The SBA has issued the first PPP Loan forgiveness application. While we expect further clarification and possible changes to the form, we believe that the material aspects of the form will not change significantly.
PPP Loan forgiveness has always been subject to two tests - a salary reduction test by employee and a reduction in headcount test. Today we will discuss the Salary reduction test and how it works on the application:
Forgiveness Reduction – Test #1 Salaries
Test #1 - The total salary or wages of any employee is reduced in excess of 25% compared to the most recent full quarter prior to the loan date. However, employees paid more than $100,000 in 2019 are not subject to the 25% limitation on salary decreases.
The determination of salary and wage reduction of >25% is required on an employee by employee basis. In other words, you have to complete this calculation for each employee:
Salaried employees - The calculation requires a comparison of Q1 annualized gross wages to the 8 week selected period (the "Covered Period" or "Alternative Covered Period"; refer to #1 here for a refresher) annualized wages:
If the 8 week annualized wages are reduced by 25% or more compared to Q1 wages then additional testing is required (see below) to determine if loan forgiveness is reduced
Hourly employees - The calculation requires a comparison of Q1 hourly wage rate paid to the 8 week selected period hourly wage rate
If the 8 week hourly rate is reduced by 25% or more compared to the Q1 hourly wage rate then additional testing is required (see below) to determine if loan forgiveness is reduced
This test looks to see if you reduced salaries or wages by more than 25% for each employee after 2/15/20. If you did reduce salaries but restored them by 6/30 then you are OK and don’t lose any forgiveness.
Salaried employees –
Compare the annualized salary paid on 2/15/20 (specific date) to the average annualized salary paid between 2/15/20 and 4/26/20. If the 2/15 to 4/26 period salary is less than 2/15 then:
Compare the annualized salary paid on 2/15/20 to the annualized salary paid on 6/30/20. If the 6/30/20 salary is the same or higher than 2/15/20 then forgiveness is NOT reduced.
Hourly employees –
Compare the hourly rate paid on 2/15/20 (specific date) to the average hourly rate paid between 2/15/20 and 4/26/20. If the 2/15 to 4/26 period hourly rate is less than 2/15 then:
Compare the hourly rate on 2/15/20 to the hourly rate on 6/30/20. If the 6/30/20 hourly rate is the same or higher than 2/15/20 then forgiveness is NOT reduced.
See how easy this is?
There are still many open questions that the SBA will be issuing guidance on soon (hopefully.) Rest assured, the EDGe team is reviewing this application and guidance closely and we will continue to provide updates and clarifications. There are many more details on how this application works (assuming it doesn't change) that I will cover in future emails. The EDGe team of experts now offers PPP loan forgiveness tracking for your business. If you need to talk through specific options for your business, Molly, Paula, and I are here to help. Schedule a 30 minute consultation via Zoom where we will discuss your specific business situation for only $49. If you have any questions, feel free to reach out to any of us. And keep checking our emails, blog, and social media for updates.
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