Well, by this point, many of you have applied for and may be waiting for your PPP (Paycheck Protection Program) funding from the SBA. What a journey. There was a lot of mid-game changing the guidelines that kept us all on our toes. But the fun is not over yet! You are obviously aware that the PPP has a loan forgiveness component that is calculated based on a certain set of conditions. While we do not have all of the answers (yet), we have prepared an FAQ on PPP loan forgiveness so that you can start to get a handle around your approach and how we intend to support you if you are a client.
Note: We are not the SBA! We don’t represent that we have all of the answers here. These are our best responses based on the information that we have at this time.
1. Should I set up a separate bank account for the PPP Loan Proceeds?
Answer: The issue that typically prompts this question is whether I need to track those dollars specifically and would it be easier to do in a separate account. However, what needs to be tracked is the spend across the qualified expense categories relative to the PPP dollars received. Stride will track this without a separate bank account.
You may be asking why a separate account is not necessary. Our best thinking (and recommendation) is that adding another bank account simply adds another layer of reconciliation which may accompany a host of other complications (adjustments required to determine the amount of payroll qualified for forgiveness, etc).
Proceeds from the PPP loan will be recorded as debt on the balance sheet. Stride will support you in tracking the loan for loan forgiveness. If you are considering setting up a separate bank account, please reach out to Stride first as we recommend not doing so.
2. What is included as a forgivable PPP expense?
Answer: Qualified expenses for which you are eligible to seek forgiveness are those expenses incurred in the eight-week period after PPP loan is funded. This includes wages, health care expenses, retirement plan contributions. Up to 25% of the loan is eligible to be used for rent, utilities and interest on mortgages. These amounts cannot be accelerated or prepaid payments of expenses incurred for a future period.
3. The amount of forgiveness of a PPP loan depends on the borrower’s payroll costs over an eight-week period; when does that eight-week period begin?
Answer: The eight-week period begins on the date of the disbursement of the PPP loan to the borrower. The lender must make the first disbursement of the loan no later than ten calendar days from the date of loan approval.
4. Do I pay employees even if the company isn’t operating?
Answer: There is no requirement for paid workers to actually be performing normal work duties. Whether recalled workers come to work and perform services or stay at home and do nothing, either is acceptable under PPP. The object of the program is to keep small businesses afloat and have a ready workforce that can come back to work when it is time to reopen. Workers rehired will no longer be able to claim unemployment benefits.
5. Will we have to provide proof of payment to receive PPP forgiveness?
Answer: Yes. Borrowers will be required to provide proof of payment of PPP qualified expenses. These include:
- Wages, bonuses, commissions and other compensation similar to what was used in the loan qualification phase. Also included are payments for the employer portion of employee benefits, employer contributions to retirement plans, rent, utilities, and interest on mortgages for company facilities. Some employers are considering additional discretionary retirement plan contributions for employees as a way of helping workers deal with the declining stock market and having more of their loan forgiven. Retirement plan contributions are not part of the $100,000 wage cap.
- Stride will track eligible expenses on a spreadsheet and reference proofs of payment location. We will point you in the direction of where to find various proofs of payment to provide to your bank upon request
- All payments for rent, utilities, and mortgage interest must be for leases, mortgages, or utility services that were in existence as of February 15, 2020. To be prepared, you might want to gather lease agreements, mortgage documents, and utility bills for several periods prior to February 15, 2020, to confirm the existence of those obligations and services prior to that date.
6. Will Stride use cash or accrual basis for tracking expenses?
Answer: There is no guidance currently that clarifies whether expenses must be tracked on a cash or accrual basis for the eight-week period beginning on the date the loan proceeds are disbursed, which could be the middle of a pay period, or if you will be allowed to use the eight-week pay beginning with the pay period starting after the first loan disbursement. As best practice, Stride will track expenses and receipts for eight weeks after the first loan disbursement and perhaps continue until the pay period after the end of the eight-week period.
7. When should I plan to apply for loan forgiveness?
Answer: Since principal and interest payments on the loan are deferred for six months for SBA loans, we foresee a two to three month period after the eight-week period ends when you will apply for loan forgiveness for your PPP loan.
8. If my loan is forgiven, is that considered taxable income?
Answer: Forgiveness of debt related to the PPP loan will not be a taxable event for Federal purposes, TBD for state purposes.
9. How could the forgiveness amount be reduced?
Answer: The full 8-week forgiveness will be granted to businesses that maintain employee count and compensation paid to those employees. Loan forgiveness amounts will be reduced if the employer has on average fewer employees during the 8-week period after loan origination than during the time periods of either February 15, 2019, to June 30, 2019, or January 1, 2020, to February 29, 2020, (as chosen by the employer), or if the employer reduces the pay of any employee by more than 25% compared to last quarter.
To encourage employers to rehire workers laid off due to the COVID-19 crisis, the PPP provides that if a business rehires previously laid-off workers or eliminates any reductions in salaries prior to June 30, 2020, it will not be penalized for having a reduced payroll at the time of loan origination.
10. How is the reduction in the loan forgiveness determined?
Answer: The maximum forgiveness of the loan is reduced based upon employee retention and average pay. The maximum loan forgiveness amount is multiplied by a fraction that measures employee retention based on the average number of full-time equivalent employees (FTEs). You will choose which fraction to use. The numerator of both fractions is the average number of FTEs employed during the eight-week period. The denominator is either:
- The monthly average FTEs for February 15, 2019, through June 30, 2019; or
- The monthly average FTEs for January 1, 2020, through February 29, 2020.
The lowest denominator is the most beneficial to your company. In addition, the maximum loan forgiveness amount is further decreased if any employee’s pay has declined by more than 25% during the eight-week period, relative to the first quarter of 2020.
In the event you had a reduction of employees during the period from February 15, 2020, through April 26, 2020, as long as you rehire those employees no later than June 30, 2020, the FTE calculation for the number in the fraction will treat those rehired employees as if they were included in the FTE for the entire 8-week period. Please note that while a delayed rehire date won’t cause issues with the employee retention fraction, it may cause you to spend less than the required 75% on payroll costs, and therefore would result in a reduction in the amount of loan forgiven. Both the average reduction in FTE and reduction in pay must be restored to eliminate the reduction in loan forgiveness.