Why would a company apply for PPP loan forgiveness before the end of their covered period?

Editor’s Note: Thank you for viewing this resource about the Paycheck Protection Program (PPP). This was a cornerstone for many organizations during the COVID-19 pandemic, but it’s important to stay current on the latest financial support options. Like PPP, the Employee Retention Credit (ERC) can be leveraged to bring your business significant financial relief.

We invite you to dive into our ERC content here. Need professional advice on maximizing your ERC benefits? Learn more about our Employee Retention Credit consulting services and then contact us.

A Recent Interim Final Rule (IFR) By The Treasury Department States:

“A borrower may submit a loan forgiveness application any time on or before the maturity date of the loan – including before the end of the covered period – if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness.”

When the PPP Flexibility Act was released on June 5, 2020, the covered period for all PPP loans changed to from 8 weeks to 24 weeks, although borrowers with existing PPP loans could elect to keep the original 8-week period, suggesting that it was one or the other.  However, when the revised forgiveness application was released on June 16, 2020, it included language that indicated the measurement date for the full-time equivalent and wage reduction safe harbors was the earlier of the date of the application or December 31, 2020.

“FTE Reduction Safe Harbor 2, Step 4:  Enter the borrower’s total FTE as of the earlier of December 31, 2020, and the date this application is submitted.”

So, what does this mean?

The IFR confirms that if you have used all the loan proceeds for which you are requesting forgiveness, you can apply for forgiveness at any time.  In other words, if a company uses all the loan proceeds in week 10 they do not have to wait until after week 24 to apply.

What do I need to do to apply early?

According to the IFR, if you have a reduction of wages of one or more employees of more than 25%, you will have to calculate the forgiveness reduction over the entire 8 or 24 week forgiveness period.

“If the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages in excess of 25 percent, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period.”

For example, if during a 10-week period an employee’s wage reduction is $1,000, that employee’s wage reduction would be $2,400 ($1,000/10 weeks*24-week covered period).

Who should apply for early forgiveness?

You should be considering what your reduction in personnel will be over the upcoming weeks.  The application for forgiveness requires the company to look at eligible expenses during the covered period and then apply the FTE reduction tests, which could lead to a reduction in loan forgiveness.

However, there are other considerations.  If over a 24-week period (or less) a company outspends its loan amount, it can still receive full forgiveness despite the reduction in FTE’s.

In addition, if a company meets one of the new safe harbor rules the Flexibility Act provides, its FTE Reduction Quotient is 100%, resulting in no reduction in forgiveness:

“Flexibility Act states that the amount of loan forgiveness ‘‘shall be determined without regard to a proportional reduction in the number of full-time equivalent employees’’ if an eligible recipient, in good faith, (A) is able to document (i) an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and (ii) an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020; or (B) is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.”

You should evaluate your company’s situation on a weekly basis and determine if you meet either of the safe harbors.  If the company does not meet them, and you are anticipating layoffs, it may be time for your company to apply for forgiveness.

Consider this before you prepare your application

SBA will begin accepting applications on August 10, 2020.  Even though the SBA will begin accepting applications on August 10^th, your bank may still be preparing for working within the parameters, and with the technologies set forth by the SBA.

The other consideration is pending legislation.  There are bills coming out in Congress that have the potential to change the forgiveness process and could potentially convert small loans to grants.  While discussions continue you may want to postpone your application for forgiveness. (Click here to read our full article on this consideration).

How can KatzAbosch help?

We realize that borrowers may still need assistance and have more questions. Each borrower has their own individual set of circumstances, and the answers are not always black and white. It is important for borrowers to “get in front” of their loan forgiveness and make adjustments, if necessary. KatzAbosch helps businesses through the process by providing consulting and guidance for Paycheck Protection Plan (PPP) funds.