Loan Approval

PPP Loan Tips for Texas Employers

So your Texas Panhandle company has received Paycheck Protection Program (“PPP”) funds, hopefully, and now you are wondering how to use those funds to maximize your loan forgiveness.

Local banks moved very quickly to assure that more than $750 million of the stimulus funds will help small businesses in our area. We all have 8 weeks to spend these funds legally and wisely to hopefully avoid any repayment of these federal loans, effectively turning them into government grants.

In the end, all of us want to use the funds to keep our employees and our businesses going in these challenging times. But there is little guidance from the Small Business Administration on how to do that. As things stand today (things are changing rapidly, so check with your employment lawyer before you make any final decisions), here are the important tips for small Texas employers about spending your PPP money:

When do I spend this PPP money?

The actual CARES act says that you must spend your PPP funds in the 8-week “covered period” after “the origination date” of your loan. The SBA has decided that the 8 weeks starts running the day that your loan was funded. That means that the date that the loans hit your account is when the clock starts running. For example, if you received your funds on April 6, 2020, you have until June 1, 2020 to spend the money.

How do I spend this PPP money?

The SBA (not the actual statute) requires that 75% of your PPP funds be spent on “payroll costs.” The CARES act defines “payroll costs” this way:

  • Salary, wage, commission, or similar compensation;
  • Payment of cash tip or equivalent;
  • Payment for vacation, parental, family, medical, or sick leave;
  • Allowance for dismissal or separation;
  • Payment required for the provisions of group health care benefits, including insurance premiums;
  • Payment of any retirement benefits; or
  • Payment of state or local tax assessed on the compensation of employees.

The CARES act goes on to point out that the following items will not be considered “payroll costs”, meaning that you cannot claim any forgiveness for these amounts, so they should not be paid out of designated PPP funds:

  • Salary, wages, commission, or other compensation that you pay an employee over $100K per year as prorated for the covered period (but not the health insurance premiums, retirement contributions, and other non-compensation items you provide to these highly-compensated employees—those can be paid out of PPP funds);
  • Social Security and Medicare taxes paid by the employer (according to the SBA FAQs, the employee’s “compensation” for forgiveness purposes will be considered the gross amount paid before the employee-portion of these taxes are withheld);
  • Compensation to any employee who principally lives outside of the U.S.; and
  • Payments under the Families First Coronavirus Response Act (“FFCRA”) for Emergency Paid Sick Leave or Emergency Family Leave.

That last part about FFCRA emergency paid leave is important: you can’t both use PPP funds for these paid leaves and take the 100% payroll tax credit for these same paid leaves. In other words, you can’t double-dip on these various relief programs offered by the federal government.

So what should you do over the next 8 weeks if an employee is unable to work due to COVID-19 or because a school is closed, and the employee has primary childcare responsibilities? For the 2-week Emergency Paid Sick Leave, in particular, my advice is that you don’t designate any time in the next 8 weeks as EPSL. Save that for later, if needed, at a time after the “covered period” when your PPP funds have been spent. That way, if your employee is sick or quarantined later, you can still pay your employee and take the 100% tax credit that the government has offered. This could become very important in the fall 2020 if there is another flare-up of the virus as some epidemiologists expect.

It is a harder decision for employers to make about how to pay an employee during the 12-weeks of extended family leave available to a parent that must stay home with children because schools and day cares are closed. Governor Abbott just announced that they will remain closed for the rest of the 2019-2020 school year. If you pay that employee out of PPP funds and don’t start the clock running on the 12 weeks, you may end up having to give that employee another 12 weeks off later in the fall of 2020 if schools or day cares close back down again, go to half-days, or otherwise modify school opening.

But if you do give an employee extended family leave now while schools are closed and pay for it out of PPP funds, just know that you can’t claim the tax credit and PPP forgiveness for the same compensation that particular employee receives on leave.

The other 25% of your PPP loan funds can be spent in the 8-week covered period on:

  • a payment of interest (only) on a mortgage on real or personal property that was incurred before February 15, 2020;
  • rent under a lease signed before February 15, 2020; and
  • utility payments if service began before February 15, 2020 for “electricity, gas, water, transportation, telephone or internet access”.

How do I get this PPP loan forgiven?

There are two parts to the loan forgiveness. Your PPP loan forgiveness will be reduced if:

  • You have fewer employees (average full-time equivalents based on 40 hours as full-time) on the payroll during the 8-week covered period when you compare it to your average full-time equivalent employees during either (your choice) of January + February 2020 or February 15, 2019 to June 30, 2019. So you have to compare the average number of employees you have now to either the beginning of this year or last spring.
    • Then the loan will be forgiven only to the extent that your current employees compare to the average of one of those two periods. So if you had 100 employees in the first two months of this year and you only have 80 now, only 80% of your loan will be forgiven.
  • There will also be an additional reduction if you are paying your employees reduced salaries during the 8-week covered period. Unfortunately, this is the most poorly worded section of the CARES act. It says: “The amount of loan forgiveness shall be reduced by the amount of any reduction in total salary or wages of any employees [up to $100,000] during the covered period that is in excess of 25% of the total salary and wages of the employee during the most recent full quarter during which the employee was employed before the covered period.”
    • The sensible reading of this is to assume that if you as an employer have kept your payroll per pay period at 75% or more of what it was in the first quarter of 2020, your PPP loan forgiveness will not be affected by this section concerning the reduction in salaries.
    • Unfortunately, the wording of the CARES act relating to “any employee” and “the employee” makes it appear that an employer might have to show that the company paid the exact employee who worked during the first quarter of 2020 at least 75% of his/her wages during the covered period to get full PPP loan forgiveness. The calculations, paperwork and spreadsheets required by that interpretation will be nightmarish. This is particularly true when college-aged employees quit and have gone back to their hometowns, some employees have refused to work because of fear of the virus, and other employees quit because the enhanced current unemployment insurance pays better and they refuse to be rehired right now.
    • There is also a problem with this forgiveness section if it means that rather than a pay period comparison, an employer has to compare a quarter’s worth of payroll to 8 weeks of payroll. I’m not a mathematician, but I’m pretty sure that you don’t pay any workforce as much in 8 weeks as you would in 13 weeks. Even the 25% safe harbor won’t make up that difference.

Here’s my best advice for spending your PPP money with an eye towards forgiveness: until we get more guidance from the Small Business Administration, try to keep as many people on the payroll each pay period during the 8 weeks as compared to the number that you employed on average during the first quarter of 2020. Second, try to keep your payroll amounts at the highest level possible during the 8 weeks after your loan is funded compared to the first quarter of 2020, even if that means you are paying people to not work.

There is one other safe harbor that may help with forgiveness amounts. If you need to rehire employees to get the number of employees up to pre-Coronavirus levels to assure PPP loan forgiveness, you have until June 30, 2020 to do that. Additionally, you have until June 30 to “eliminate the reduction in salary or wages” of your employees. Does that mean you have to hand employees a check who didn’t work in April and May? Possibly. Let’s just hope we have some concrete guidance from the Small Business Administration by then to tell us exactly how this statute is going to be interpreted so that you can maximize your loan forgiveness.

But always remember that the PPP loan interest rate is 1% over 2 years, and you don’t have to start repaying it until October. Even if it is not 100% forgiven, you have been able to obtain some money relatively easily to prop your business up during this difficult time.

2 thoughts on “PPP Loan Tips for Texas Employers

  1. Thanks for the updated information Vicki, as always it is concise and spot on. I really appreciate your help in clearing muddy waters. Chris

  2. Excellent article and very useful. You answered several questions I was trying to find answers to. Thanks Vicki!

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