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    More on PPP Loan Forgiveness

    Submitted by Joel Shabsin, CPA

    On Friday, May 22nd, the SBA issued a 26 page final interim rules regarding PPP loan forgiveness. But things are changing rapidly in this area and it looks like congress may get involved in changing some of the rules

    As of the day of this writing the Senate is considering a vote that would double the loan forgiveness period to 16 weeks and the House is expected to vote on standalone legislation that would extend the loan forgiveness period to as long as 24 weeks and also eliminate the rule requiring PPP borrowers to spend at least 75% of the funds on payroll costs to qualify
    for full loan forgiveness. A separate Senate bill would also expand the loan forgiveness period to 24 weeks and eliminate the 75% rule.

    Critics of the eight-week loan forgiveness period argue that it isn’t flexible enough for businesses that have dealt, and in many cases continue to deal, with state and locally mandated stay-at-home orders that have kept many types of businesses closed or operating at significantly reduced capacity.

    Critics of the 75% rule argue that it does not do enough to accommodate businesses whose employees haven’t been able to work because of government-imposed business closures.

    Under these circumstances it’s extremely difficult to advise clients who received the PPP loan about the loan forgiveness program as the SBA, Congress, the IRS and other government agencies each have different thoughts on the forgiveness regulations that were not very well defined in the original CARES Act.

    However, there is one thing that clients must be aware of that probably will not change in any upcoming legislation or government agency clarifications. It was included in the CARES Act and was a large part of the 26 page final interim rules issued on May 22nd.

    Under the CARES Act, loan forgiveness could be reduced if the number of full time equivalent employees (FTE’s) during the covered current 8 week period decreased as compared to a base period number of FTE’s. The borrower is allowed to choose the base period to use for the FTE calculation, either February 15, 2019 through June 30, 2019 or January 1, 2020 to February 29, 2020. If the average number of FTE’s during the covered
    period is less than the base period, the eligible expenses available for forgiveness is reduced proportionally by the percentage reduction in FTE employees.

    SBA gives an example where the borrower had 10 FTE employees during the base period they selected and only had 8 FTE employees during the covered period, the percentage of FTE employees declined by 20% and therefore only 80% of eligible expenses are available for forgiveness. The same reduction applies to a reduction in employee salary and wages in the covered period as compared to the base period. The CARES Act and the SBA pronouncement also talk about one way to avoid the reduction of forgiveness due to a reduction of FTE’s or a reduction in salaries and wages during the covered period. There is a statutory exemption for borrowers who rehire employees and/or restore salary levels by June 30, 2020. The SBA and Treasury Department are interpreting this loosely by expanding the exemption for borrowers who have offered to rehire employees or restore employee hours or pay rates, even if the employees do not accept the offer.

    To qualify for this exemption a borrower must:

    1. Make a good faith written offer to rehire the employee during the current 8 week covered period
    2. Offer the employee the same wage or salary and the same number of hours the employee had in the last pay period the employee worked.
    3. Have the offer rejected by the employee.

    The borrower must document the written offer and its rejection by the employee and must inform the state unemployment insurance office of the employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.

    IDES has a form on their website for employers to use to notify the department of employees who reject the return to work offer along with instructions including where to send the form. See and look under employers on their home page. If clients do not report the rejected offer, reductions in FTEs will reduce their forgiveness for the PPP loan. When IDES receives the form, the employee will lose their eligibility for continued benefits.

    Currently it appears the exemption for reductions in FTEs or in salary and wages will survive any changes Congress makes to the PPP forgiveness program so make sure your clients understand that if they reduced FTEs or salary and wages they take advantage of the above exemption from reduction in forgiveness and document, document, document reemployment offers and reemployment rejections.

    Commercial Members