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By Jennifer Mailhes, CPA – Business Advisory Shareholder

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.

Covered Periods

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:

  • Borrowers who received their loan before June 5, 2020, can opt to use the original eight-week covered period or the extended 24-week covered period put into place by the PPPFA.
  • Borrowers who received their loans after June 5, 2020, are required to use a 24-week covered period.

Evaluating Your Covered Period Options

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:

  • Expanded paid and incurred costs: Borrowers are allowed to include paid and incurred costs during the eight weeks, as long as the costs are paid on their next regularly scheduled payroll after the eighth week is up. For most companies, this means you get to include more than eight weeks and potentially up to 10 weeks of payroll in your covered period. Your calculation expands to include all payroll costs paid and earned in the eight weeks and paid on the next pay cycle.
  • Reduced payroll thresholds: With the recent change to allowed payroll cost percentages made by the PPPFA, borrowers are now only required to spend 60%, instead of 75%, of the funds on payroll costs to be eligible for full forgiveness. If your business doesn’t quite make the threshold amount, it will impact you proportionally. For example, if your loan amount was $1 million and you spent $540,000 on payroll costs, $900,000 of your loan in total would be eligible for forgiveness ($540,000/60%), even if you spent more than the $360,000 difference on non-payroll costs eligible for forgiveness.
  • Expanded safe harbors around headcount reductions: Safe harbors allow you eliminate any reduction in employees if someone leaves voluntarily, the reduction arose from an inability to rehire individuals who were employees on Feb. 15, 2020, hire similarly qualified employees for unfilled positions on or before Dec. 31, 2020, or an employee refusing to restore their hours.
  • Potentially favorable headcount calculations: Headcount retention and salary reductions apply for the full covered period you choose to use on your application. Consider these scenarios:

Scenario One

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.

Scenario Two

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:

  1. Calculate your average full-time equivalents (FTEs) for the eight weeks or 24 weeks, and divide it by the lower of your average FTEs from Feb. 15, 2019 through April 30, 2019, or Jan. 1, 2020 through Feb. 29, 2020.  If the answer is more than 1.0, you do not need to account for any reductions in headcount.
  2. If you were unable to operate between Feb. 15, 2020 and the last day of your covered period at the same level of business activity before this date due to COVID-19 related requirements (as specifically defined), you will qualify for the safe harbor.
  3. You may also consider the headcount safe harbor available. To see if you are eligible, take your FTEs for the payroll including Feb. 15, 2020 and compare to the average FTEs from Feb. 20, 2020 through April 26, 2020. If Feb. 15, 2020 is higher, then you can count the FTEs as of the earlier of Dec. 31, 2020 or the date the application is submitted, divide that by your number of employees on the payroll including Feb. 15, 2020. If the answer is 1.0 or higher, then you will not qualify for the reduction safe harbor and you should have to use the calculation in step 1.

Be Confident in Your Decision

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.