• Derek Carter

Forgiveness Clarity—We Are Flying Blind

Over the past couple weeks I have discussed the need for guidance related to how forgiveness of the PPP loans will end up being calculated. I have spent most of my time talking about the lack of definition related to full time equivalent employees (FTEE). I’ve done this for two distinct reasons. The first is my belief that the FTEE definition will be the most significant factor that drives overall forgiveness for small businesses. The second is simple - our customers find this to be the most concerning piece of the PPP loan forgiveness discussion.


Clearly there is a lot more to forgiveness than the FTEE definition. I want to briefly explore several of those items. Before I do that though, let me give everyone a little hope. Hope may be the wrong word. Clarity is better. Clarity is coming.


The CARES Act states that “not later than 30 days after the date of enactment of this Act, the Administrator shall issue guidance and regulations implementing this section” (this section is Sec. 1106 Loan Forgiveness. The 30 days will be up on April 26, so barring some unforeseen circumstances we should get long-awaited answers soon.


So what do we know about forgiveness? Not nearly enough. Even what we think we know could change in the coming days, so stay tuned.


We know the following must take place to have the possibility of achieving full forgiveness:


  1. Loan proceeds must be spent within 8 weeks from receiving the funds.

  2. Loan proceeds must be spent on approved costs, which include payroll, rent, utilities, and interest on mortgage obligations

  3. 75% of the loan proceeds must be spent on payroll costs


That is simple enough, so what do we need clarity on? Most of Sec. 1106 Loan Forgiveness. I will touch on the items I think carry the most weight below, but by no means is this a full list.


1. What does it mean by “costs incurred and payments made” during the Covered Period?


Near the beginning of Sec. 1106 Loan Forgiveness we find the following statement, “An eligible recipient shall be eligible for loan forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made during the covered period”.


It seems there are two possible interpretations of this statement. The first being the cost must be BOTH incurred and paid during the covered period. This interpretation is troubling mainly because of payroll, but applies to all approved expenses. Let’s assume your covered period ended on June 11. The last pay period near June 11 ends on June 10. Payroll payments related to the pay period ended June 10 are pulled from your account on June 12 In this example it would appear that the pay period ended June 10 would be excluded from the calculator because although the costs had been incurred during the covered period, the payment of that cost had not been made by June 11. You could apply the same theory to the beginning of the covered period or to other approved expenses as well.


The second interpretation allows for more flexibility and opportunity for the business owner. This interpretation would read as the cost can be EITHER incurred or paid during the covered period. It seems unlikely this interpretation would end up as the rule in the final guidance.


2. What is the definition of full-time equivalent employee?


I have mentioned this on other posts and in webinars and I think it tells the whole story. I’ve received three unique definitions of FTEE from various lenders we work with. There is clearly no formal definition related to FTEEs as it relates to the PPP today.


Additionally, we need the definition to begin the calculation related to the “reduction based on reduction in number of employees'', but that is only one piece of the puzzle. We need guidance about various situations employers will find themselves in as it relates to headcount. What about employees who quit? Or were terminated for cause - during the covered period or leading up to it? Or were/are furloughed? And every other possible scenario that will impact the headcount calculations.


3. How do we really calculate the “reduction relating to salary and wages”?


This provision is noble in the sense it is trying to ensure employers bring employees back at no less than 75% of what they had been making in the most recent full quarter in which they were employed. That said, the administrative burden this will place on small business owners is off the charts. Additionally, it doesn’t address the same issues as we pointed out in #2. What about employees that quit, were terminated for cause, were furloughed, etc?


4. What are the tax consequences to the PPP?


We know that the IRS will deem loan forgiveness on PPP loans cancelled debt, so you won’t be taxed on it. What about the expenses you pay with PPP proceeds? Will those be considered deductible expenses come 2020 tax time?


5. Unemployment compensation is better for my employees than them coming back - how does that impact the above calculations?


Many business owners I speak with are worried their employees would prefer to stay on unemployment because they are receiving more than if they were working. Will businesses be punished related to forgiveness if they can’t get their employees back in a timely manner or can’t hire replacements fast enough?


6. Can I pay my employees more than what they were making before?


Business owners are already planning to get creative with compensation in order to get people back on payrolls (see #5), planning on wage increases or bonuses to incentivize employees to get back to “work”. They are also considering bonusing employees as a way to enhance employer/employee relationships during this very challenging time. There is no guidance stating paying employees more is a problem, but more definitive guidance would be nice.


Today, April 23, we expect additional funding for the PPP to pass the House and be signed by the President. Getting that done will be a major help to many small businesses throughout this country and couldn’t be more important.


Equally important though is the need for the SBA and Treasury Department to put out clear and concise guidance on CARES Act Sec. 1106 Loan Forgiveness as quickly as possible. Business owners need to make decisions related to how they structure their businesses and they need to do it now. Today they sit and wait, afraid of making decisions they will be punished for in 8 weeks. Let’s hope we don’t have to wait three more days to get the guidance we need.


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