Many of you have received your PPP and naturally want to ensure that the maximum amount is ultimately forgiven – ideally 100%!
Here is a more detailed explanation of how and when you need to spend your funds, based on the latest Treasury Department guidance as interpreted by the SBA. This guidance changes literally every day. Please know that I am doing my darndest to give you accurate information, but I simply cannot guarantee that the rules today will be the rules tomorrow. It is quite a challenge for all of us to be working in this quicksand environment!
What I do know as of today is that you have to spend the funds within 8 weeks after the loan is disbursed by your bank – but no later than June 30 to be on the safe side, because of a definition in the CARES Act that refers to the “covered period” Feb 15, 2020 to June 30, 2020. If your loan was disbursed May 5 or later, then you might have fewer than 8 weeks to use the money. This definition of the “covered period” (which implies a June 30 deadline) is one that many industries are lobbying to have extended, but as of today, June 30 is the end of the “covered period.”
To be clear, there is no guidance on what is meant by “spending.” Does it include wages earned before June 30 but paid later? The rules do not address this. I recommend you actually pay the funds out by June 30 to be on the safe side, even if you are an accrual basis taxpayer.
You already know that at least 75% of your loan must be spent on payroll costs to be forgiven. Payroll costs include expenses incurred by the employer: wages, vacation, sick leave, group health, retirement, and state taxes (in Washington, that’s L&I, ESD, and PFML). However, federal payroll taxes are excluded specifically, meaning payroll costs do NOT include the employer’s portion of Social Security and Medicare (FICA taxes), nor do they include Federal Unemployment (FUTA).
Furthermore, you have to pay each employee who made under $100K at least 75% of their earnings in the last full quarter they worked. As pointed out in an earlier email, this makes no sense mathematically. The forgiveness period is 8 weeks, but the CARES Act requires a comparison to a quarter, which is typically 13 weeks, but can also be defined as 12 weeks (those crazy accountants!). This is a rule that is expected to be changed, but for now, this is what it says. You can pay employees hazard pay or bonus pay if you’d like, to get up to the 75% minimum. Or you can pay them their normal wages and be prepared to pay back part of the loan if this 75% rule does not change.
You cannot give yourself a big fat raise to use up the funds. If you pay yourself a salary, that amount must be no more than 8 weeks’ worth of what you paid yourself in 2019.
You have to maintain your headcount. The rules have been amended so that headcount is based on “full time equivalent employees.” Here is how to do the math:
- Calculate your FTEs during the eight week “covered period.” For example, if you have 10 full time employees and 6 half time employees, you have 13 FTEs. (Look for a post on how to do the math very soon.)
- Calculate your average FTEs between February 15 and June 30, 2019
- Calculate your average FTEs between January 1 and February 29, 2020.
- As long as the current FTEs is the same as or more than either of the prior periods, you are fine. In fact, as long as the FTE count on June 30 is the same or more, you are fine – you don’t even need to have had all the employees on the payroll the entire 8 weeks.
Is your head spinning yet?
And here’s something new as of May 3: If you make a written, good faith offer to re-hire an employee at the same salary and the same number of hours, and if that employee rejects the offer, then you can still count that person as one of your current FTEs for purposes of loan forgiveness. It’s not your fault that he or she would rather stay home watching Law and Order reruns than go back to work!
If you are a sole proprietor, your personal “payroll cost” will be owner’s compensation replacement, which is calculated as 8/52 of the net profit on your 2019 Schedule C.
But enough about payroll! What about the other 25% that you can spend on rent, utilities, and mortgage interest?
Rent is forgivable if there was a lease in place as of February 15, 2020. SBA has not explicitly said so, but some of the examples they have given lead one to believe that leases of personal property might be included too. Stay tuned for more guidance on this.
Utilities are defined by the CARES Act as electricity, gas, water, transportation, telephone or internet access for service which began prior to February 15, 2020. This definition has now been changed to also include gas used when driving a business vehicle. Perhaps this is what they mean by “transportation.” This will NOT apply to gas purchased for your personal vehicle, even if you use it partially for business. There may be other things added to the definition of utilities (e.g. garbage collection, security monitoring) but these are not included right now.
Mortgage interest refers to the interest paid on a loan secured by your business property. Since all kinds of property can be subject to a mortgage (equipment financing loans, for example) it stands to reason that you could spend the PPP on interest paid for both real and personal business-owned property. The rules just say “mortgage interest.”
At the end of the day, the documentation and interpretation of what qualifies will really be up to the bank that funded your PPP.
As recommended in the last email, continue paying your employees and keep reading my emails! You could also take a stab at calculating your FTEs for the two time periods described above, as you will need that information eventually. If MBBMS does payroll for you (including through a payroll service provider), we will be happy to do that math for you.