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Paycheck Protection Program Loans: A First, Deep Dive

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covid19 paycheck loans

This article summarizes certain portions of the Paycheck Protection Program contained in the recently enacted CARES Act. It focuses particularly on a few of the technical questions relating to PPP loans and the possible forgiveness of a portion of such loans. It is highly likely that some of the information in this article will need to be updated or changed, based upon future technical amendments, regulations or formal guidance.

A. LOAN AMOUNT CALCULATION

  1. Multiply the average total monthly “payroll costs” incurred during the 1-year period prior to loan origination by 2.5. However, it is important to note that the PPP Loan Application says to use the Applicant’s “average monthly payroll for 2019”.
    1. “Payroll costs” include: (i) salary, wage, or similar compensation; (ii) payment for vacation, parental, family, medical, or sick leave; (iii) allowance for dismissal or separation; (iv) payment required for group health care benefits, including health insurance premiums; (v) payment of any retirement benefit; and (vi) payment of state or local taxes assessed on the compensation of employees. Section 1102(a)(2)(A)(viii)(I).
    2. “Payroll costs” do not include: (i) the compensation of an individual employee in excess of $100,000 based on an annual salary; (ii) the employer portion of FICA and FUTA tax; (iii) qualified sick leave wages where a credit is taken under the FFCRA; and (iv) qualified family leave wages where a credit is taken under the FFCRA. Section 1102(a)(2)(A)(viii)(II). The employee’s FICA and FUTA taxes are not included because they are costs to the employee.

B. BASIC LOAN FORGIVENESS CALCULATION

  1. Add the total “payroll costs” (as determined in Section A(1), above), rent expense and utility expense incurred during the 8-week period following loan origination.
    1. “Payroll costs” for purposes of loan forgiveness should only include compensation up to $100,000 annualized. This runs parallel with the $100,000 threshold used when calculating the loan amount in Section A(1), above. Section 1106(a)(8).
    2. Due to the amounts appropriated by Congress in the CARES Act and based on the Treasury Department’s estimation of how many employers will participate in PPP, it is cautioning that the forgiveness program should cover 100% of payroll costs, but might cover as little as 25% of other allowable costs (rent, utilities, etc.).
    3. In accordance with guidance issued by the Treasury Department, any amounts not forgiven will be payable over two years (commencing after a six-month deferral period) at an interest rate of 1%.

C. LOAN FORGIVENESS REDUCTION CALCULATIONS

  1. Reduction Based on a Reduction in the Number of Employees.
    1. The loan forgiveness amount (as per Section B(1)) is reduced to the amount determined by multiplying the original loan forgiveness amount by a fraction, the numerator of which is the average number of full-time equivalent employees (“FTEEs”) per month (calculated by the average number of FTEEs for each pay period falling within a month) during the 8-week forgiveness period, and the denominator of which is either the average number of FTEEs per month employed from February 15, 2019 to June 30, 2019 or the average number of FTEEs per month employed from January 1, 2020 until February 29, 2020 (whichever is more favorable to the borrower). Section 1106(d)(2). Please note that there may be a technical glitch in the CARES Act with respect to this formula. The above is based upon how we, and most commentators, are interpreting the provisions, but we may need to await technical amendments or formal guidance to be certain.
    2. There is also a potential for a reduction in the forgiveness amount when there is a decrease in excess of 25% in the total salary or wages of any employee who did not make more than $100,000 annualized during any pay period in 2019, when compared to the most recent full quarter. The reduction in loan forgiveness is equal to that amount of salary or wage reduction for such employee that is in excess of the 25% threshold. Section 1106(d)(3).
    3. As of the date hereof, there is no detailed guidance or regulations with respect to the loan forgiveness aspects of PPP. It appears that any borrower will have to APPLY for forgiveness and provide detailed information in support of that application. In other words, the borrowing process is streamlined, but the forgiveness process will not be.

D. EXAMPLES

  1. Assumptions.
    1. The applicant borrows $2,000,000 (2.5 x $800,000).
    2. Average Monthly Payroll Costs (for both historical period and 8-week period): $800,000.00.
    3. Average Monthly Rent Costs (for 8-week period): $50,000.00.
    4. Average Monthly Utility Costs (for 8-week period): $5,000.00.
    5. Average Monthly Number of Employees (for historical period): 100 employees.
    6. Based upon subsections (a) through (d), above, the total “allowable” expenses for the 8-week period that begins when loan funding occurs is $1,710,000.
    7. The compensation paid to the applicant’s employees is not reduced (excluding the reduction of compensation paid to any employees making more than $100,000 per year). Thus, a possible reduction based upon Section C(1)(a), above, is not included in the examples.
  2. First Scenario: No Decrease in Number of Employees.
    • Under this scenario, the applicant is eligible for loan forgiveness in the amount of $1,710,000 (with a balance of $290,000 to be paid back), assuming no appropriation limitations, or $1,610,000 forgiven (with a balance owed of $390,000) if the anticipated reduction due to appropriation limitations occurs. The difference in the amount borrowed versus the amount forgiven is primarily a function of the loan amount being based upon the applicant’s average monthly payroll x 2.5, while the loan forgiveness is based upon the allowable expenses over an 8-week period.
  3. Second Scenario: Five Employees Laid Off.
    • Under this scenario, the loan forgiveness amount referenced in the First Scenario would be decreased by $85,500, thus making the anticipated loan forgiveness amount $1,624,500 and the balance owed $375,500 (or a forgiveness amount of $1,542,000 and balance owed of $458,000 if the possible appropriation limitations occur). With respect to the reductions set referred to above and in Section D(4) that are based upon anticipated appropriation limitations, such amounts are for illustration purposes, since the exact method for calculating such reductions will depend upon future guidance and regulations.
  4. Third Scenario: Ten Employees Laid Off.
    • Under this scenario, the loan forgiveness amount referenced in the First Scenario would be decreased by $171,000, thus making the anticipated loan forgiveness amount $1,539,000 and the anticipated loan balance owed $461,000 (or a forgiveness amount of $1,456,500 and balance owed of $543,500 if the possible appropriation limitations occur).

E. CONCLUSION

Before making any decisions regarding whether or not to apply for a PPP loan, we urge you to consult with your expert advisors. We at Isaac Wiles stand ready to help.

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