PPP Loan Forgiveness: Part 2

Let’s spend a moment revisiting full forgiveness, then cover possible solutions to glitches that may occur. Due to the range of questions we are receiving, we will continue to report on information you may find useful. Remember, successful loan forgiveness is all about asking the right questions.

Full Forgiveness: How will I know? On one level it’s fairly straight forward. The loan is fully forgivable when all the criteria are met: use PPP funds for proper spending and maintain certain levels of employee retention/payroll levels (discussed below). In fact, if you qualify, it’s so easy that the SBA will let you file for forgiveness using a simplified, EZ format. NOTE: this is provided by your lender.

Moreover, the absolute easiest way to reach full forgiveness occurs when you spend all, or most, PPP funds on payroll-related costs. Expanding the “spend-period” to 24 weeks has been vital in this area in that it allows you adequate time to use your funds. (See Part 1 for discussion) However, there are some things you need to be aware of.

What can deter FULL PPP forgiveness?  You will recall the original intent of the PPP funding was to maintain employee levels. Meeting all the criteria can be a little tricky. Even if you do spend the funds properly there are two things that can trip-up full forgiveness: 25% reductions in employee head-counts and/or 25% reductions in employee salaries and wages. The SBA refers to this as the 25% rule. Fortunately, the SBA has provided a way to overcome some of these issues.

What if I have more than a 25% reduction in employee’s pay? The forgiveness calculation compares your employee’s average pay during the “spend period’’ to pre-Covid levels. Unrestored pay cuts over 25% can potentially reduce your forgiveness amount. NOTE: You do not have to include employees earning over $100,000.

Is there an exception for a reduction in employee pay? Yes. The SBA has provided a safe-harbor. You have until the earlier of your forgiveness application (due 10-months after your spend period) or December 31 to restore employee average pay to pre-Covid levels.  

What if I have more than a 25% decrease in employee head count?  The application will ask you to compare your average employee count before and after your “spend-period.” A reduction in employee count can potentially reduce your forgiveness amount. But, what can I do if it’s taking longer to bring back my workforce?

Safe-harbors to fix reduction in employee head counts. The SBA has issued two safe-harbor rules and one exclusion to protect you even where a reduction in employees has occurred at no fault of your own.    

• Safe Harbor No. 1 - During your “spend-period” you were ordered by a government agency (CDC, HHS or OSHA) to reduce or outright cease business operations. In essence, making it impossible to carry-on business.
•  Safe Harbor No. 2  - By December 31 you’re able to restore your employee count back to where they were on February 15, 2020.
• Exclusion - You can exclude from the comparison employees who refuse to return to work, voluntarily resign, dismissed for cause, ask for reduced hours, or you simply haven’t been able to find a qualified replacement for one you attempted to rehire. You need to maintain documentary evidence of the above.

NOTE: The above safe harbors all reference December 31 as the deadline for fixes. It is why you may want to wait before filing your forgiveness application until you have used the safe harbors.

Part 3 will continue with specific or unique issues.