PPP Forgiveness Planning Scenarios

August 18, 2020 Alerts and Newsletters

How to use this article: You already know that the Paycheck Protection Program (PPP) is highly complex, with intertwining conditions, exceptions, and definitions that defy simple explanation. This article assumes that you are pretty familiar with PPP terminology as relates to your business. We present nine different scenarios commonly found within the PPP recipient pool and offer an intentionally over-simplified discussion of when and how you should apply for forgiveness. Our goal here is to provide a useful starting point for you to plan the forgiveness application for your particular company and situation.

* * *

First you stressed out over applying for the new Paycheck Protection Program on a form provided by your banker. After submitting the application (and maybe a correction or two), you stressed out over when the loan would actually get funded. After receiving the funding, you stressed out over how to track each dollar used for qualified expenses and whether you could satisfy the 75% test for payroll costs.

After the third or fourth round of FAQ guidance changes from Treasury/SBA,[1] you became more philosophical and decided you would just take things as they come and hope for the best.

Then you heard about how people could go to jail if their PPP loan wasn’t sufficiently “necessary,” and so your stress level shot right back up. After a few anxious weeks, you heard that SBA would focus on companies that received $2 million or more and probably would let you just pay the money back rather than have you go to prison. By this time, you were pretty wrung out.

You turned philosophical again in mid-May when Treasury/SBA published a forgiveness application so complex that you realized – at a level beyond your prior experience – the profound wisdom of the expression “no such thing as a free lunch.”

Then in early June the PPP Flexibility Act came out and you realized that most of the math you had spreadsheeted and worried about had just become moot, due to Congress changing the Covered Period[2] to 24 weeks instead of 8 weeks (unless you elect otherwise), and substituting a 60% payroll cost minimum in place of Treasury/SBA’s 75% minimum.

When Treasury/SBA in mid-June published the new EZ form, you took that as a sign that everything was going to be okay. Then you actually started reading the EZ form and realized it was more complicated than their mid-May form.

The nine scenarios presented below are intended to illustrate key concepts relevant to forgiveness applications. Pick the one that is closest to your situation and consider carefully whether our suggestions here make sense for you.

For Early PPP Loan Recipients Who Are
Doing Okay (or Better Than Okay)

SCENARIO #1 (No Drop in FTE; No Major Drop
in Wage Rates)
:

  • Your PPP loan was funded before June 5, 2020

  • Your “payroll costs” (as defined)[3] for the original 8-week period easily exceed 60% of the total loan amount[4]
  • 8 weeks of covered rent, utilities, and mortgage interest payments is more than enough to cover the remaining loan amount
  • No drop in FTE headcount versus your comparator period (typically, February 15 – June 30, 2019), other than isolated departures/reductions at the employee’s initiative
  • No major (>25%) drop in wage/salary rates for any continuing employee since the 1st Quarter of 2020 – for these purposes, “continuing employee” means someone who was employed during Q1 2020 and continued to be employed during at least part of the 8-week period, but does not include those who in 2019 were paid at an annualized rate exceeding $100,000
  • Your current employees include one or more owner-employees who currently receive cash compensation at a rate exceeding $100,000 per year.

This scenario qualifies for a filing on the “EZ” version of the forgiveness application (Form 3508) and would support electing an 8-week Covered Period. If the business has sufficient eligible costs to consume 100% of the PPP loan amount in 8 weeks, the forgiveness picture is never going to get better than this.

SCENARIO #2 (FTE Drops but Fully Recovers;
No Major Drop in Wage Rates)
:

  • PPP loan was funded before June 5, 2020
  • Payroll costs within the first 8 weeks did not meet the 60% standard, due to a sharp drop in FTE headcount in the March-May 2020 timeframe
  • Payroll costs within the relevant 24-week period (5-1/2 months) do exceed 60% of the total loan amount, and 5-1/2 months of covered rent, utilities, and mortgage interest payments is more than enough to cover the remaining loan amount
  • No major (>25%) drop in wage/salary rates for any “continuing employee” (as defined above, which excludes certain higher-paid employees) since the 1st Quarter of 2020
  • Despite significant layoffs and hours reductions initially, you are confident that you will be able to restore the FTE headcount to your February15, 2020 level by December 31, 2020 or earlier.

In Scenario #2, you will not be using the 8-week Covered Period. If your FTE numbers recover strongly by, say, September 1 (i.e. well before a full 24 weeks have elapsed), you might want to consider filing early. Doing so will lock in your recovery, and reduce the risk that a future downturn before the end of 24 weeks could sour your forgiveness numbers.

For Early PPP Loan Recipients Who
Can Satisfy a Hail Mary Exemption

SCENARIO #3 (FTE Drops but Nearly Recovers;
No Major Drop in Wage Rates)
:

  • Same situation as Scenario #2 except that the FTE headcount recovery doesn’t quite reach the February 15, 2020 level.

In Scenario #3, you will use the 24-week Covered Period and will want to study carefully the “FTE Reduction Exceptions” found in the Instructions to the PPP Schedule A Worksheet.[5] Think about whether you can omit from the FTE count any departed people who were employed at February 15:

  • Any employee who during the Covered Period was fired for cause or voluntarily resigned, but only if you did not within the Covered Period fill that vacant position with a new employee; and
  • Any laid-off employees who declined your good-faith, written offer to rehire them, if you were unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020. (Note that Borrowers are required to notify the applicable State unemployment insurance office of any employee who rejected a rehire offer, within 30 days of that employee’s rejection of the offer.)

If the FTE shortfall is due in significant part to reductions in average hours worked, think about whether under the “FTE Reduction Exceptions” a particular employee’s reduction in hours can be ignored:

  • She voluntarily requested and received a reduction of in hours; or
  • During the Covered Period, you made a good-faith, written offer to restore her reduction in hours, at the same salary or wages, and she rejected the offer

SCENARIO #4 (FTE Stable or Fully Recovers;
Major Drop in Wage Rates is 100% Restored)
:

  • PPP loan was funded before June 5, 2020
  • Salaries and wage rates in March/April 2020 were cut dramatically across-the-board in an effort to avoid layoffs
  • As a result of these across-the-board cuts (and some loss of headcount), payroll costs within the first 8 weeks did not meet the 60% standard; however, payroll costs within the relevant 24-week period (5-1/2 months) do exceed 60% of the total loan amount, and 5-1/2 months of covered rent, utilities, and mortgage interest is more than enough to cover the remaining loan amount
  • You are confident that for every “continuing employee” (as defined above) you will be able to restore salary/wage rates to their February 15, 2020 levels by December 31, 2020 or earlier
  • Your company did suffer some drop in headcount after February 15, 2020, but either this in each case was the result of voluntary resignations (for example due to the drop in wage rates) or else your total headcount returns to its February 15 level by December 31, 2020 or (if earlier) by the date of your forgiveness application

In Scenario #4, you will use the 24-week Covered Period and may want to consider holding off on submitting an application until after December 31, 2020. You will want to study carefully the Salary/Hourly Wage Reduction Safe Harbor described in the Instructions to the PPP Schedule A Worksheet. If you restore a continuing employee’s salary/wage rate to 100% of her February 15, 2020 level by the time you submit the application, you can disregard a >25% shortfall in her salary/wage rate during the Covered Period. (Note that if your across-the-board cuts did not amount to more than 25% of salary/wage levels at February 15, 2020, then these are not major enough to reduce the forgiveness amount. But if the cuts did exceed 25%, then be aware that restoring wages to less than the full 100% doesn’t qualify for this Hail Mary exemption.)

SCENARIO #5 (Headcount Slashed due to Covid-19
Mandates and Guidelines; Wage Rates Stable):

  • PPP loan was funded before June 5, 2020
  • Your business is a restaurant, a gym, a hotel, or another public-facing, employee-heavy facility that was forced, essentially, to sharply curtail its business for a significant length of time due to COVID-19 mandates and guidelines
  • As a result, you laid off a large portion of your employees, and have little chance of being able to operate at pre-February 15, 2020 levels before the end of the 24-week Covered Period
  • You did not cut salary/wage rates of continuing employees by more than 25% compared to February 15, 2020 levels

In this Scenario #5, you will want to consider carefully whether your company meets the following hardship standard:

The Borrower . . . , in good faith, is able to document that it was unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020, by the Secretary of Health and Human Services [HHS], the Director of the Centers for Disease Control and Prevention [CDC], or the Occupational Safety and Health Administration [OSHA], related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19. [emphasis added]

Under this scenario, you should use the 24-week Covered Period and should plan to apply on the EZ version of Form 3508 as soon as possible after that period elapses.

Self-Employed Owners; No Other Employees

All of the following scenarios differ depending on the tax status of the business and should be carefully analyzed with assistance from your tax advisor.

SCENARIO #6 (Schedule C Individual Owner;
No Other Employees):

  • PPP loan was funded before June 5, 2020
  • You are a self-employed individual who reports her income from the business on Schedule C of your federal income tax return
  • You had no employees in 2019, and thus did not include any employee salaries in the computation of average monthly payroll in your PPP loan application form

For Schedule C filers, your maximum PPP loan amount equals 2.5/12ths of your 2019 net profit from the business, as reported on your 2019 Schedule C. Due to caps imposed by Treasury/SBA,[6] the loan amount for such an applicant with no other employees cannot exceed $20,833 (i.e. 2.5/12ths of $100,000) and the maximum amount that can be forgiven for an 8-week Covered Period is $15,385 (i.e. $100,000 multiplied by 8/52). If your loan amount exceeds $15,385, you should use the 24-week Covered Period. In any case, the business should make compensation payments to you during the Covered Period that equal or exceed your full loan amount.

SCENARIO #7 (C Corp Owner-Employees;
No Non-Owner Employees):

  • Same situation as Scenario #6 except that the business is taxed as a C corp
  • This scenario can involve two or more owner-employees

In your loan application, payroll costs were limited to $100,000 of cash compensation payments per owner-employee plus the employer (C corp) share of (i) state and local payroll taxes, (ii) employee health insurance, and (iii) retirement contributions paid to the owner-employees. Thus, although the cash compensation portion of the loan amount was limited to $20,833 per person, the C corp’s share of those other payroll costs could have formed the basis for a higher PPP loan amount. During the 24-week Covered Period, use the loan proceeds to make covered payroll payments that consume the entire loan amount without exceeding the $20,833 cap on cash compensation to any owner-employee.

SCENARIO #8 (S Corp Owner-Employees;
No Non-Owner Employees):

  • Same situation as Scenario #6 except that the business is taxed as an S corp
  • This scenario can involve two or more owner-employees

In your loan application, payroll costs were limited to $100,000 of cash compensation payments per owner-employee plus the employer (S corp) share of (i) state and local payroll taxes and (ii) retirement contributions paid to those owner-employees; payroll costs here would not include any portion of owner-employee health insurance costs. During the 24-week Covered Period, use the loan proceeds to make payroll cost payments (other than health insurance costs) that consume the entire loan amount without exceeding the $20,833 cap on cash compensation to any owner-employee.

SCENARIO #9 (Partnership Owners;
No Non-Owner Employees):

  • Same situation as Scenario #6 except that the business is a partnership (or taxed as a partnership, such as most LLCs)
  • This scenario by definition involves more than one owner

The loan forgiveness amount for partnerships is highly complex, and should be discussed with your tax advisor. For purposes of this article, suffice it to say that the share of PPP forgiveness attributable to a given partner should be computed over at least an 11-week Covered Period, cannot exceed $20,833 for any partner, and should actually be distributed to the partners during the Covered Period in order to qualify.

Length of Covered Period; When to Apply

All of the foregoing scenarios assume that the business received funding of its PPP loan before June 5, 2020. That assumption means that the business can elect to use the original 8-week Covered Period. That assumption also is realistic – the majority of federal funds under this program were disbursed in April and May of 2020.

A business generally should not elect the 8-week period if a longer period is needed to expend the PPP loan on eligible costs. That usually will be the case if the business has cut its headcount at all or has made cuts in salary/wage rates.

If an early PPP recipient does not elect the 8-week period, then the default for the Covered Period is 24 weeks. However, Treasury/SBA have stated that a business need not wait until the end of the 24 weeks before submitting an application.[7]

If the business elects to file the application less than 24 weeks after the funding date, then – with one important exception – the numbers are computed through the date of the application.[8] The exception is that the salary/wage reduction calculation (the aggregate dollar amount by which employee salary/wages have been reduced by more than 25% compared to their Q1 2020 salary/wage rate) must be multiplied out to cover the entire 24-week period. In other words, filing early does not cut off an accumulating salary/wage reduction.

As some of the commentary above suggests, filing earlier than 24 weeks locks in the applicant’s numbers and helps avoid a situation where the facts subsequently change for the worse. Either way, remember that the 8-week numbers can still be used in a pinch. Even if the 8-week numbers are not ideal, they might turn out to be superior to the numbers that a sudden downturn might generate.

If the business chooses not to file early, then arguably it makes sense to wait past December 31, 2020 to file, especially if there is some aspect of its forgiveness application that is uncertain or unfavorable. The PPP rules have changed a lot, and it is possible that a later change in the legislation or in the Treasury/SBA rules and guidance could save the day or provide useful clarity. Of course, it also is possible that future changes in the political climate or SBA audit procedures might leave you wishing you had submitted your forgiveness application long before.

* * *

One final note. The suggestions in this article are based on currently available guidance from Treasury/SBA. Be wary of any future changes in guidance when attempting to apply the foregoing scenarios to your particular circumstances.


[1] A useful compilation of guidance from the Treasury Department and the Small Business Administration is found at Treasury’s CARES Act website page: https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses.

[2] In the case of a business that funds its payroll weekly or biweekly, SBA allows the company to elect an “Alternative Covered Period” that better matches the company’s payroll period. Reference in this article to the “Covered Period” also means the “Alternative Covered Period” where relevant.

[3] Bear in mind that Treasury/SBA has imposed a $100,000 annualized cap on cash compensation in its definition of “payroll costs,” which means that for forgiveness purposes the cash compensation portion per employee cannot exceed $1,923 per week (i.e. $100,000 divided by 52 weeks). In the case of employees who also are owners, Treasury/SBA has imposed an overall cap of $20,833 on cash compensation (equal to 2.5/12ths of $100,000). This owner cap kicks in by around 11 weeks (i.e. $20,833 divided by $1,923/week); thus a highly-compensated owner’s salary is doubly undercounted for Covered Periods of 11 weeks or more. In many scenarios, however (including this Scenario #1), the owner cap makes no difference because there typically will be plenty of other eligible payroll expense (together with other covered costs) to support forgiveness of the entire loan amount.

[4] The PPP Flexibility Act dropped the minimum payroll cost percentage from 75% of the forgiveness amount to 60%. The number of days in an 8-week period (56) is 73.6% of the number of days in a 2.5 month period (76). Thus in an 8-week period a business that incurs payroll costs at a rate per day identical to that in 2019 will fall just short of the 75% minimum. Dropping the minimum to 60% means that the same business would need 46 days to meet the 60% minimum – an amount well less than the 56 days in an 8-week period. But the Flexibility Act also increased the normal Covered Period to 24 weeks (168 days). Over a 168 day period, a business can satisfy the 60% minimum even if its daily payroll costs drop by two-thirds compared to 2019.

[6] See footnote 1 above.

[7] “A borrower may submit a loan forgiveness application any time on or before the maturity date of the loan—including before the end of the covered period—if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness.” Interim Final Rule on Revisions to Loan Forgiveness Interim Final Rule and SBA Loan Review Procedures Interim Final Rule (originally posted 6/22/2020).

[8] We don’t have guidance yet on whether a business can end its Covered Period at the end of a payroll period and then submit the application a few days later without having to update its numbers past that payroll period. In the absence of such guidance, it seems safer to project your numbers through the end of the payroll period and then file the next business day.

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