Borrowers that received PPP funds prior to June 5, 2020 have the option to use either a 24-week forgiveness period or an 8-week forgiveness period. On June 22, 2020, the SBA issued updated guidance that provides an additional option allowing a borrower to apply for forgiveness before the 24-week period ends.
However, the guidance states that if an employer applies for forgiveness before the end of the 24-week covered period and has reduced any employee’s pay rate by more than 25%, then a reduction in the forgiveness amount must be calculated on the reduction for the full 24-week period. Further, the borrower cannot rely on the safe harbor, which would normally allow for the restoration of pay rates by December 31, 2020.
Although not addressed in the guidance, it would seem that the borrower must maintain their full-time equivalent (FTE) employee count only for the shortened forgiveness period in order to receive full forgiveness while applying early. However, in order to take advantage of the safe harbors for re-hiring employees by December 31, 2020 or for allowable drops in the employee count due to COVID related reductions in business activity, it seems that the full 24-week period must be used.
For borrowers that need some extra time to accumulate forgivable expenses, but do not wish to wait the full 24 weeks, this option is helpful. However, it may not be the preferred option for all borrowers. For example, if a borrower has not maintained FTE counts, but expects to re-hire by December 31, 2020, waiting and applying based on the full 24-week period likely makes more sense.
The new guidance also further clarifies the eligible payroll costs for owner-employees. In our ORBA Client Alert dated June 19, 2020, we indicated which payroll costs were deductible. That chart remains accurate as to deductibility. However, it appears that the maximum deductible amount for all payroll costs paid to an owner-employee is limited to the lesser of $20,833 or 2.5/12 of 2019 qualified payroll costs ($15,385 or 8/52 of qualified payroll costs if using the 8-week period). Qualified cash compensation, health insurance and retirement plan contributions for owner-employees, in total, are subject to this limitation. This interpretation remains unclear and further guidance would be beneficial.
The Treasury and the SBA continue to update, change and clarify the guidance related to the PPP Loan Program. Your ORBA advisor is available to assist you through this complex process. If you have questions regarding this Client Alert or if we can be of assistance in helping you through the application or forgiveness process, please contact Frank Washelesky at [email protected] or your ORBA advisor.