On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The Paycheck Protection Program (“PPP”) is an integral part of the CARES Act and currently provides almost $349 billion to eligible businesses, nonprofit organizations, and veteran organizations. These funds are to provide financial assistance to qualifying entities in response to economic difficulties caused from the COVID-19 pandemic.
Lenders have been accepting PPP loan applications since April 3, 2020, and loan applicants are starting to receive their approvals from lenders. Unlike other traditional loans, having the loan forgiven will not count toward taxable income. Your focus should now turn to maximizing loan forgiveness.
Once the loan is funded, you have eight weeks to spend the money on authorized expenses. The 8-week period begins on the date the lender makes the first disbursement of the loan. The lender must make the first disbursement of the loan no later than 10 calendar days from the date of the loan approval.
Employer A had 75 FTEs per month from February 15, 2019 to June 30, 2019. From January 1, 2020 to February 29, 2020, Employer A had 70 FTEs. Employer A received a PPP loan originating on April 13, 2020. For the 8 weeks starting on April 13, Employer A had an average of 65 FTEs. No additional employees are re-hired until July.
Employer A will choose the lower of 75 or 70 as its baseline FTE count. The maximum percentage of loan forgiveness is 65/70 = 92.86%.
Employer A hires 5 FTEs back before June 30, 2020. The original decrease in FTEs happened before April 25, 2020. With these facts, there is no reduction in the amount of potential loan forgiveness due to a reduction of FTEs since the FTE count matches the FTE count from January 2020 to February 2020.
After the eight weeks, you will need to submit a request to the lender who is servicing the loan. The request will include all documents supporting the spending of the funds, number of full-time employees, and compensation levels. The lender will have 60 days to decide on forgiveness.
We highly recommend contacting your bank as early as possible after your funding has been approved to determine the appropriate loan forgiveness documents. As with the calculation method of the loan amount, we expect there to be some differing opinions and guidance regarding the required documentation in the near-term, so we encourage you to over-document and track everything in as much detail as possible.