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Maximizing and Calculating Your PPP Loan Forgiveness

By Angela Bao
May 28, 2020
(Photo credit): Gettyimages.com/BFG Images

The SBA has released new guidance—here’s how to calculate and maximize your PPP loan forgiveness.

As of May 21, the Small Business Administration has approved over $512 billion in Paycheck Protection Program loans, which leaves almost $150 billion left of the $660 billion total. Despite the frenzy from the first round of PPP funding that depleted the initial $349 billion in 14 days, demand for the loan has slowed down significantly due to confusion over the terms, particularly around forgiveness. Some businesses that have received PPP loans have even left the funds untouched.

Recently, the SBA has issued guidance on how businesses can apply for forgiveness and has released an 11-page application. Although the requirements for forgiveness remain the same (75 percent of the loan must be used for payroll costs), the SBA has included more specifics on how businesses can determine what’s eligible. Here’s what you need to know in order to calculate and maximize your forgivable amount.

A quick overview of PPP forgiveness

The PPP loan can be forgiven if:

  1. Seventy-five percent of the loan amount was used toward covering payroll expenses in the eight-week (56-day) period, starting the day the loan was disbursed (Covered Period) or starting the first day of the first pay period after the loan disbursement (Alternative Payroll Covered Period)
  2. The other 25 percent can go to eligible non-payroll expenses, which are defined as mortgage interest payments for the business (debt incurred before February 15, 2020); rent or lease payments on lease agreements that were made before February 15, 2020; and utility payments on electricity, gas, water, transportation, phone and/or internet services that began before February 15, 2020.
    1. For non-payroll expenses, you must use the Covered Period for your forgiveness calculations.
  3. There are “safe harbors” related to both employee wages/salaries and full-time equivalent (FTE) employees that exempt businesses from loan forgiveness reductions, as long as certain criteria (explained below) are met.

Maximize your forgiveness

Matt Vondersaar, first vice president and credit supervisor at East West Bank, cautions borrowers that the PPP guidance is likely to be updated further down the line. In addition, borrowers need to know that forgiveness most likely won’t start until after June 30 because “they need to provide certain tax forms and know what their payroll was on June 30 before they can finish all the calculations for the application.” However, businesses should start looking at the application now so that they can begin planning out how to best maximize their loan forgiveness.

The SBA gives borrowers two options for determining how much forgiveness they are eligible for: using the Covered Period, which is based off of when the loan was first disbursed, and the Alternative Payroll Covered Period, which is based off of the first pay period after the loan disbursement. Since 75 percent of the loan must be used for payroll in order to be forgiven, the latter can be very helpful for businesses whose pay periods don’t align with the first disbursement date to maximize their forgivable amount. However, Vondersaar says the Alternative Payroll Covered Period is best for businesses that pay their employees either weekly or every two weeks.

Businesses can choose to use either the Covered Period or the Alternative Payroll Covered Period when calculating loan forgiveness.

(Photo credit): Gettyimages.com/filo

Vondersaar provides a simple outline of how businesses can best maximize their forgivable amount.

  1. Maintain full-time equivalent employee levels or restore those levels by June 30, 2020.
  2. Calculate which period has the lowest FTEs: February 15, 2019 to June 30, 2019, or January 1, 2020 to February 29, 2020. Whichever period has the lowest FTEs, you should try to maintain levels as close as possible to that number during the Covered Period.

    Vondersaar notes that FTEs are based on hours paid, not worked. “You count hours for your FTEs if you’re paying someone to stay at home under a shelter-in-place order,” he explains.

  3. Do not reduce wages or salaries by more than 25 percent.
  4. Wages or salaries are capped at $15,385 ($100,000 annualized) per employee. To calculate the amount that can be forgiven, determine the total pay between January 1 and March 31, 2020. Divide that amount by 13 weeks, and then multiply that amount by eight weeks to get the right amount. For employees making $100,000-plus annually, their wages can be reduced to $75,000.

  5. Restore employee levels and wages by June 30, 2020.
  6. Vondersaar says that, if a business did have to reduce its FTEs, there is an FTE Reduction Safe Harbor provision that will allow forgiveness if they restore employee and wage levels.

    If you reduced FTE employee levels between February 15, 2020 and April 26, 2020, but then restored FTE employee levels to the pay period that included February 15, 2020 by no later than June 30, 2020, then any decreases in wages or FTEs are ignored and the full amount is eligible for forgiveness.

Calculating your forgivable amount

Below are steps to calculate your loan forgiveness, as outlined in East West Bank’s guide.

  1. Tally up your total forgiveness-eligible expenses
  2. Calculate reductions to payroll expenses
  3. If employees making under $100,000 had their wages reduced by over 25 percent, then reduce your total forgivable amount by the difference between their current pay and 75 percent of their original pay. You will do this for each employee.

    East West Bank’s loan forgiveness guide gives an example: Employee A usually makes $15,000 from January 1 to March 31 ($60,000 per year or $1,154 per week for 13 weeks). However, during the Covered Period, Employee A only makes $6,923, or $865 per week for the eight-week period, annualized at $45,000. Since Employee A is still making at least 75 percent of their original pay, you will not need to reduce your forgivable amount.

    However, Employee B, who usually makes the same amount as Employee A, was only paid $3,077 (annualized at $20,000) for the eight-week Covered Period—a 67 percent pay decrease, which means that you will have to deduct the difference from your forgivable amount. To calculate, subtract Employee B’s wage ($3,077) from what they would have made if they only received a 25 percent pay cut ($6,923) to determine how much you have to deduct ($3,846).

  4. Calculate reductions in your FTEs
  5. For each employee, find out the average number of hours paid per week from either the Covered Period or the Alternative Payroll Covered Period, divide by 40 and round that number to the nearest tenth, with each employee capped at 1.0 (meaning overtime work does not count toward FTE).

    For example, three part-time employees who each worked 20 hours a week would equal 60 total hours, or 1.5 FTEs. You will add your full-time FTE figure and part-time FTE figure to get your total FTE—so if you also had four full-time employees (1.0 each) you would have a total of 5.5 FTEs. You can also opt for a simplified method of assigning 1.0 for employees who work 40-plus hours per week and 0.5 for employees who work less than that.

    For the comparison period, you can choose to find your average FTEs between February 15, 2019 through June 30, 2019, or January 1, 2020 through February 29, 2020. For seasonal businesses, use February 15, 2019 to June 30, 2019, or January 1, 2020 to February 29, 2020. They may also use any consecutive 12-week period between May 1, 2019 and September 15, 2019.

    Divide your average FTE during your chosen eight-week period by the average FTEs from one of the comparison periods (for the comparison period, choose the one with the lowest average FTEs to maximize forgiveness). Then multiply that number by the total amount of your PPP loan that’s eligible for forgiveness, which will result in the total amount eligible for forgiveness.

    For example, your chosen comparison period with the lowest FTEs averaged 40 FTEs. During your Covered Period, you only had 34 FTEs. Divide 34 by 40 to get 0.85, then multiply 0.85 by the total loan amount (e.g. $500,000) to determine how much will be forgiven ($425,000 in this case).

  6. Calculate whether you meet the Safe Harbor requirements
  7. For businesses that had to either reduce their employees’ pay or total number of employees, the SBA has two safe harbor rules that help prevent loan forgiveness reduction.

    The salary/hourly wage safe harbor reduction is determined on an individual employee level. It applies only to employees that received less than or equal to $100,000 in 2019, and whose salary or wage level was reduced by more than 25 percent during the Covered Period or Alternative Payroll Covered Period. You’re exempted from a reduction if, by June 30, 2020, you return any employee who received over a 25 percent reduction to the same wage or salary levels they had as of February 15, 2020. If any employee does not meet that, then you don’t qualify for this safe harbor.

    To meet FTE safe harbor requirements, you must have reduced your FTE levels during the period of February 15 to April 26, 2020, and then restored FTE levels to the same as the pay period that includes February 15, 2020, by no later than June 30, 2020.

    However, if you can’t maintain FTE levels due to select reasons, you won’t be penalized by a reduction in forgiveness. Those reasons include: employee refusing to return to work after the employer provides a good-faith written offer to return to work; employee quits; employee is terminated for cause; or employee voluntarily reduces their work hours.

  8. Deduct EIDL loan advances
  9. If you applied for and received an advance from the Economic Injury Disaster Loan, you have to deduct the amount of the advance from your total forgivable amount.

(Photo credit): Gettyimages.com/Utamaru Kido
“Document everything. Keep every payroll receipt, keep every payroll invoice and cancelled check, because you’ll need those documents for forgiveness down the road."

-Matt Vondersaar

Make sure you have the necessary documents

“Document everything,” emphasizes Vondersaar. “Keep every payroll receipt, keep every payroll invoice and cancelled check, because you’ll need those documents for forgiveness down the road.”

The SBA is requiring businesses to submit supporting documentation when applying for loan forgiveness. You will want to keep documents verifying your payroll, FTEs and forgivable non-payroll expenses.

Vondersaar says that businesses should have:

  • Bank account statements or third-party payroll service provider reports that state the amount of cash compensation given to employees
  • Tax forms (payroll tax forms like Form 941) or third-party payroll service provider reports that overlap with the Covered Period or the Alternative Payroll Covered Period
  • Payment receipts, cancelled checks or account statements that verify employer contributions to employee health insurance or retirement plans
  • For business mortgage interest payments, a copy of the lender amortization schedule and receipts or cancelled checks verifying eligible payments made during the Covered Period
  • For business rent or leases, a copy of the current lease agreement and receipts or cancelled checks verifying eligible payments made during the Covered Period
  • For utilities, copies of invoices from February 2020 and those paid during the Covered Period, as well as receipts, cancelled checks or account statements verifying those payments

For more tips go to our business continuity toolkit with the latest resources on how to deal with the pandemic

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