credit card debt does not count as eligible debt for purposes of interest paid.

What types of lease agreements qualify for the rent payment forgiveness?

The guidance is not currently clear what constitutes a rent payment. The Act states that it is “rent obligated under a lease agreement in force before February 15, 2020”. It is not clear if this includes commercial building rent only or would include equipment or other rent paid under leasing agreements.

What type of utility payments qualify for forgiveness?

Utilities are defined as payments for electricity, gas, water, transportation telephone and internet access for which service began before February 15, 2020.

Are there any other requirements related to eligible costs to qualify for forgiveness?

Yes. No more than 25% of the loan forgiveness amount may be attributable to non-payroll costs, and at least 75% of the forgiveness amount must be attributable to payroll costs.

Can you give an example of how Step 1 of the forgiveness would be calculated?

Let’s assume monthly payroll costs are $100,000 and a Company qualified for a $250,000 loan (2.5x average monthly payroll).  Note these payroll costs are based on a 10-week period (2.5 months). Let’s also assume that payroll costs remained the same during the 8-week period following the loan as it was previously and the loan proceeds were received April 15,2020. Step 1 of forgiveness calculation is below:

Payroll costs incurred April 15-June 15 (8 weeks)       $200,000

Rent paid April 15-June 15                                                  10,000

Utilities paid April 15-June 15                                               4,000

Interest paid April 15- June 15                                              2,000

Total eligible costs during 8 week period                       $216,000

Loan amount                                                                       250,000

Potential amount required to be paid back                    $  34,000

I am short on what I plan to spend in the 8-week period to maximize forgiveness. Can I bonus myself or employees or pre-pay rent to maximize the amount of the loan forgiven?

Currently, there is no stipulation that you can’t.  Remember,payroll costs are capped at $100,000 annually per employee.   Meaning, the maximum paid to an owner or employee during the 8-week period is $15,384.  We expect there to be further guidance that may potentially limit the amount of payroll costs, rent and utilities paid during the 8-week period to avoid prepayment of such costs, however as of now there is no stipulation you cannot do this. We will monitor the guidance related to this question as it comes out.

I applied for the EIDL loan advance of up to $10,000 maximum. Does that impact the PPP loan forgiveness?

Yes. The loan advance amount (which is not required to be re-paid) received under the EIDL loan will reduce the amount of forgiveness under the PPP loan.

What are the requirements to avoid having the amount forgiven reduced?

The loan forgiveness calculated in Step 1 is reduced if there is a reduction in the number of employees compared to the base period OR a reduction of greater than 25% in wages paid to employees.

Can I reduce wages of employees and keep them employed without impacting the loan amount forgiven?

An employee who makes less than $100k annually whose wages were reduced by greater than 25% impacts the calculation of forgiveness. The excess of the reduction in wages that is greater than 25% compared to the employees’ wages in the most recent full quarter lowers the amount forgiven.

What periods am I comparing for the headcount and salary requirements under the forgiveness?

You are comparing the average number of FTEs for the 8-week period beginning after the loan is received to either the average FTEs for the period February 15 – June 30, 2019 OR the period January 1, 2020 – February 29, 2020 (at the election of the borrower)

How do I know which base period I should select to compare my headcount and salary to?

You choose. You would choose which of the two potential periods you had the lowest number of FTEs.  The lower the better, as it will make it easier for you to meet the head count and salary requirements when comparing to the current figures.

Can you give an example of how Step 2 of the forgiveness would be calculated?

Yes.   Noted in the calculation above, we calculated forgiveness in the amount of $216,000.   Let’s assume during the period February 15,2019 – June 30, 2019, you had 20 FTEs.  Let’s also assume that during the 8-week period following the loan, you had 15 FTEs.     Your loan forgiveness would only be 75%(15/20) of the amount originally calculated.   The actual loan forgiveness amount calculated above would be reduced to$162,000 (75% of $216,000).

If our headcount is not at least the same or more as the base period we compare it to, does that mean none of our loan is forgiven?

No. See example directly above. The amount of loan forgiven will be reduced on a pro-rata basis, but not eliminated completely.

What if I have already laid employees off, will that impact my forgiveness?

It depends.   For employees laid off between February 15, 2020 and April 27, 2020, the reduction in headcount and wages related to these employees will NOT reduce the forgiveness IF the employees are re-hired by June 30, 2020.  However, the first step of forgiveness is amounts spent on eligible costs, including payroll.    If employees are not hired back until the end (or after) your 8-week spending period, you will have spent less of the loan on eligible costs, which negatively impacts the amount forgiven.

Is the amount of loan forgiveness taxable?

No,it is not.   The loan forgiveness amount is tax-free.

Do I have to rehire employees back to qualify for the loan forgiveness?

Not necessarily.  It will, however, lower the amount spent on payroll costs during the 8-week period (step 1) that determines the forgiveness amount, as well as further reduce the amount of forgiveness calculated in Step 1 pro-rata by the reduction in head count.

What if I have received my loan, but my business is not yet able to be open? Do I need to hire my workers back to pay them?

No. First rule of thumb is to make a business decision.   If your business is not open,it may not make sense to hire back your employees unless there is productive work that they can do. Not hiring employees back will most likely reduce the amount of the loan forgiveness; however the loan payback is only at a 1%interest rate with no prepayment penalties. Hiring back employees would require the business to pay employer payroll taxes that are not part of the loan forgiveness calculation.

If I hire back my employees and pay them for the 8-week period, how long do I have to keep them employed after the 8-week period is done?

There is no current guidance on this that states employees must be employed after the 8-week period is up.  The hope is that the business is up and running after the 8-week period and business owners would choose to maintain employment levels, but if that is not the case, there currently is nothing that would prohibit an employer to lay off the employee at any time they choose.  We expect further guidance to be provided in this area.

If my business will not be open by the date I receive the loan proceeds, does it even make sense to receive the loan?

It will be a case by case basis, but generally speaking there will still be some benefit to a business owner whose business is not yet open.  At a minimum, the loan can be used to pay for the owner’s payroll, rent,utilities, and interest on other debt for the 8-week period (this assumes that at the end of the 8 week period anyone previously laid off is rehired and therefore they do not count as a reduction in headcount).  The remainder that is not forgiven turns into a low interest loan that provides extra cash to be used once the business does re-open.

What are the loan terms for any amounts that are required to be repaid?

Loans are for a two-year period, incurring interest at 1% on the amount not forgiven. No payments are required for 6 months after the loan date.

How do I communicate to my bank the amounts I expect to be forgiven under the loan?

You will need to file an application with your Bank after the eight-week period. Support will need to be provided for your forgiveness calculation, including support for payroll costs,rent, utilities, and interest. It is important to ensure you are tracking eligible costs and keeping organized records to provide to the bank for support for amounts forgiven.

Do you expect any further clarification on anything related to the Paycheck Protection Program Loans?

Definitely. For the most part, the application process and the many questions around it have been resolved. Once the SBA has completely gotten past the application process and businesses are starting to get funded, it will turn its attention to the loan forgiveness part of the program. We expect further guidance on many unanswered questions related to loan forgiveness to come out in the near future.

For additional Paycheck Protection Program Loan Q&As, please visit the SBA website: Paycheck Protection Program Loan Q&A