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Navigating Paycheck Protection Program Loans and Forgiveness

Remember January 2020? Oh, so much has changed since those good old days. Wearing masks is the norm, excessively handwashing and slathering hand sanitizer is considered a virtue, and standard business etiquette now includes a whole chapter on virtual meetings. Many of us are obsessing over the ever-changing Paycheck Protection Program (PPP) loans received thanks to the CARES Act. There is no doubt that the impact of PPP has been overwhelmingly positive for non-profits but there have been and continues to be, many challenges with PPP.

As this article goes to print, the extended deadline to apply for PPP has expired but most of you that have received your loans have likely not applied for forgiveness. At its most basic, to receive forgiveness of your PPP loan, you are required to spend at least 60% on payroll-related expenses and not more than 40% on specifically identified non-payroll related expenses. You may choose a covered period of anywhere from eight to twenty-four weeks. You also have the option of using an alternative covered period for payroll-related costs.

Payroll related costs include salaries, wages, bonuses, hazard pay, and employer portions of health, dental, and vision insurance, and retirement plan contributions. Non-payroll costs include rent paid for both real and personal property, interest paid on mortgages for both real and personal property, and payments for utilities. In all cases, the mortgage, rental agreement or utility services must have begun before February 15, 2020. While these may seem clear enough, I can assure you there is plenty of grey area.

In addition to the above, PPP loan forgiveness may be reduced if you have either a reduction in full-time equivalent employees (FTEs) or you have reduced an employee’s salary/hourly wage by more than 25% during the covered period or alternative covered period.

FTEs need to be calculated in one of two ways, either the traditional method or the simplified method. Under the traditional method, an FTE will be calculated based on a 40-hour work week. So, an employee working 32 hours a week would be a .8 FTE. Under the simplified method, any employee working 40 or more hours per week is 1.0 FTE, while any employee working less than 40 hours per week is .5 FTE. In addition to your choice of how to calculate FTEs, you have a choice as to the period you compare your FTEs to, either the period February 15, 2019 – June 30, 2019, or January 1, 2020 – February 29, 2020. In either scenario, you compare the FTEs to your covered period or alternative covered period.

The calculation for determining if you had a reduction in an employee’s salary/hourly wage of more than 25% is no less complicated. You must first compare the average annual salary or hourly wage during your covered period or alternative covered period to the average for the period of January 1, 2020 – March 31, 2020. There are several “safe harbor” exceptions that could eliminate the FTE and/or salary/hourly wage reductions.

The biggest “safe harbor” news has been the SBA’s clarification that if you are following state or local shutdown orders that are based in part on the guidance of these Federal agencies, that qualifies as indirect compliance. In other words, if you were forced to shut down due to a government mandate, you do not have to satisfy the FTE elements of the forgiveness calculation. Documenting the shut-down orders that affected your operation and your organization’s specific response to those orders is important. With many organizations being impacted by government shut down orders, this safe harbor is worth consideration as you consider your forgiveness calculation.

The SBA has released two versions of the application for forgiveness, form 3508 and form 3508EZ. The EZ form is available for use if you can attest that you 1) did not reduce the number of employees or the average paid hours of employees between January 1, 2020, and the end of your covered period or 2) you were not able to operate between February 15, 2020, and the end of your covered period at the same level of business activity as before February 15, 2020, due to compliance with the requirements or guidance of certain Federal agencies.

As of the date of writing this article, there have been over 20 interim final rules issued by the SBA, as well as a FAQ document with 49 questions and answers. Many questions also remain unanswered at this time. It is also important to note that while your lending institution is required to conduct a review of your application for forgiveness, they are only required to perform a limited “good faith” review as the responsibility for providing an accurate calculation is the borrower’s.

Beyond the myriad rules and regulations set forth by the SBA for PPP, there are other factors to be considered. Not the least of which is if you receive any Federal, State, or County grants or receive funding through one of the many State agencies (OPWDD, OMH, OASAS, SED, etc.) you are likely concerned about the dreaded “double-dip.” This is the theory that if you receive forgiveness for a dollar spent on payroll you cannot also claim that payroll dollar against your funding arrangement with the New York State agency. Very few of these funders have published any specific guidance related to the double-dip, but logically it would appear to be an issue if you received funding from one source for certain expenses and also included those expenses in your application for forgiveness for PPP.

My hope is that after reading this article, you have a basic understanding of some of the many requirements of the PPP loan program and the potential for forgiveness of those loans. I also hope that you recognize the fact that there are many variables both within the PPP rules and regulations and beyond. While you may be able to navigate these rules, regulations, and unknowns on your own, it is likely a worthy investment to have the assistance of those keeping a constant eye on these ever-changing variables. Please don’t hesitate to reach out to your Bonadio team members for additional information and assistance in navigating these difficult and unchartered waters.

The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We, therefore, make no warranties, expressed or implied, on the services provided hereunder.