How Much of Your PPP Will be Forgiven?

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Now that you have received a Paycheck Protection Program loan, you will need to understand the calculations on how much of the loan might be forgiven.  As we write this blog post there is already another Bill in the Senate to increase the funding amount by close to $200 billion and make some changes to the program.

But for now, we will focus on how the law allows for part or all of the loan to be forgiven.

The covered period to determine how much will be forgiven starts the day after the loan is funded and runs for 8 weeks.  During that period, you are allowed to accumulate all of your payroll costs (employee compensation, group health costs, retirement payments and state and local employer portion taxes), rents, interest on mortgages and utilities.  Rents, interest and utility payments all had to be in place on February 15, 2020.  The law does mention mortgages on personal property.  That needs to be defined.

In order to have all of the loan forgiven, at least 75% must be spent on payroll costs.  The new bill may eliminate this requirement.  The other 25% can be spent on rents, interest and utilities.

However, simply spending 75% on labor costs may not result in full forgiveness.  There are two tests that you must meet.  First, your full-time equivalent employee (FTEE) count must be either equal to or greater than a test period.  The test period is either February 15, 2019 through June 30, 2019, or January 1, 2020 to February 29, 2020.  All of these tests are based on monthly averages.

If your FTEE’s during the covered period is greater than the test period, then no reduction in loan forgiveness.  For many farmers this may be fairly easy to meet.  However, the next adjustment calculation may be more burdensome.

You are required to determine if total pay to each employee during the 8 week covered period is less than 75% of the total pay during the first quarter of 2020 (the wording in the CARES Act discusses a more than 25% reduction in total pay for each employee).  The first quarter has 13 weeks and 75% of 13 is 9.75 weeks.  Therefore, to not have any reduction in loan forgiveness you are required to stuff 9.75 weeks of pay for each employee into an 8 week period.  Let’s look at an example:

Sue obtains a PPP loan of $40,000 based on wages paid to her five hired hands.  During the first quarter she paid the 5 workers a total of $50,000.  75% of $50,000 is $37,500.  During the 8 week covered period, she paid the workers $29,000.  $8,500 of her $40,000 loan will not be forgiven even though she spent all $40,000 on payroll costs during the period (the other $11,000 was spent on health insurance and state payroll taxes).

This calculation appears to be required for each employee and any employee whose annualized pay exceeded $100,000 for any pay period in 2019 is not counted.  Here is an example:

One of Sue’s workers incurred a large amount of overtime in 2019 for one pay period.  She pays her workers weekly and his gross payroll for that particular week was $2,000 which results in $104,000 of annualized pay.  Sue does not need to include him in the loan forgiveness calculation.  

The bottom line is that PPP loans may be easy to get, but they may be tougher to get full forgiveness.  We shall see if Congress makes changes to this or if that was their intent.

 

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