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Paycheck Protection Program (PPP) Loan Forgiveness – Maintaining FTE and Salary Levels

Joseph Most. J.D.

7.29.20 | Client Alert – COVID-19  Update

The combination of many applicants having used all of their PPP funds and the ability to apply for loan forgiveness before the new 24-week covered loan period has resulted in a common question being raised; “At what point do I no longer have to maintain my full-time employee (FTE) count and employee salary levels and not risk having my loan forgiveness amount reduced?”

As a little background, under the PPP statute:

  • The amount of a company’s loan that is eligible for forgiveness may be reduced if certain FTE and/or employee salary levels are not maintained (please see our prior alerts for a detailed discussion) and
  • A borrower must maintain FTE and salary levels through the covered period in order to avoid a reduction in the amount of the loan eligible for forgiveness.

Under the PPP regulations, called Interim Final Rules or IFRs:

  • A borrower may apply for loan forgiveness before its 24-week covered period expires if it has expended the PPP funds for which it is requesting forgiveness, and
  • If the borrower does apply for forgiveness before the end of its 24-week covered period, as a practical matter, it will have to use FTE and salary numbers as of the date of the application.

Neither the PPP statute nor the IFRs indicate whether, to avoid any forgiveness reduction, an early applicant borrower must maintain its FTE and salary levels once the forgiveness application is submitted (i.e., through the end of the covered period).

Because of this uncertainty, unless and until further guidance is issued, to ensure maximum PPP forgiveness as it relates to this issue, FTE and salary levels should be maintained through the full selected covered period.

PPP Loan Forgiveness—Utilizing the Full 24-Week Covered Period May Maximize Forgivable Amounts

Under the loan forgiveness provisions of the PPP and the SBA’s forgiveness application, the starting point for calculating loan forgiveness is all amounts spent on eligible costs during the loan’s covered period. Because the covered period (24 weeks) is significantly longer than the 2.5 months of payroll costs that the PPP loan amount was based upon, it is likely that borrowers will calculate a potential forgiveness amount that is much higher than their PPP loan principal and interest. Next, the salary reduction and FTE reduction calculations are applied to that amount. If after applying the reductions, the modified forgiveness amount is still greater than the borrower’s loan amount then the borrower may still achieve full loan forgiveness, even after the reduction. The mechanics of this calculation are demonstrated below:

  • Borrower has 10 employees that each make $20,000 during the 2.5 month measuring period and takes a $200,000 PPP loan
  • Borrower has had 10 employees at all times before taking out the loan
  • During the 24-week covered period the borrower now only has 8 employees and pays them each $46,154 in salary ($369,232 in total)
  • The borrower also pays $100,000 in rent and $30,768 in utilities during the covered loan period
  • The borrower has $500,000 of potential eligible costs that qualify for forgiveness ($369,232 + $100,000 + $30,768)
  • The borrower’s FTE reduction quotient is 20% and has no salary reductions; therefore, the modified loan forgiveness amount is $400,000
  • The borrower receives $200,000 in loan forgiveness because the modified amount is in excess and at least 60% of costs were spent on payroll

By calculating loan forgiveness in this manner, the more eligible costs that are paid during the covered period the more loan forgiveness a borrower will likely be entitled to, possibly overriding, in whole or in part, any forgiveness reduction from a failure to maintain FTE or salary levels through the end of the covered period. Because FTE and salary reductions are measured over the full 24-week covered period anyway (please see above), in most situations it will be advantageous for borrowers to wait the full 24 weeks before submitting their forgiveness application. While this may or may not have been the law writers’ intent, the statute, regulations and application are all clear and consistent on this point.

For more information on this topic or any other matter related to the COVID-19 pandemic, please contact your Berdon Advisor.

Berdon LLP New York Accountants