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When the Paycheck Protection Program Flexibility Act (PPPFA) was signed into law, many borrowers were excited to learn they had 24 weeks to spend their loan on forgivable expenses. However, it is critical for borrowers to also evaluate the eight-week covered period option if they are eligible to use it – especially if they plan to make changes in the additional 16-week period. The revised application and the EZ form will help you with this analysis, and we’ve provided a deeper look into the 8-week versus 24-week covered periods based on each application.
Borrowers have the option of using the original 8-week covered period (if their loan was made before June 5, 2020) or an extended 24-week covered period. Details include:
If your business remained opened during the course of the pandemic and is eligible to use the eight-week covered period for your loan forgiveness, the eight-week covered period could be the most beneficial option for you. Here’s why:
If you kept everyone employed for your chosen eight-week period, but later, had to make some changes to headcount, this could make your forgiveness amount less than desired. For example, if you had a $1 million loan amount and kept all your employees with no pay changes, had $600,000 of payroll expenses paid and incurred, and $300,000 of other eligible costs by the end of your eight weeks, your forgiveness amount would be $900,000.
Should you decide to use the 24-week period to spend the last $100,000, you have also now incurred $700,000 payroll and $300,000 on other costs. If you reduced your 24-week average employees from 65 to 54, your loan forgiveness would be reduced. You would be eligible for 83% of forgiveness, or $830,000, which is $70,000 less than if you had chosen the eight weeks. This decision would be driven by the savings in payroll on the potential salary reductions for the additional 16 weeks. You would actually have to run some scenarios on likely reductions to assess the best option for you. Keep in mind, using the average means you still had the employees for the initial eight weeks, so in this example, you would reduce headcount by more than 11 for this reduction to apply – it would be a reduction of the 17 at the end of the eight weeks.
If you laid off employees due to the pandemic, but restored your average full-time employee headcount by the earlier of Dec. 31, 2020, or the date the application was submitted, you could qualify to use the full available forgiveness amount. For example, if you had a $1 million loan amount and you leveraged the safe harbor rules by restoring employee and pay levels, you could qualify for the full $1 million forgiveness. There are some hurdles to checking if you are eligible to use this safe harbor.
Here’s how the headcount calculations and potential reductions work:
Borrowers should conduct a covered-period analysis to determine which covered period will provide the highest level of forgiveness. If you received your loan before June 5, 2020, and have determined your eight-week numbers don’t align with a full forgiveness, we recommend you consult with our team of seasoned CPAs and business advisors to go over the calculations, forecast salaries and staffing levels to see what options are best for you.
Doeren Mayhew is committed to supporting you and your business with its PPP loans and much more during these times of uncertainty. Contact us today for assistance.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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