The release of the Paychecks Protection Program Loan Forgiveness Application (shown here) has clarified several issues which have generated much dialogue and speculation over the last several weeks. For example:

Rent and Lease payments.  Lease payments made in connection with real estate and personal property are considered eligible nonpayroll costs. Personal property includes items such as autos and equipment.

Full-Time Equivalent Employees (“FTE”).  Forty (40) hours is the key figure NOT thirty (30) hours as contemplated.  Two options exist to calculate the average weekly full-time equivalency – both during the pre-virus reference period chosen and the eight (8) week covered period.  Remember, rejected written attempts to re-hire, terminations for cause, voluntary resignations, and voluntary reductions in hours will not count against the borrower when determining FTE reductions in connection with the loan forgiveness calculation.

Method 1.  The average hourly work week is divided by 40 hours.  For example, an employee who averaged 35 hours a week during the eight (8) week covered would generate the following calculation (35/40=.875 rounded to .87). The maximum value an employee can receive is (1.0).  Employees receiving less than (1.0) are rounded to the nearest (.10).

Method 2.  This simplified method assigns a (1.0) to all employees who averaged 40 hours per week during the eight (8) week covered period and (.5) to any employee who did not average 40 hours per week.

Alternative Payroll Period. The CARES Act defined the eight (8) week covered period as beginning on the date the business receives loan funds. This created a record keeping nightmare for many businesses given funds were typically received in the middle of a payroll.  Borrowers with a biweekly or more frequent payroll schedule are permitted to calculate eligible payroll costs for an eight (8) week covered period beginning on the first day of the borrower’s first pay period following the receipt of loan proceeds.

$100,000 salary limit. Cash compensation for an employee may not exceed an annual salary rate of $100,000 or as prorated $15,385 during the eight (8) week covered period. This may impact bonuses plans for certain higher compensated employees. Health and retirement benefits are not included for purposes of calculating the $100,000 threshold.

June 30, 2020 FTE Reduction Safe Harbor.  If a borrower reduced its workforce between February 15 and April 26, 2020 then no later than June 30, 2020 restored the workforce to an FTE count equal to borrower’s workface as of February 15, 2020 the borrower may be eligible for the FTE reduction Safe Harbor. The Safe Harbor eliminates the forgiveness reduction potentially resulting because the number of FTEs employed during the eight (8) week covered period employed was less than the pre-virus FTE comparison period you designated.  The instructions appear to require the full workforce be reinstated by June 30, 2020.

75/25 Rule Remains. Although it has speculated a change was in the works the 75% rule remains.  Per the application instruction 75% of the potential loan forgiveness amount must still be used for payroll costs.

We suggest that you attempt filling in the application now rather than after your eight (8) week covered period expires to determine what issues you encounter.  Also confirm the supporting documentation gathered to date aligns with the application. We can assist you with any questions that arise in connection with your application review.

The attorneys of Maiello, Brungo & Maiello are available to answer additional questions and assist you with navigating the PPP Loan  forgiveness application process.  Please contact either Lawrence Maiello or John H. Prorok of Maiello, Brungo & Maiello, LLP’s Business Law Team.

John H. Prorok
John Prorok

John Prorok possesses an invaluable understanding of privately held business owners’ needs in business planning, corporate formation, and transactions. He frequently speaks and counsels emerging and start‐up enterprises, offering insightful legal strategies toward success.