Loan Forgiveness Under the CARES Act Paycheck Protection Program

Understanding the Forgiveness Provisions and What Businesses Need to Do Now to Maximize Loan Forgiveness

It is hard to believe that the CARES Act’s Paycheck Protection Program (“PPP”), and specifically PPP loans for small businesses, became law just two weeks ago. In that short time, small businesses across the country, as well as SBA lenders and financial advisors, have been busy trying to interpret PPP loan guidelines and started applying for the loans. Now that many small businesses have applied and will soon find out if their loans were approved, they need to start preparing for the next phase in the PPP loan process – applying for loan forgiveness. Please look for our upcoming PPP Loan Forgiveness Q&A Webinar.

While the CARES Act does provide general guidelines for businesses to follow to have their loans forgiven, the SBA will still need to provide further clarification in the weeks ahead as the June 30th loan application period ends and the loan forgiveness application period begins. However, now is the time for those businesses who receive loans to ensure that they comply with all of the strict requirements set forth in the CARES Act; requirements that will need to be followed during the critical eight week period following the funding of loans (the “Covered Period”). Businesses that meet these requirements will have the greatest likelihood of maximizing loan forgiveness.

Under the CARES Act, the following three general guidelines will have to be adhered to during the Covered Period in order for businesses to achieve maximum loan forgiveness:

Use of Loan Proceeds

The first guideline requires that loan proceeds be used specifically for payroll costs, rent, utilities, and interest on certain “covered mortgage obligations”. To the extent that loan proceeds are not used for these specific purposes, then that portion of the loan will not be forgiven. In addition, 75% of expenses paid have to be used for payroll costs, as defined in the CARES Act.

FTE’s During the Covered Period

The second guideline measures average monthly full-time equivalent employees (“FTE’s”) during the Covered Period to a period before the COVID-19 pandemic (the “Base Period”). The CARES Act provides for the following three options that businesses can use for the Base Period:

  • The average number of monthly FTE’s during the period February 15, 2019, to June 30, 2019
  • The average number of monthly FTE’s during the period January 1, 2020, to February 29, 2020
  • For seasonal businesses, the average number of monthly FTE’s during the period February 15, 2019, to June 30, 2019

For those businesses that reduce their monthly average FTE headcount during the Covered Period, a portion of their loan will not be forgiven. The CARES Act sets forth specific calculations using FTE headcount for both the Covered and Base Periods to determine the amount of loan forgiveness.

Payroll Expensed During the Covered Period

Similar to maintaining FTE headcount, the third guideline requires businesses to maintain certain salary levels during the Covered Period. For those businesses that reduce individual employee wages by more than 25%, as compared to the most recent quarter, their loan forgiveness will be reduced further.

Bringing Back Employees During the Covered Period

Many small businesses either furloughed or laid off employees during the early stages of the health crisis. The CARES Act recognized this and allows businesses to re-hire employees during the Covered Period and include them in both their FTE headcounts and salary requirements. This will allow businesses to maximize their loan forgiveness. While the deadline to re-hire employees is June 30, 2020, further clarification from the SBA is needed to understand and properly apply this provision.

Planning Now

It is expected that SBA lenders, in conjunction with SBA guidelines, will require detailed FTE headcount and salary information, as well as supporting historical accounting and payroll records, in order to grant loan forgiveness. For this reason, it is important to start planning now to make sure loan proceeds are used in accordance with the CARES Act guidelines, to maintain proper payroll and accounting records during the Covered Period, and to assess how re-hiring employees will impact loan forgiveness.

If you would like additional information please contact your Gettry Marcus Advisor or Lee Ferber the author of this article.