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Key Details on the Covered Period For Loan Forgiveness Calculation

The CARES Act specifies that a PPP borrower will be eligible for forgiveness of indebtedness on a PPP loan in an amount equal to the sum of payroll costs, covered mortgage interest payments, covered rent payments, and covered utility payments made during the eight week period after loan origination. 

The Frequently Asked Questions relating to the Paycheck Protection Program, released by the Small Business Administration and continuously updated since April 6, 2020, indicate that the “eight-week period” for forgiveness under the PPP “begins on the date the lender makes the first disbursement of the PPP loan to the borrower.” Moreover, the interim final rules published by the SBA specify that a minimum of 75% of the forgiveness amount must be payroll costs.

Forgiveness Reductions For Reductions in Employees or Reductions in Compensation

Subject to the safe harbor described below, the CARES Act reduces the forgiveness amount if the average number of full-time equivalent employees per month during the eight week period after loan origination is less than the average number of full-time equivalent employees during, at the borrower’s election (1) the period beginning on February 15, 2019, and ending on June 30, 2019, or (2) the period beginning on January 1, 2020, and ending on February 29, 2020. The forgiveness amount is also reduced if the salary of employees making $100,000 or less have been reduced.

Safe Harbor for Re-Hires and Restoration of Salary

Section 1106(d)(5)(b)(i)(II) and (ii)(II) of the CARES Act specifies that the reductions described above, if made from Feb. 15, 2020-Apr. 26, 2020, will not apply if the reduction in full-time equivalent employees or reduction in salary or wages is eliminated not later than June 30, 2020.

Impact for Businesses

For those businesses getting their loans quickly, the 8-week “covered period” for measuring the total amount of loan forgiveness (the 8-week period after getting the PPP loan) will terminate prior to the June 30, 2020 deadline to rehire employees. Nevertheless, since the forgivable amount is mostly based on payroll costs (minimum of 75%) incurred and paid during the forgiveness period, rehiring too late will reduce the amount that can be forgiven. Therefore, to maximize forgiveness, such businesses should:

  • Hire back workers (especially those who made under $100,000 in 2019) during the forgiveness period (so that employees are paid during the forgiveness period), but in any event prior to June 30th, so that there is no forgiveness reduction; and
  • Not try to manipulate the forgiveness amount (e.g., hiring back workers on June 29 and laying them off on July 1).

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