PPP Forgivable Loan Program: How to Do the Math

April 3, 2020 Alerts and Newsletters

(Originally published 4/2/2020, last revised 4/10/2020)

Thousands of articles are circulating about the new Paycheck Protection Program under the CARES Act signed into law on March 27. Having a general idea about how this Program works is good. But if you have questions about the math, then this article is for you.

The following is a slightly simplified explanation of how to compute the loan amount and the forgivable amount. The precise numbers will differ slightly due to the details of the Program (some of which have yet to be defined in rules and guidance). But for your company’s planning purposes, this may be close enough.

LOAN AMOUNT: Take your total 2019 payroll costs – wages, salaries, commissions, bonuses, severance pay, and so forth – but subtract out the portion of any employee’s pay exceeding $100,000 per year (annualized). Add amounts paid by the company for 2019 group health care benefits, including insurance premiums. Add any retirement benefits paid in 2019. Add the company’s payments of state taxes on payroll, including unemployment taxes. Then divide by 12 and multiply this resulting average payroll cost calculation by 2½. That is an approximation of the amount the company can borrow.

USE OF LOAN PROCEEDS: Once your loan is funded, the amount you spend during the next eight weeks on certain costs is the amount that potentially is allowed to be forgiven. So have your bank open a new account, deposit 100% of the loan proceeds in that account, and then use that money over the eight-week period, first, to cover your payroll costs (still not counting the portion exceeding the $100,000 annualized cap), and then to help cover your rent and utilities. Make sure to spend all of the loan proceeds on those approved costs within the eight-week period if you can, with at least 75% devoted to payroll cost if possible. If you run out of approved costs (e.g. because your payroll shrank), don’t worry about it . . . you can continue to use the "stranded" proceeds for approved costs until the principal amount is consumed . . . at worst you have a low-interest loan . . . count your blessings!

FORGIVABLE AMOUNT: This is a three-step process (reduction in headcount, reduction in wages, rehires). Step One is to multiply your total loan amount (minus the stranded proceeds, if any) by the following fraction:

Numerator: average number of full-time equivalent employees per month employed by the company during the eight-week period; divided by:

Denominator: the lower of (i) the average number of full-time equivalent employees per month employed by the company during the period from February 15, 2019 through June 30, 2019 or (ii) the average number of full-time equivalent employees per month employed by the eligible recipient during the period from January 1, 2020 through February 29, 2020.

Step Two requires you to further subtract a dollar amount computed as follows: (i) identify all “below-100 people” [defined below] who are still employed during the eight-week period, (ii) for each below-100 person, take that person’s wages/salary rate during the eight-week period and compare it to that person’s wages/salary rate for Q1 2020; (iii) if the current wages/salary rate hasn’t dropped by more than 25% of the Q1 wages/salary rate, that’s good; (iv) for any below-100 person whose current wages/salary rate did drop by more than 25%, compute (x) the amount of wages/salary the employee would have received for the eight-week period at 75% of the Q1 rate and subtract (y) the amount the employee actually received for the eight-week period; (v) add up all of the >25% reduction amounts for all of the below-100 people still employed during the eight-week period. That aggregate dollar amount further decreases the amount of the loan that is forgivable. The “below-100” people are a subset of current employees, consisting only of those whose wages/salary rates did not exceed $100,000 per year at any point during 2019. Thus, the wage reduction calculation will exclude altogether any current employee who earned more than $100,000 in 2019. But the calculation also excludes any current employee who in 2019 had a variable pay arrangement (overhead, commissions, etc.) and who earned more than $8,333 in any month.

Step Three allows a company to “fix” reductions from Step One or Step Two, as follows:

The Step One Reduction (headcount) can be avoided if by June 30, 2020 your total FTE headcount has been restored to the same level as at February 15, 2020; and/or

The Step Two Reduction (wages) can be avoided if by June 30, 2020 you have restored to the below-100 people the same wages/salary they were earning as at February 15, 2020.

Step Three, obviously, is an inducement to use loan proceeds to restore headcount and wage levels. If you do both, then the full loan amount can still be forgiven. If you do one or the other, then one reduction or the other is ignored. As in horseshoes, however, close is not good enough – there is no pro rata relief for restoring almost all of the headcount or almost all of the wages/salary.

This “simplified” explanation hides further complexities: computing the average headcount, seasonal employers, the effect of headcount reductions before February 15, EIDL proceeds, COVID-19 tax credits, etc. But for most companies, this should give you a pretty good idea of the math as we currently understand it.