NCET Biz Tips: Paycheck Protection Program Repayment

by Michael D. Bosma, Principal at CliftonLarsonAllen

NCET helps you explore business and technology

Generally, the Paycheck Protection Program (PPP) “loan” amount you received was based on 2 ½ months of 2019 W-2 salary with no employee with more than an annualized income of $100,000. 

The funds were to be used for payroll, mortgage interest, rent and utilities.

All expenses that fall under those categories are eligible for forgiveness, and that’s also why savvy business owners need to pay attention to the fine print to make sure there are no surprises when the bank certifies how much is required to be repaid. Especially since the certification will generally occur after the window of time to actually do anything about it.

The following conditions apply:

1. 24 weeks of coverage

Eligible expenses are those that are incurred over 24 weeks, starting from the day the first payment was made by your lender. Note that if you received your PPP loan before June 5, you can still use an 8-week period.

2. The 60/40 rule

At least 60% of your loan must be used for payroll costs. Payments to independent contractors cannot be included in the payroll costs. Your forgivable amount will scale in proportion to the amount you spend on payroll, up to the total loan amount.

3. Staffing requirements

You must maintain the number of employees on your payroll.

Here is the calculation you can use to determine if you’ve met this requirement:

First, determine the average number of full-time equivalent employees you had for:

  • The 8-week period following your initial loan disbursement, (A)

  • February 15, 2019 to June 30, 2019, (B1)

  • and January 1, 2020 to February 29, 2020. (B2)

Take A and divide that by B1. Do the same with B2. Take the largest number you obtain. If you’re a seasonal employer, you must divide by B1.

  • If you get a number equal to or larger than 1, you successfully maintained your headcount and meet this requirement.

  • If you get a number smaller than 1, you did not maintain your headcount and your forgivable expenses will be reduced proportionately.

Exemptions on rehiring employees

Employees who were employed as of February 15, 2020, and were laid off or put on furlough may not wish to be rehired onto payroll. If the employee rejects your re-employment offer, you may be allowed to exclude this employee when calculating forgiveness.

To qualify for this exemption:

  • You must have made an written offer to rehire in good faith

  • You must have offered to rehire for the same salary/wage and number of hours as before they were laid off

  • You must have documentation of the employee’s rejection of the offer

If any of these conditions apply to an employee, you can also qualify for an exemption:

  • They were fired for cause

  • They voluntarily resigned

  • They voluntarily requested and received a reduction of their hours

You may also be required to demonstrate you were unable to hire similarly qualified employees for unfilled positions, or document that due to safety requirements, you were unable to return to normal operating levels. Note that employees who reject offers for re-employment may no longer be eligible for continued unemployment benefits.

4. Pay requirements

You must maintain at least 75% of total salary.

This requirement will be individually assessed for every employee that did not receive more than $100,000 in annualized pay in 2019.

If the employee’s pay over the 8 weeks is less than 75% of the pay they received during the most recent quarter in which they were employed, the eligible amount for forgiveness will be reduced by the difference between their current pay and 75% of the original pay.

5. Rehiring grace period

You can rehire any staff that were laid off or put on furlough and reinstate any pay that was decreased by more than 25% to meet the requirements for forgiveness, if those changes were made due to COVID-19 between February 15 and April 26. You have until December 31st to do so.

In conclusion, spending your PPP funds on the right things is straightforward enough. But things get more complicated when you don’t keep your headcount. Applications for loan forgiveness will be processed by your lender who will have you complete a PPP Forgiveness Application. The lender has 60 days to respond. The rules are complicated.  We recommend working with a qualified CPA to make sure you don’t have any repayment surprises!

Learn about Paycheck Protection Program Repayment at 3 pm NCET’s Biz Cafe Online on July 22, 2020. NCET is a member-supported nonprofit organization that produces educational and networking events to help people explore business and technology. More info at www.NCETcafe.org

Michael D. Bosma is Principal at CliftonLarsonAllen (www.claconnect.com) and has been helping many business owners navigate this PPP process.  CLA focuses on helping closely held businesses find success in a difficult economy.

Maren Rush