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Written By: James R. Taylor

The recently enacted CARES Act includes forgivable Paycheck Protection Program loans for small businesses (PPP Loan).  While the CARES Act includes parameters for loan forgiveness, we expect more details when the Small Business Administration (SBA) issues regulations implementing the program. 

The CARES Act – Paycheck Protection Program Loan article outlined the method for determining the amount available for businesses to borrow, this article clarifies the parameters for determining forgiveness.  The forgivable amount:

  • Corresponds to the payroll costs, rent and utilities paid over the 8-week period following loan origination
  • Encourages retention of employees by taking into account the number of full-time equivalent employees employed prior to the impact of COVID-19
  • Encourages re-hiring employees laid off due to COVID-19

Maximum Available Forgiveness

The amount borrowed to the extent spent during the 8-week period following loan origination on the following:

  • Payroll costs, excluding the portion of any employee’s compensation above $100,000 per year;
  • Rent or, if the business owns its building, mortgage interest;
  • Utilities.

Adjustment For Workforce Reduction

The amount available for forgiveness will be reduced, but not increased, by multiplying the amount by the percentage obtained by:

Dividing:  
The average number of full-time equivalent employees per month employed by the business during the 8-week period following the loan origination

By:           
The average number of full-time equivalent employees per month employed by the business during either of the following periods (as selected by the business):

  • February 15, 2019 – June 30, 2019; or
  • January 1, 2020 – February 29, 2020.

Example:   A business’s amount available for forgiveness is $1,000,000.  For the first two months of 2020, the business employed, on average, 20 full time equivalent employees per month.  During the 8-week period following loan origination, the business employed, on average, 18 full time equivalent employees per month.  Because of the reduction in work force, 90% (18 ÷ 20 = 90%) of the $1,000,000 (i.e., $900,000) can be forgiven. 

Adjustment For Wage Reduction

The amount available for forgiveness will be reduced by an amount equal to any reduction in an employee’s compensation during the 8-week period following the loan origination that exceeds 25% of the employee’s compensation during the most recent full quarter.  However, this reduction only applies to employees earning less than a rate of $100,000 per year at any time in 2019.

Example:   During the fourth quarter of 2019, Employee’s average compensation was $2,400 (plus benefits) per two-week pay period.  During the 8-week period following loan origination, Employee’s compensation was reduced to $1,200 per pay period (plus benefits).  Because the reduction in compensation exceeds 25% during the 8-week period following the loan origination, the amount available for loan forgiveness will be reduced by the amount of the reduction that exceeds a 25% reduction.  The amount that exceeds 25% is $600 per pay period, which, over four pay periods (8 weeks) totals $2,400.  

We will publish additional updates following the SBA’s release of the implementing regulations.