There is  some new guidance on the limits and restrictions of the PPP loan proceeds in order to shoot for 100 percent loan forgiveness.

There are two areas that you can spend the loan on – at least 75 percent of the loan has to be used for Payroll Costs, and no more than 25 percent can be used for Non-Payroll Costs.  Together, these are your covered costs.

Payroll Costs

Payroll costs are considered incurred on the day the employee’s pay is earned. And Payroll Costs are considered paid on the day paychecks are distributed or the day the employer originates an ACH transaction to the employee. That means you can pay payroll costs even after the 8-week covered period. In other words, payroll paid during the Covered Period counts toward loan forgiveness, but so does payroll which is incurred during the Covered Period but which is not paid until the first regular payroll period after the Covered Period.

Fluctuating Work Weeks For those of us paying on a bi-weekly or more frequent basis, we know that there may be times during our Covered Period when we don’t have payroll for some workers.  This is especially true for sales representatives or installers (assuming they are W2 employees, of course) on commission or piece-rate structures. For purposes of calculating Payroll Costs (and only Payroll Costs), you can begin your Covered Period on the first day of your pay period, as opposed to the day you first received the PPP loan proceeds.  For example, if you received the loan proceeds on Day 1, but your next pay period does not start not until Day 5, then you can use Day 5 as the beginning of your Covered Period for purposes of calculating Payroll Costs for loan forgiveness.

Maximum Payroll Per Worker/Owner The maximum payroll for any one individual worker during the Covered Period is $15,385. You can increase the compensation to be paid to employees, so long as you do not exceed the cap.  However, owner-employees, self-employed individuals, and self-employed partners’ maximum compensation is 8/52 of 2019 compensation, and also capped at $15,385 per person. 

Health Insurance  As expected, eligible health insurance costs that are paid or incurred during the Covered Period should be fine. That includes self-insurance programs and employer-sponsored group health plans, reduced by employee contributions. Interestingly, it seems that accrued insurance costs paid during the Covered Period will count toward loan forgiveness as well.

Retirement  There does not appear to be any limitation on retirement contributions, even as to including accrued costs, so long as it is paid during the Covered Period.  This means that you may wish to consider paying  2019 accrued retirement contributions and use those costs towards your 75% minimum Payroll Cost calculation for loan forgiveness.

Non-Payroll Costs

Remember, here we are referring to rental payments for real property or equipment leases,  vehicle leases, utility payments and interest payments – as long as all of these debts were due to contractual obligations that were in place before February 15, 2020.  And when we refer to utilities, we are discussing a whole range of costs, including, for example, electricity, gas for business vehicles, water, telephone, internet, and transportation costs – again, all so long as the agreements for the providers of these services, if any, were in place before February 15, 2020.

Non-Payroll Costs can be paid on or before the next regular billing date, even if that falls outside of the Covered Period. Moreover, while Non-Payroll Costs can not be pre-paid, it does appear that Non-Payroll Costs accrued from before the PPP loan was funded can be paid using the loan proceeds and as long as the payment occurs during the Covered Period, it can be used towards the loan forgiveness calculation.

Staffing Level Requirements

We knew that loan forgiveness was going to be tied to bringing your full-time staffing back up by the end of the Covered Period to the same level it was at before the impact of Covid-19.  More to the point, your full-time head count should be at or above the levels you had between February 15, 2019 and June 30, 2019 or between January 1, 2020 and February 29, 2020.  You can choose which time period gives you an easier comparison (although seasonal employers have to use the 2019 period). 

Full-Time and Part-Time  A full-time worker is an individual supplying at least 40-hours of work per week.  A borrower can either choose to count two part-time workers as one full-time worker, or you can treat a worker as partial full-time based on the percentage of a 40-hour work week performed.  For example, someone working 30-hours would be ¾ of a full-time worker.

Bad Workers  As we noted in a prior Alert, your loan forgiveness is not going to be reduced if you offered in writing to re-employ a worker in good faith at the same job and pay and they refused.  You have to be able to document this actually occurred, of course – and you may want to remind the worker that if they turn down an offer of employment, then they can’t technically continue to obtain unemployment benefits without committing fraud.  In addition, your loan forgiveness is not going to be reduced for any workers who voluntarily resigned, were fired for cause, or requested a reduction in hours worked.

Staffing Safe Harbor  There is a two-step safe harbor test you may be able to meet, which would allow you to forget all about the above concerns:  First, you had more full-time employees on February 15, 2020 than the average number of full-time employees you had between February 15 and April 26, 2020. Second, you had at least as many full-time employees at the end of your Covered Period that you had on February 15, 2020.  If you meet both of those requirements, you are in the clear as to staffing.

Payroll Level Requirements We knew that loan forgiveness was also going to be based on bringing your overall payroll back up to a pre-Covid-19 level by the end of the Covered Period. Somewhat surprisingly, it appears the wage reduction calculation is going to be computed on an employee-by-employee basis – although employees who earned more than $100,000 annualized in 2019 are excluded from this calculation.

For all other employees, wages earned from January 1 – March 31, 2020, should be annualized, and there is a worksheet on the Loan Forgiveness Application that can be used to walk through this process and determine if there will be a reduction in your loan forgiveness.Payroll Safe Harbor   If you do run into loan forgiveness issues due to payroll for a specific employee, there is a safe harbor test you may be able to meet: First, the annualized wages for that employee from February 15 – April 26, 2020, must be less than the annualized wages on February 15, 2020.  Second, the employee’s annualized wages at the end of your Covered Period need to be at least as much as the employee’s February 15, 2020, annualized wages. If you meet both of those requirements, you are in the clear as to loan forgiveness reduction for that employee’s wages. QR


MARIE FRENKEL May 26, 2020 - 5:00 pm

As a sole proprietor who submitted a Schedule C to obtain PPP funds, what do I have to present to substantiate this Schedule C in order to forgive my loan?

Patrick OToole
Patrick OToole June 8, 2020 - 10:22 am

Marie: For many people, PPP loans are originated by their regular bankers. If you are working with your regular banker, they will tell you what documents to provide. If you applied more directly through the government website, you can get your list of required documents there as well. The good thing is now that forgiveness period has been expanded. Your covered period is 24 weeks.

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