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The Paycheck Protection Program (PPP) enables small businesses to cover certain payroll and other costs. Businesses with fewer than 500 employees are eligible to receive loans of as much as $10 million. Loans are calculated by multiplying an employer's monthly payroll times 2.5. The loans are completely forgiven, tax-free, if the funds are spent on payroll, rent and certain other expenses in the two months following funding of the loan.
 
  
This program is incredibly complex, and was developed under significant pressure. Limited funds were available to be allocated, and businesses have been aggressive in pursuing them. The Small Business Administration (SBA) struggled to give banks guidelines in timely fashion, becasuse the CARES Act calls for disbursement more or less immediately. Banks were swamped with applicants, and initially catered to their proven customers to reduce the chances of holding the bag when the loans were forgiven. Underwriting was limited, and rushed. Multiple changes were made in application forms and standards, and deadlines were missed. Relative chaos has ensued.
+
The Paycheck Protection Program (PPP) enables small businesses to cover certain payroll and other costs. Businesses with fewer than 500 employees are eligible to receive loans of as much as $10 million. Loans are calculated by multiplying an employer's monthly payroll times 2.5. The loans are completely forgiven, tax-free, if the funds are spent on payroll, rent and certain other expenses in the following funding of the loan.
 +
 
 +
This program is incredibly complex, and was developed under significant pressure. Limited funds were available to be allocated, and businesses have been aggressive in pursuing them. The Small Business Administration (SBA) struggled to give banks guidelines in timely fashion, because the CARES Act calls for disbursement more or less immediately. Banks were swamped with applicants, and initially catered to their proven customers to reduce the chances of holding the bag when the loans were forgiven. Underwriting was limited, and rushed. Multiple changes were made in application forms and standards, and deadlines were missed. Relative chaos ensued. A second round of funding was required and eventually many small businesses did get the loan.
  
 
Full examination of the CARES Act and its implementation is beyond the scope of this guide. Any business serious about this program must contact its accountant and banker, and be extremely proactive to find success in the near future. But here are the basics.
 
Full examination of the CARES Act and its implementation is beyond the scope of this guide. Any business serious about this program must contact its accountant and banker, and be extremely proactive to find success in the near future. But here are the basics.
 +
 +
===General Terms and Eligibility Requirements===
  
 
The types of businesses and organizations eligible for a PPP loan include:
 
The types of businesses and organizations eligible for a PPP loan include:
  
 
<ul>
 
<ul>
<li>Small business concerns, as well as any business concerns, a 501(c)(3) nonprofit organization, a 501(c)(3) veterans organization, or Tribal business concern described in section 31(b)(2)(C) that has fewer than 500 employees, or the applicable size standard in number of employees for the North American industry Classification System (NAICS) industry as provided by SBA, if higher.</li>
+
<li>small business and other business concerns, 501(c)(3) nonprofits, 501(c)(3) veterans organization, tribal business concerns with fewer than 500 employees described in section 31(b)(2)(C) of the Small Business Act, or the applicable size standard in number of employees for the North American Industry Classification System (NAICS) as provided by SBA, if higher;</li>
<li> Individuals who operate a sole proprietorship or as an independent contractor and eligible self employed individuals.</li>
+
<li>sole proprietors, independent contractors and eligible self-employed individuals;</li>
<li> Any business concern that employs not more than 500 employees per physical location of the business concern and that it is assigned a NAICS code beginning with 72, for which the affiliation rules are waived.</li>
+
<li>any business concern that employs fewer than 500 employees per physical location and that is assigned an NAICS code beginning with 72, for which the affiliation rules are waived.</li>
<li> Affiliation rules are also waived for any business concern operating as a franchise that is assigned a franchise identifier code by the Administration, and company that receives funding through a Small Business Investment Company.</li></ul>
+
</ul>
 +
 
 +
Affiliation rules also are waived for any business concern operating as a franchise that is assigned a franchise identifier code by the administration, and any entity that receives funding through a small business investment company. (SBICs are privately owned outfits licensed and regulated by the SBA.)
 +
Affiliation rules are important when the SBA is deciding whether a business affiliation precludes it from being deemed “small.” Generally, affiliation exists when one business controls or has the power to control both businesses. Think of a fast-food franchise.
 +
 
 +
Loan proceeds must be used for certain purposes including:
  
Affiliation rules become important when SBA is deciding whether a business affiliations preclude them from being considered “small”. Generally, affiliation exists when one business controls or has the power to control both businesses. Think of a fast food franchise.
+
<ul>
 +
<li>payroll costs;</li>
 +
<li>costs related to the continuation of group health-care benefits during periods of paid sick, medical or family leave, and insurance premiums;</li>
 +
<li>employee salaries, commissions, or similar compensation;</li>
 +
<li>payments of interest on a mortgage obligation;</li>
 +
<li>rent;</li>
 +
<li>utilities;</li>
 +
<li>interest on any other debt obligations incurred before the covered period.</li>
 +
</ul>
  
Loan proceeds must be used for allowable purposes including:
+
Recipients of PPP loans may not use them to line their pockets. The idea is to keep businesses afloat for a couple of months while they must cease operations. The loan funds explicitly may not be used for:
  
 
<ul>
 
<ul>
<li> Payroll costs</li>
+
<li>employee/owner compensation more than $100,000;</li>
<li> Costs related to the continuation of group health care benefits during period of paid sick, medical or family leave, and insurance premiums</li>
+
<li>taxes imposed or withheld under Chapters 21, 22 and 24 of the IRS Code;</li>
<li> Employee salaries, commissions, or similar compensation</li>
+
<li>compensation of employees whose principle place of residence is outside the U.S.;</li>
<li> Payments of interest on any mortgage obligation</li>
+
<li>qualified sick and family leave for which a credit is allowed under the FFCRA.</li>
<li> Rent</li>
+
</ul>
<li> Utilities</li>
+
 
<li> Interest on any other debt obligations incurred before the covered period</li></ul>
+
===Loan Forgiveness===
 +
 
 +
Borrowers have 24 weeks from the disbursement of their loan to use the PPP funds, or until Dec. 31, 2020, when the program is set to end. This is an extension from the original eight weeks borrowers had to use PPP funds. If the funds are used properly, the loan may be forgiven and does not have to be paid back.
 +
 
 +
The borrower must submit an application for loan forgiveness. In assessing eligibility, the lender will determine how the funds were spent in an eight-week period called "the covered period." The PPP loan forgiveness application is here: https://home.treasury.gov/system/files/136/3245-0407-SBA-Form-3508-PPP-Forgiveness-Application.pdf
 +
 
 +
That application must include:
 +
 
 +
<ul>
 +
<li>verification of the number of employees on payroll and pay rates, including IRS payroll tax filings and state income, payroll and unemployment insurance filings;</li>
 +
<li>verification of payments on covered mortgage obligations, lease obligations and utilities;</li>
 +
<li>certification from a representative of the business or organization authorized to certify that the documentation provided is true and that the amount being forgiven was used in accordance with the program’s guidelines for use.</li>
 +
</ul>
 +
 
 +
Loan amounts not forgiven are carried forward as an ongoing loan with a maximum term of 10 years, at a maximum interest rate of 4%. Principal and interest will continue to be deferred for six months to one year after disbursement of the loan.
 +
 
 +
A business may not apply for more than one PPP loan but may apply for other SBA assistance, including EIDLS, SBA 7(a) loans, SBA 504 loans and microloans, and also receive investment capital from a small business investment company.
 +
 
 +
A business may not use the PPP loan for the same purpose as its other SBA loan(s). For example, if a business uses its PPP loan to cover payroll for the covered period, it may not use a different SBA loan product for payroll costs in the same period, although it may be used to meet payroll for a different period or for different workers.
 +
 
 +
Borrowers have until Dec. 31 to rehire laid-off or furloughed employees if they are seeking loan forgiveness. This is a revision from the original date of June 30 to rehire workers. See the subsection below, '''Steps to Rehiring Workers for Loan Forgiveness,''' for guidance on rehiring.
 +
 
 +
===Use of Paycheck Protection Program Proceeds===
 +
 
 +
In order to obtain forgiveness, funds must be used properly. The main portion must be used for payroll. Borrowers must use at least 60% (legislatively revised from an original 75% requirement) of their PPP payroll funds for:
  
Recipients of PPP loans may not use the loans to line their pockets. The idea is to keep business afloat for a couple of months while they have to stop operations. The loan funds explicitly may not be used for any of the following:
 
 
<ul>
 
<ul>
<li> Employee/owner compensation over $100,000</li>
+
<li>salaries and wages (capped at $100,000 per employee; payroll costs may not exceed eight weeks of compensation an owner/operator or self-employed individual/general partner received in 2019, capped at $15,385);</li>
<li> Taxes imposed or withheld under Chapters 21, 22, and 24 of the IRS Code</li>
+
<li>payments for vacation, parental, family medical or sick leave;</li>
<li> Compensation of employees whose principle place of residence is outside the U.S.</li>
+
<li>severance payments;</li>
<li> Qualified sick and family leave for which a credit is allowed under the FFCRA.</li></ul>
+
<li>payments for the provision of group health-care benefits, including insurance premiums;</li>
 +
<li>retirement benefits; and/or</li>  
 +
<li>state and local taxes assessed on employee compensation.</li>  
 +
</ul>
  
The loan amount is determined in different ways as follows:
+
The remaining 40% of the PPP proceeds may be spent on:
  
 
<ul>
 
<ul>
<li> For businesses open between February 15, 2019 – June 30, 2019 the max loan is equal to 250% of the average monthly payroll costs. If the business is a seasonal employer, the max loan is equal to 250% of the average monthly payroll costs between February 15, 2019 and June 30, 2019. A business can also choose March 1, 2019 as the time period start date.</li>
+
<li>interest on any debt or mortgage obligation whether for real or personal property that existed prior to Feb. 15, 2020;</li>
<li> For businesses not open between February 15, 2019 and June 30, 2019 the max loan is equal to 250% of the average monthly. Payroll costs between January 1, 2020 and February 29, 2020.</li>
+
<li>rent under a lease agreement in force before Feb. 15, 2020;</li>
<li> If the business took out an Economic Injury Loan (EIDL) (discussion below) between February 15, 2020 and June 30, 2020 and the business wants to refinance that loan into a PPP loan, the business would add the outstanding loan amount to the payroll sum.</li></ul>
+
<li>utility payments including electricity, gas, water, transportation, telephone and internet access for which service began before Feb. 15, 2020.</li>
 +
</ul>
 +
 
 +
Businesses that use more than 40% of the loan proceeds for purposes other then payroll costs will have to repay the amount spent and could be subject to additional charges imposed by the Small Business Administration (SBA).
 +
 
 +
===Steps to Rehiring Workers for Loan Forgiveness===
 +
 
 +
There is guidance from the Small Business Administration and the Department of the Treasury informing PPP borrowers how to make rehire offers in order to comply with the requirements of loan forgiveness: https://home.treasury.gov/system/files/136/PPP-IFR-Loan-Forgiveness.pdf.
 +
 
 +
Loan forgiveness requires businesses to:
 +
 
 +
<ol>
 +
<li>Provide the laid-off or furloughed employee an offer in writing to return to work.</li>
 +
<li>Offer the same salary, wages and number of hours the employee had prior to layoff or furlough.</li>
 +
<li>Receive a rejection of that offer.</li>
 +
<li>Document the offer and the rejection.</li>
 +
<li>Notify the California Employment Development Department (EDD) within 30 days that the offer was rejected.</li>
 +
</ol>
  
  
The Small Business Administration (SBA) requires lenders to provide complete payment deferment relief (including payment of principal, interest, and fees) for impacted borrowers with covered loans for a period of at least six months, but not more for one year. So no payments need be made in that initial time period.
+
Documentation is important. The employee's rejection of the offer needn't be in writing, but employers must document receipt of an oral rejection. Because the offer to return must include the same hours, salary or wage as the employee's prior work, employers should spell out the prior terms of employment and clearly state that the employee will be returning under those terms and conditions.  
  
Loan recipients are eligible for loan forgiveness in an amount determined by a particular calculus provided by the Act. Fundamentally, in the two months following the receipt of funds, the employer may be forgiven up to the complete amount of the loan if it spends the funds on payroll, rent, and some smaller expenses. The, the employers must apply through their lender for forgiveness. In the application for forgiveness the employer must include:
+
The guidance clarifies that there is no reduction in loan forgiveness if employees:
  
 
<ul>
 
<ul>
<li> Documentation verifying the number of employees on payroll and pay rates, including IRS payroll tax filings and State income, payroll and unemployment insurance filings;</li>
+
<li>voluntarily resign;</li>
<li> Documentation verifying payments on covered mortgage obligations, lease obligations, and utilities;</li>
+
<li>voluntarily request and receive a reduction in hours; or</li>
<li> Certification from a representative of the business or organization who is authorized to certify that the documentation provided is true and that the amount that is being forgiven was used in accordance with the program’s guidelines for use.</li></ul>
+
<li>are fired for cause.</li>
 +
</ul>
  
Loan amounts not forgiven are carried forward as an ongoing loan with maximum term of 10 years, at a maximum interest rate of 4%. Principal and interest will continue to be deferred for 6 months to a year after disbursement of the loan.  
+
So all employee separations must be documented fully ,including the reason for separation and its date.
  
A business cannot apply for more than one PPP loan but may for other SBA assistance, including Economic Injury Disaster Loans (EIDLS), SBA 7(a) loans, SBA 504 loans, and microloans, and also receive investment capital from Small Business Investment Corporation.
+
===Partial Loan Forgiveness===
  
A business cannot use the PPP loan for the same purpose as its other SBA loan(s). For example, if a business uses its PPP loan to cover payroll for the 8 week covered period, the business cannot use a different SBA loan product for payroll for those same costs in the same period, although it can be issued for payroll for a different period or for different workers.
+
Employers may rehire fewer workers or rehire workers with reduced hours and pay, but they will not be able to claim 100% loan forgiveness under those circumstances.  
  
Businesses can apply for loans through all current SBA 7(a) lenders. The Department of the Treasury will authorize additional lenders, including no bank lenders, to help meet the needs of small business owners.  
+
If a business rehires fewer employees, the reduction in loan forgiveness is determined by a complex formula. It's calculated by multiplying the amount of forgiveness by a fraction whose numerator is the borrower's average number of full-time equivalent (FTE) employees during the eight-week covered period. The denominator is either: (a) the borrower's average number of full-time equivalent employees between Feb. 15, 2019 and June 20, 2019; or (b) the borrower's average number of full-time equivalent employees between Jan. 1, 2020 and Feb. 29, 2020. Most borrowers may choose whichever is lower.
 +
 
 +
The application clarifies that average full-time equivalent employees should be calculated on a weekly basis based on a 40-hour workweek. Alternatively, borrowers may simplify the calculation by treating all employees who work 40 hours or more per week as one (1) and all other employees who work fewer than 40 hours per week as 0.5 FTE. 
 +
 
 +
If a business reduces wages, the amount of loan forgiveness may be reduced as well.  The calculation of the amount of loan forgiveness is complicated; it's outlined in detail in the PPP Schedule A worksheet attached to the application. The worksheet compares each employee's salary/wages during the covered period to the employee's wages/salaries between Jan. 1, 2020 and March 31, 2020. 
 +
 
 +
A reduction in the number of employees or in wages/salaries can be cured and won't reduce the amount of loan forgiveness if, by June 30, 2020, the borrower eliminates the reduction in employees or the reduction in wages.
 +
 
 +
Note: There is no requirement that the employer rehire the same employees –– restoring the same number of employees is sufficient. The application clarifies that borrowers must increase their FTE employees' pay equivalent to what they paid in the period that included Feb. 15, 2020.
 +
Employers who have benefited from PPP loans are advised to regularly review SBA and Treasury guidance to ensure that they are meeting all requirements.The loan amount is determined in different ways:
 +
 
 +
<ul>
 +
<li>For businesses open between Feb. 15, 2019 – June 30, 2019, the maximum is equal to 250% of the average monthly payroll costs. If the business is a seasonal employer, the maximum loan is equal to 250% of the average monthly payroll costs between Feb. 15, 2019 - June 30, 2019. A business may choose March 1, 2019 as the start date.</li>
 +
<li>For businesses not open between Feb. 15, 2019 - June 30, 2019, the maximum is equal to 250% of the average monthly payroll costs between Jan. 1, 2020 - February 29, 2020.</li>
 +
<li>If the business took out an Economic Injury Disaster Loan (EIDL –– reference below) between Feb. 15, 2020 - June 30, 2020, and the business wants to refinance it into a PPP loan, the business would add the outstanding loan amount to the payroll sum.</li>
 +
</ul>
  
 
For further information please see https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program-ppp.
 
For further information please see https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program-ppp.
  
 +
==See Also==
  
==SEE ALSO==
 
 
* [[When Is COVID-19 Work Related?]]
 
* [[When Is COVID-19 Work Related?]]
 
* [[State and Local Workplace Safety Orders]]
 
* [[State and Local Workplace Safety Orders]]
  
 +
----
  
----
 
  
 
<center>
 
<center>
 
{| class="wikitable"
 
{| class="wikitable"
! [[Enhanced Unemployment|< Enhanced Unemployment]] !! [[Navigating_COVID-19:_A_Guide_For_California_Employers|Table of Contents]] !! [[Emergency Economic Injury Disaster Loans and Emergency Economic Injury Grants| Emergency Economic Injury Disaster Loans and Emergency Economic Injury Grants >]]
+
! [[Enhanced Unemployment|< Enhanced Unemployment]] !! [[Navigating COVID-19: A Legal Guide For California Employers|Table of Contents]] !! [[Emergency Economic Injury Disaster Loans & Emergency Economic Injury Grants| Emergency Economic Injury Disaster Loans & Emergency Economic Injury Grants >]]
 
|-
 
|-
 
|}
 
|}
 
</center>
 
</center>

Latest revision as of 21:18, 18 January 2024

< Previous Table of Contents Next >


The Paycheck Protection Program (PPP) enables small businesses to cover certain payroll and other costs. Businesses with fewer than 500 employees are eligible to receive loans of as much as $10 million. Loans are calculated by multiplying an employer's monthly payroll times 2.5. The loans are completely forgiven, tax-free, if the funds are spent on payroll, rent and certain other expenses in the following funding of the loan.

This program is incredibly complex, and was developed under significant pressure. Limited funds were available to be allocated, and businesses have been aggressive in pursuing them. The Small Business Administration (SBA) struggled to give banks guidelines in timely fashion, because the CARES Act calls for disbursement more or less immediately. Banks were swamped with applicants, and initially catered to their proven customers to reduce the chances of holding the bag when the loans were forgiven. Underwriting was limited, and rushed. Multiple changes were made in application forms and standards, and deadlines were missed. Relative chaos ensued. A second round of funding was required and eventually many small businesses did get the loan.

Full examination of the CARES Act and its implementation is beyond the scope of this guide. Any business serious about this program must contact its accountant and banker, and be extremely proactive to find success in the near future. But here are the basics.

General Terms and Eligibility Requirements

The types of businesses and organizations eligible for a PPP loan include:

  • small business and other business concerns, 501(c)(3) nonprofits, 501(c)(3) veterans organization, tribal business concerns with fewer than 500 employees described in section 31(b)(2)(C) of the Small Business Act, or the applicable size standard in number of employees for the North American Industry Classification System (NAICS) as provided by SBA, if higher;
  • sole proprietors, independent contractors and eligible self-employed individuals;
  • any business concern that employs fewer than 500 employees per physical location and that is assigned an NAICS code beginning with 72, for which the affiliation rules are waived.

Affiliation rules also are waived for any business concern operating as a franchise that is assigned a franchise identifier code by the administration, and any entity that receives funding through a small business investment company. (SBICs are privately owned outfits licensed and regulated by the SBA.) Affiliation rules are important when the SBA is deciding whether a business affiliation precludes it from being deemed “small.” Generally, affiliation exists when one business controls or has the power to control both businesses. Think of a fast-food franchise.

Loan proceeds must be used for certain purposes including:

  • payroll costs;
  • costs related to the continuation of group health-care benefits during periods of paid sick, medical or family leave, and insurance premiums;
  • employee salaries, commissions, or similar compensation;
  • payments of interest on a mortgage obligation;
  • rent;
  • utilities;
  • interest on any other debt obligations incurred before the covered period.

Recipients of PPP loans may not use them to line their pockets. The idea is to keep businesses afloat for a couple of months while they must cease operations. The loan funds explicitly may not be used for:

  • employee/owner compensation more than $100,000;
  • taxes imposed or withheld under Chapters 21, 22 and 24 of the IRS Code;
  • compensation of employees whose principle place of residence is outside the U.S.;
  • qualified sick and family leave for which a credit is allowed under the FFCRA.

Loan Forgiveness

Borrowers have 24 weeks from the disbursement of their loan to use the PPP funds, or until Dec. 31, 2020, when the program is set to end. This is an extension from the original eight weeks borrowers had to use PPP funds. If the funds are used properly, the loan may be forgiven and does not have to be paid back.

The borrower must submit an application for loan forgiveness. In assessing eligibility, the lender will determine how the funds were spent in an eight-week period called "the covered period." The PPP loan forgiveness application is here: https://home.treasury.gov/system/files/136/3245-0407-SBA-Form-3508-PPP-Forgiveness-Application.pdf

That application must include:

  • verification of the number of employees on payroll and pay rates, including IRS payroll tax filings and state income, payroll and unemployment insurance filings;
  • verification of payments on covered mortgage obligations, lease obligations and utilities;
  • certification from a representative of the business or organization authorized to certify that the documentation provided is true and that the amount being forgiven was used in accordance with the program’s guidelines for use.

Loan amounts not forgiven are carried forward as an ongoing loan with a maximum term of 10 years, at a maximum interest rate of 4%. Principal and interest will continue to be deferred for six months to one year after disbursement of the loan.

A business may not apply for more than one PPP loan but may apply for other SBA assistance, including EIDLS, SBA 7(a) loans, SBA 504 loans and microloans, and also receive investment capital from a small business investment company.

A business may not use the PPP loan for the same purpose as its other SBA loan(s). For example, if a business uses its PPP loan to cover payroll for the covered period, it may not use a different SBA loan product for payroll costs in the same period, although it may be used to meet payroll for a different period or for different workers.

Borrowers have until Dec. 31 to rehire laid-off or furloughed employees if they are seeking loan forgiveness. This is a revision from the original date of June 30 to rehire workers. See the subsection below, Steps to Rehiring Workers for Loan Forgiveness, for guidance on rehiring.

Use of Paycheck Protection Program Proceeds

In order to obtain forgiveness, funds must be used properly. The main portion must be used for payroll. Borrowers must use at least 60% (legislatively revised from an original 75% requirement) of their PPP payroll funds for:

  • salaries and wages (capped at $100,000 per employee; payroll costs may not exceed eight weeks of compensation an owner/operator or self-employed individual/general partner received in 2019, capped at $15,385);
  • payments for vacation, parental, family medical or sick leave;
  • severance payments;
  • payments for the provision of group health-care benefits, including insurance premiums;
  • retirement benefits; and/or
  • state and local taxes assessed on employee compensation.

The remaining 40% of the PPP proceeds may be spent on:

  • interest on any debt or mortgage obligation whether for real or personal property that existed prior to Feb. 15, 2020;
  • rent under a lease agreement in force before Feb. 15, 2020;
  • utility payments including electricity, gas, water, transportation, telephone and internet access for which service began before Feb. 15, 2020.

Businesses that use more than 40% of the loan proceeds for purposes other then payroll costs will have to repay the amount spent and could be subject to additional charges imposed by the Small Business Administration (SBA).

Steps to Rehiring Workers for Loan Forgiveness

There is guidance from the Small Business Administration and the Department of the Treasury informing PPP borrowers how to make rehire offers in order to comply with the requirements of loan forgiveness: https://home.treasury.gov/system/files/136/PPP-IFR-Loan-Forgiveness.pdf.

Loan forgiveness requires businesses to:

  1. Provide the laid-off or furloughed employee an offer in writing to return to work.
  2. Offer the same salary, wages and number of hours the employee had prior to layoff or furlough.
  3. Receive a rejection of that offer.
  4. Document the offer and the rejection.
  5. Notify the California Employment Development Department (EDD) within 30 days that the offer was rejected.


Documentation is important. The employee's rejection of the offer needn't be in writing, but employers must document receipt of an oral rejection. Because the offer to return must include the same hours, salary or wage as the employee's prior work, employers should spell out the prior terms of employment and clearly state that the employee will be returning under those terms and conditions.

The guidance clarifies that there is no reduction in loan forgiveness if employees:

  • voluntarily resign;
  • voluntarily request and receive a reduction in hours; or
  • are fired for cause.

So all employee separations must be documented fully ,including the reason for separation and its date.

Partial Loan Forgiveness

Employers may rehire fewer workers or rehire workers with reduced hours and pay, but they will not be able to claim 100% loan forgiveness under those circumstances.

If a business rehires fewer employees, the reduction in loan forgiveness is determined by a complex formula. It's calculated by multiplying the amount of forgiveness by a fraction whose numerator is the borrower's average number of full-time equivalent (FTE) employees during the eight-week covered period. The denominator is either: (a) the borrower's average number of full-time equivalent employees between Feb. 15, 2019 and June 20, 2019; or (b) the borrower's average number of full-time equivalent employees between Jan. 1, 2020 and Feb. 29, 2020. Most borrowers may choose whichever is lower.

The application clarifies that average full-time equivalent employees should be calculated on a weekly basis based on a 40-hour workweek. Alternatively, borrowers may simplify the calculation by treating all employees who work 40 hours or more per week as one (1) and all other employees who work fewer than 40 hours per week as 0.5 FTE.

If a business reduces wages, the amount of loan forgiveness may be reduced as well. The calculation of the amount of loan forgiveness is complicated; it's outlined in detail in the PPP Schedule A worksheet attached to the application. The worksheet compares each employee's salary/wages during the covered period to the employee's wages/salaries between Jan. 1, 2020 and March 31, 2020.

A reduction in the number of employees or in wages/salaries can be cured and won't reduce the amount of loan forgiveness if, by June 30, 2020, the borrower eliminates the reduction in employees or the reduction in wages.

Note: There is no requirement that the employer rehire the same employees –– restoring the same number of employees is sufficient. The application clarifies that borrowers must increase their FTE employees' pay equivalent to what they paid in the period that included Feb. 15, 2020. Employers who have benefited from PPP loans are advised to regularly review SBA and Treasury guidance to ensure that they are meeting all requirements.The loan amount is determined in different ways:

  • For businesses open between Feb. 15, 2019 – June 30, 2019, the maximum is equal to 250% of the average monthly payroll costs. If the business is a seasonal employer, the maximum loan is equal to 250% of the average monthly payroll costs between Feb. 15, 2019 - June 30, 2019. A business may choose March 1, 2019 as the start date.
  • For businesses not open between Feb. 15, 2019 - June 30, 2019, the maximum is equal to 250% of the average monthly payroll costs between Jan. 1, 2020 - February 29, 2020.
  • If the business took out an Economic Injury Disaster Loan (EIDL –– reference below) between Feb. 15, 2020 - June 30, 2020, and the business wants to refinance it into a PPP loan, the business would add the outstanding loan amount to the payroll sum.

For further information please see https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program-ppp.

See Also



< Enhanced Unemployment Table of Contents Emergency Economic Injury Disaster Loans & Emergency Economic Injury Grants >

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