What are PPP Loans, and how do they work?
In late March 2020, the U.S. federal government created the "Paycheck Protection Program", or "PPP", as part of the "Coronavirus Aid, Relief, and Economic Security (CARES) Act".
The COVID-19 pandemic's effects on the economy made it necessary for the Small Business Administration (SBA) to provide forgivable loans to small businesses, which would help keep employees on the payroll rather than force them to quit.
These PPP loans are forgivable if the borrowing company adheres to the following guidelines:
The loan must be used only for payroll and limited non-payroll expenses during the time starting from the date of the first loan payment or starting from the first day of the first pay period after receiving the payment and ending twenty-four weeks after, or December 31, 2020, whichever comes first.
At least 60% of the funds granted should be used for "payroll costs," which are defined as salaries, wages, and tips, up to $100,000 per year of pay per employee (for 24 weeks, this equates to a maximum of $46,154 per individual, or for eight weeks, a maximum of $15,385 per individual), as well as covered benefits for employees (but not owners), including health care insurance, retirement fund contributions, and the employer's share of state/local taxes (e.g., unemployment insurance), while up to 40% may be used for "non-payroll costs", which include other business costs such as mortgage interest, rent, and utilities.The employer must maintain full-time equivalent (FTE) employment numbers, or they must rehire employees furloughed or laid off between the dates of February 15, 2020, and April 26, 2020, by December 31, 2020, to reach the FTE numbers without reductions, unless you are entitled to certain FTE Safe Harbor laws.
The employer must not reduce salaries/hourly wages by more than 25% of any employee's normal rate who made less than $100,000 (or equivalent salary) in 2019, between the dates of January 1, 2020, and March 31, 2020, or they must bring those wages back to normal by December 31, 2020.
Additionally, reimbursable owner compensation has different guidelines than employee compensation. There are two different methods that can be used to determine this, primarily based on whether you elect to use an 8-week period or a 24-week period:
Eight weeks’ worth (8/52) of 2019 net profit (up to $15,385) for an eight-week covered period, or
2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period.
How do I apply for PPP Loan forgiveness?
In June 2020, the SBA published an application form that companies must use when applying for loan forgiveness. This is SBA Form 3508: Paycheck Protection Program Loan Forgiveness Application.
There is also an abridged version, SBA Form 3508-EZ. We recommend using this form if possible, as it is easier to work with, but it can only be used if you:
Are self-employed and have no employees; OR
Did not reduce the number of employees or the average paid hours of employees between January 1, 2020, and the end of the covered period (other than any reductions that arose from an inability to rehire individuals who were employees on February 15, 2020, if you were unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020, and reductions in an employee’s hours that you offered to restore and were refused); OR
You were unable to operate between February 15, 2020, and the end of the covered period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020, and December 31, 2020, by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.
Once either of these forms is completed, simply submit it to the loan lender as soon as possible.
There's a lot to read within this packet, but the most crucial parts of it are the PPP Schedule A Worksheet, PPP Schedule A, and PPP Loan Forgiveness Calculation Form, as these are what's necessary to determine how much of the PPP Loan will be forgiven. You may also need to reference some amounts from your original loan application, so have that available as well.
Note that SBA Form 3508-EZ omits PPP Schedule A and the PPP Schedule A Worksheet.
How do I know if my loan will be forgiven?
DISCLAIMER: The following is information interpreted from the guides and information attached to SBA Form 3508. We at Fingercheck have worked to represent these definitions as simply as possible, to make them easy to understand, but we do not take responsibility for the accuracy of the information presented below.
As always, we recommend to consult with a certified accountant for any questions.
Calculating PPP loan forgiveness can be broken up into 4 main parts, represented as lines on SBA Form 3508. These are as follows:
Payroll & Non-Payroll Costs
These lines summarize the "costs" that the loan is meant to be used for.
Line 1: Payroll costs
The total of all gross wages paid to employees during the covered period, plus the employer's contributions towards health insurance, retirement plans, unemployment insurance, and state and local taxes assessed on all paychecks.Line 2: Mortgage interest payments
The amount of mortgage interest payments made during the covered period. This should only include a mortgage that was in place before February 15, 2020.Line 3: Rent or lease payments
The amount of rent or lease payments you made during the covered period, if you entered into the lease agreement before February 15, 2020.Line 4: Utility payments
The number of utility payments you made during the covered period if the service began before February 15, 2020.
Full-time equivalency (FTE) & salary/hourly wage adjustments
Note: The abridged form, SBA Form 3508-EZ, does not include this section, as you should only be using that form if you would not utilize these lines or PPP Schedule A.
These lines have to do with determining if there are amounts that fall outside of the PPP loan guidelines mentioned earlier.
Line 5: Total salary/hourly wage reduction over 25%
If you have any salary or hourly wage reductions over 25%, enter the amounts here. To determine if you have made any reductions, compare wage and FTE levels to what they were during the period you used when initially applying for the loan. If you didn’t make any wage cuts over 25%, this line would be 0.Line 6: Add lines 1 through 4, then subtract line 5
Line 7: "FTE reduction quotient"
You should use the PPP Schedule A to determine this amount. If you haven’t reduced any FTEs since receiving the loan, this line would be 1.0.
Some "safe harbor" laws allow you to have a 1.0 on this line. Read further on in this section for more information on Safe Harbor provisions.
Consult with a certified accountant if you are unsure of what to enter on this line.
Later, we'll show how Fingercheck can pull your FTE amounts for you, but in the meantime, you can figure out your FTE by following this formula:
Take the average number of hours each employee worked during a week, divide it by 40, and then round the result to the nearest tenth (should not be more than 1.0).
Potential forgiveness amounts
These lines list possible forgiveness values.
Line 8: Multiply Line 6 by Line 7
This determines the total of your payroll & non-payroll costs, minus your wage reduction amounts, multiplied by your FTE reduction quotient.Line 9: Total original PPP loan amount
Line 10: Payroll cost: 60% requirement
To determine this, take your total payroll costs (see Line 1) and divide it by 0.6. This indicates that you used 60% of the loan for payroll costs, per the loan guidelines.
Final forgiveness amount
Lastly, this determines what amount of the loan you'll be forgiven.
Line 11: Final forgiveness amount
This is determined by referencing lines 8, 9, and 10, and indicating whichever is the lowest amount.
Regarding the Safe Harbor laws mentioned earlier, you may be able to use FTE Safe Harbor provisions if you have lowered full-time equivalent (FTE) employees if you document an inability to:
Rehire individuals who were employees as of February 15, 2020
Hire similarly qualified employees for unfilled positions on or before December 31, 2020
Return to the same level of business activity before February 15, 2020, due to compliance with requirements or guidance from the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration from March 1, 2020, through December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
How can Fingercheck help me with the calculation process?
Fingercheck has you covered when it comes to figuring out your payroll costs and FTE Quotient.
This is done by running our PPP Loan Forgiveness report, which can be found by going to Reports > Payroll, then looking for the report named "Cares2 - PPP Forgiveness Report" and clicking the "Run Report" button.
When you click the "Run Report" button, you'll be asked to specify a time range. The report is designed to be run for a time period that spans 24 weeks, so make sure you adhere to that standard, or some calculations may not be correct.
Keep in mind that Fingercheck doesn't know when you received your first payment, so you will need to adjust the default date range provided by the program.
This report is to be used to determine employee compensation only. It will not accurately calculate owner compensation limits.
If you are an owner and included in your company's employee roster, we recommend excluding yourself by unchecking your name in the "Available Employees" list.
Here is an example of how to determine the range to run
There are two facts to consider when determining the appropriate date range: your company's pay structure, and the day you received the loan. For example:
Your typical payday is on Fridays, and your checks cover the week prior.
You received your loan on Thursday, April 16, 2020.
In this situation, your start date for the range would either be 04/16/2020 (the day you received the loan money), or 04/20/2020 (the first day of the first pay period after).
Let's say you want to use 04/16/2020 because you want to include the payday that happened on 04/17/2020 (that covers the pay period of 04/05/2020-04/11/2020).
This is permitted.
Since your start date is April 16, 2020, your end date should be September 30, 2020, which is 24 weeks after the start date.
If you are unsure of what range to run the report for, feel free to reach out to us using the contact information at the bottom of this article, and we'll be happy to assist you.
Here's an example of what to expect from the report
The report lists relevant information for all employees paid within the specified date range.
Here is a breakdown of the columns in this report, what they mean, and how they can be used to help you determine your loan forgiveness.
FTE: These are your FTE Quotients for the current period. These values can be compared to those used when initially applying for the loan to determine Line 7 of the SBA Form 3508.
Gross Pay: This is the employee's raw gross pay, with no other calculations applied to it.
FFCRA Excluded: These are earnings that were issued using FFCRA-related Earning Codes (e.g., FFSICK, FFCHLDCARE, etc.)
The SBA states that these amounts are exempt from PPP Loan Forgiveness and should not be used in determining it.Gross Pay > $100,000: These are earnings that are over the annual $100,000 limit for the employee (this is scaled down to $46,154 for the period this report should be run for). Note that this does not include the FFCRA-excluded funds from the previous column.
The SBA states that any earnings over $100,000 are not to be paid using funding from a PPP Loan, and therefore should not be used in determining forgiveness.Eligible Gross Pay: This is the "Gross Pay" column minus the "FFCRA Excluded" and "Gross Pay > 100K" columns.
State ER Tax: This is the total of all employer taxes going towards state and local tax codes.
Retirement ER Match: This is the total of all employer-matched amounts that went towards retirement funds (e.g., 401k, HSA).
Health Insurance ER: This is the total of all employer-matched amounts that went towards healthcare benefits and insurance (e.g., medical, dental, vision, etc).
Total Cost: This is the total of the previous 4 columns, which corresponds directly to Line 1 of the SBA Form 3508.
Also, note that totals across all employees can be found at the end of the report.
Thank you for using Fingercheck. If you have any questions on this article's topic, you can reach out to our team at 1-800-610-9501, or use the chat option below.