How to Determine Loan Forgiveness Under the Paycheck Protection Program

The recent $669-billion Paycheck Protection Program (PPP) established by the Coronavirus Aid Relief and Economic Security (CARES) Act has been enacted to a chorus of mixed reviews.

The PPP provides loans of up to $10 million per eligible small business to cover payroll costs and other qualifying expenses (such as rent and utilities) to keep small businesses afloat and employees paid until government agencies allow them to reopen. Perhaps best of all, the total amount of each loan used to cover payroll and qualifying expenses may ultimately be forgiven. In other words, the U.S. government won’t require repayment under certain conditions.

Since banks started taking applications for PPP loans, the program has been plagued with controversy — from big businesses getting the lion’s share of the allocated funds to employers having to contend with furloughed and laid off employees who do not see the value in returning to work because they may be able to earn more by remaining on unemployment.

If your company applied for and was approved for a PPP loan, all of this controversy may be water under the bridge. Now your concern is focused on how much of the money you received in the form of a PPP loan will need to be paid back. This post addresses that concern — both for businesses with employees and for self-employed individuals.

Loan Forgiveness for Businesses with Employees

If you own a business and have employees working for you, the amount of your Paycheck Protection Program loan that will be forgiven is said to be equal to the following payments made, and the costs incurred during the eight-week period beginning on the loan origination date (the first disbursement date):

• Payroll costs:
  • Gross salary, wages, commissions, or tips paid to employees (based on an annual wage of up to $100,000 per worker)
  • Vacation, parental, family, medical, or sick leave (excluding any family or sick leave covered under the Families First Coronavirus Response Act and reimbursed through payroll tax credits)
  • Termination allowances
  • Group health care benefits, including insurance premiums
  • Retirement benefit payments
  • State and local payroll taxes
• Mortgage interest on a mortgage taken out by the borrower for real or personal property incurred prior to Feb. 15, 2020 (not including prepayments)
• Rent on a lease taken out before Feb. 15, 2020
• Utilities for service begun before Feb. 15, 2020

The entire amount of the Paycheck Protection Program loan is supposed to be forgiven if you meet all three of the following conditions:

1. You spent all the money to cover payroll and other qualifying expenses incurred during the eight-week period starting from the loan origination date.
2. You retained all your employees during this time.
3. You maintained your employees’ salaries and wages (you didn’t reduce them during the eight-week period).

The portion of the loan that should be forgiven will be reduced for any reductions in full-time equivalent employees (FTEEs) or reductions in salaries or wages. (An FTEE is an employee who works at least 30 hours per week or two or more employees, neither of whom works full time but together work an average of at least 30 hours per week. For example, if you have eight full-time employees and four employees who work 15 hours each, you have 10 FTEEs.)

What we’re hearing is, loan forgiveness is reduced by the same percentage as that of any workforce reduction. For example, suppose you averaged 25 full-time or FTE employees during the period in 2019 that corresponds to the eight-week period in 2020 following the Paycheck Protection Program loan origination date. And let’s suppose you received a loan of $200,000. In that same period in 2020, your workforce was reduced to 20 employees. Your loan forgiveness would be 20/25 = 80 percent of $200,000, which equals $160,000. You’d be required to pay back $40,000, plus 1 percent interest.

Paycheck Protection Program loan forgiveness is also supposed to be reduced by any and all employees’ reduction in salary or wages (over the eight weeks covered by the loan), if that reduction is more than 25 percent of their salary or wages in the eight weeks prior to the loan origination. (Note: You need to make this calculation on an employee by employee basis.)

For example, you have two employees — one earning $50,000/year and the other earning $60,000/year in the first quarter of 2020, and their salaries were reduced by 30 percent in the eight-week period covered by the loan. The first employee is now earning $50,000 – ($50,000 x .30) = $50,000 – $15,000 = $35,000, and the second employee is earning $60,000 – ($60,000 x .30) = $60,000 – $18,000 = $42,000.

EMPLOYEE	SALARY IN Q1	NEW SALARY	REDUCATION
No. 1	$50,000	$35,000	$15,000
No. 2	$60,000	$42,000	$18,000
		TOTAL…….	$33,000

In the example above, your company’s loan forgiveness will be reduced by $33,000.

Note: The loan forgiveness will not be reduced if, by June 30, 2020, you restore the number of FTEEs and restore any salaries or wages that had been reduced during the period from Feb. 15, 2020, to April 26, 2020 (30 days after enactment of the CARES Act).

Also — and this is very important to know — loan forgiveness does not happen automatically. Borrowers must apply for loan forgiveness from their lender, and the lender has up to 60 days to respond.

Loan Forgiveness for Self-Employed Individuals

Paycheck Protection Program loans also provide relief for self-employed individuals to cover lost income and any expenses related to keeping the business afloat during the economic shutdown, including rent for office space and any business-related utility costs.

Payment protection for the self-employed is capped at $15,385, which is based on a maximum $100,000 annual salary. To come up with the figure of $15,385, divide $100,000 by 52 weeks to get a payment of $1,923.08/week and then multiply that by eight weeks to get $15,385.

If you’re self-employed and received a PPP loan, you should take the time now to figure out how much of the loan amount you’ll need to pay back, so you won’t be blindsided when the balance comes due. To calculate how much will be forgiven, take the following steps:

STEP 1: Add the amount of self-employment income you would have earned during the eight-week period starting from the loan origination date. (not to exceed $15,385 as explained above)

STEP 2: Add Non-Payroll authorized costs:

• Any payments of business-related interest on mortgage obligations and rent payments on leases during the same eight-week period.
• Any business-related utility expenses incurred during the same eight-week period.

If you missed out on the initial Paycheck Protection Program funding and need cash due to loss of work related to COVID-19, stay tuned for additional government programs to help small businesses like yours stay afloat. We also encourage you to check for state-funded programs that might help. For example, many states that normally prohibit self-employed individuals from filing for unemployment have been temporarily allowing the self-employed to file for these benefits.

In the meantime, if you’d your own copy of an Excel file that helps you determine loan forgiveness for your company or self-employed entity, please click to download the  Stees, Walker & Company, LLP Paycheck Protection Program Loan Forgiveness Calculator.

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About the Author: Laura Stees, CPA is a partner and business strategist with Stees, Walker & Company, LLP — a San Diego, Calif.-based boutique tax consulting firm focused on personalized tax and financial guidance to individuals and businesses.

Disclaimer: The information in this blog post about Paycheck Protection Program loan forgiveness and repayment is provided for general informational purposes only and may not reflect current financial thinking or practices. No information contained in this post should be construed as financial advice from the staff at Stees, Walker & Company, LLP, nor is this the information contained in this post intended to be a substitute for financial counsel on any subject matter or intended to take the place of hiring a Certified Public Accountant in your jurisdiction. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this post without seeking the appropriate financial planning advice on the particular facts and circumstances at issue from a licensed financial professional in the recipient’s state, country or other appropriate licensing