Navigate to a Safe Harbor with Your PPP Loan

Congratulations! You’ve been approved for your Small Business Administration (SBA) Paycheck Protection Program (PPP) loan. This can be a big benefit for your business as you consider next steps.

Be aware, the amount you received will be reduced by any Economic Injury Disaster Loan (EIDL) grants you also received.

While most business owners are looking for loan forgiveness, keep in mind that this low-interest loan can be helpful in getting your business operating and profitable. Funds not needed by the business can always be repaid now or later. Unforgiven amounts are a two-year loan at one-percent interest, and the first six months of payments are made for you by the SBA.

On Friday, May 22, the SBA stated, “SBA may begin a review of any PPP loan of any size at any time in SBA’s discretion.” (“Loan Review Procedures IFR,” II (2)(c) at p.14). That’s quite a different situation for PPP loan recipients of less than $2M than some commentators were suggesting just a few weeks ago.

FTE Pay Periods in Consideration

Remember, there are limits to the government’s forgiveness. For example, loan forgiveness may be reduced by a drop-in, full-time equivalent employee (FTE), or a reduction in their wages. However, a borrower may ignore the required reduction by meeting a safe harbor test. To satisfy it, the borrower must first determine FTEs for two additional periods:

  1. February 15, 2020, through April 26, 2020; and
  2. For the pay period that includes February 15, 2020. That means if the pay period ended on Feb. 15, but the employee wasn’t paid until the following payday, the costs incurred for the Feb. 15 pay period would be included.

How to Compute FTEs

According to the SBA Form 3508 published May 20, 2020, the average FTE calculation during the covered period, or the alternative payroll covered period, is computed by entering the average number of hours paid per week, divide by 40, and round the total to the nearest tenth.

The formula:

  1. Avg # of hours per wk / 40 = X
  2. Round X up to the nearest tenth

The maximum for each employee is capped at 1.0.

A simplified method for borrowers is to assign a 1.0 to employees who work 40 hours or more per week, and a 0.5 for employees who work fewer hours.

Then, identify if…

  1. The average FTEs for the first period is less than the FTEs for the second period, the borrower must then compare the average FTEs for the second period to the total FTEs as of June 30, 2020.
  2. The FTEs on June 30, 2020, are greater than the FTEs on February 15, 2020, the safe harbor is met, and no reduction is required.

You will want to analyze which time periods work best to achieve maximum loan forgiveness. If you are interested in more support related to this topic, give me a call at 201.787.6542.