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PPP Loan Forgiveness: Should I wait 8 or 24 weeks - Part 1

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Should you wait 8 or 24 weeks to apply for PPP Loan forgiveness? This depends on when you reach full forgiveness. This presentation will help guide you.

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PPP Loan Forgiveness: Should I wait 8 or 24 weeks - Part 1

  1. 1. PPP Loan When should I apply for forgiveness
  2. 2. When to apply for PPP loan forgivenes s? If you received your loan proceeds before June 5th , you could elect to use an 8 week or a 24-week expenditure period. After June 5th, you must use a 24-week testing period However, you can submit your loan forgiveness application if you have used all the loan proceeds.
  3. 3. Last day to use proceeds Regardless of when you took your loan, all proceeds must be used by December 31, 2020
  4. 4. Periods you should understand before deciding when to apply for forgiveness
  5. 5. Covered Period The Covered Period is either (1) the 24-week (168-day) period beginning on the PPP Loan Disbursement Date, or (2) (2) if the Borrower received its PPP loan before June 5, 2020, the Borrower may elect to use an eight-week (56-day) Covered Period. For example, if the Borrower is using a 24-week Covered Period and received its PPP loan proceeds on Monday, April 20, the first day of the Covered Period is April 20 and the last day of the Covered Period is Sunday, October 4. In no event may the Covered Period extend beyond December 31, 2020.
  6. 6. Alternative Payroll Covered Period Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the 24-week (168-day) period (or for loans received before June 5, 2020 at the election of the borrower, the eight-week (56-day) period) that begins on the first day of their first pay period following their PPP Loan Disbursement Date. For example, if the Borrower is using a 24-week Alternative Payroll Covered Period and received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, October 10.
  7. 7. Wage reduction compariso n period The actual amount of loan forgiveness the Borrower will receive may be reduced if pay was reduced by more than 25% when compared to wages paid between January 1, 2020 to March 31, 2020.
  8. 8. Wage reduction safe harbor periods If the Borrower restored salary/hourly wage levels, the Borrower may be eligible for elimination of the Salary/Hourly Wage Reduction amount if: • The wage rate paid between February 15, 2020 and April 26, 2020 is less than the amount paid as of February 15th • But was restored as of the application submission date or December 31st (whichever is earlier)
  9. 9. Wage Reduction Safe Harbor Example You have an employee making $25,000 as of February 15th. Your business slowed down so you reduced salary between February 15th and April 26th However, you restored the salary back to the level (or more) by the application submission date You meet the salary/ wage harbor and not subject to salary/ wage reduction.
  10. 10. Reference period In addition to the salary wage reduction, there is also a full-time equivalency reduction i.e. a reduction for reducing your employee's hours However, in the case of the FTE reduction calculation, you get to choose your reference period. The reference period with the least FTE will help you most.
  11. 11. Reference period contd. Date choices (i) February 15, 2019 to June 30, 2019; (ii) January 1, 2020 to February 29, 2020; or (iii) in the case of seasonal employers, either of the preceding periods or any consecutive 12-week period between May 1, 2019 and September 15, 2019.
  12. 12. Example With the relevant periods in mind, let us work through an example This example will deal with the wage reduction caveat
  13. 13. Example Adam Smith who had one employee received a $20,000 PPP Loan. Find below his data referencing the key periods: Covered period: 8 weeks from 3/18/2020 to 5/12/2020 Since the covered period and payroll fell on the same day, there was no need to use the alternative payroll covered period. Wages paid during the covered periods was $12,000 at an average rate of $10 an hour
  14. 14. Example cont. • Wage reduction comparison period: • The average wage rate between January 1 and March 31, 2020 was $20 • Due to a decline in business income, Adam was not able to keep up with the wages
  15. 15. Example contd. Wage reduction safe harbor periods: The average wage rate paid between February 15, 2020 and April 26, 2020 was $10 The wage rate as of February 15th was $20 The wage rate as of the application submission date or December 31st (whichever is earlier) was $10 ( was not restored to previous levels)
  16. 16. Example cont. Wage reduction calculation: From the example we see that wage was reduced by 50% (more than 25%) The wage as of February 15th was $20 Reduced to $10 between February 15th and April 26th But not restored by the application submission date. No safe harbor applies Salary is reduced by $3,720 (calculation on the next slide)
  17. 17. Salary/ Hourly Wage Reduction Calculation • Figure out the salary reduction over 25% • Jan to Mar wage = $20 *. 75 = $15 • Subtract the wage paid during the covered period from $15 = $5 • Multiply by the average # of hours worked per week $31 • 5 * 31 = $155 • Multiply by # of weeks in your forgiveness window (8 weeks) • 155 *8 = $1,240 • Salary wage reduction will be $1,240
  18. 18. Wages eligible for forgivenes s The wages eligible for forgiveness will be Payroll cost less the salary reduction which will be 12,000 – 3,720 = 10,760
  19. 19. Apply or not? Adam’s only other expense was his pay of $8,000 (Note: Owners pay is not evaluated the same way as payroll expenses). Total payroll expenses of $8000 + $10,760 = $18,760 Adam has not achieved full forgiveness and is better off waiting till the end of the 24-week period to accumulate more expenses
  20. 20. Apply or not? However, if Adam had other expenses like rent and utilities, he will be able to reach the $20,000 without waiting Total payroll expenses of $18,760 is 94% of total loan. This is more than the 60% required With other expenses, Adam will not need to wait even though he reduced wages during the covered period.
  21. 21. Apply or not? This workbook will make it easier to run your numbers. It is worth checking to see if you are eligible for full forgiveness within the 8-week window.
  22. 22. Apply or not Next, we look at the effect of reduction in work hours.
  23. 23. https://lifestylecpa.com/product/ppp-loan-forgiveness-in-less-than-1-hour/

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