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PPP Loan Forgiveness: Don’t Rush into the Wrong Decision

By November 5, 2020Employment News, News

Now that the banks (with guidance from the SBA and the U.S. Treasury) are finally opening their doors to PPP Loan forgiveness, dutiful borrowers and their accounting staff are anxious to get their forgiveness applications rolling and the loans off their books.

As the initial spirit or “intent” of the loan was to provide coverage for payroll, rent and utilities for a period of 8 weeks, it’s logical that most businesses are starting their application process here. The issue that we’re seeing, as a payroll provider, is that many employers didn’t incur enough expenses during that 8-week period.

The program was designed to account for businesses of all types from across the U.S. and had to take into consideration varied commercial real estate rentals rates. In fact, early on there were complaints that the program was not generous enough to account for some restaurants, retailers and other businesses occupying space in the priciest downtown business districts or most expensive commercial real estate markets.

Today some borrowers with smaller office footprints and lower rent obligations are having trouble making the accounting work to apply for forgiveness using the 8-week calculator.  Here’s why:

The PPP Loan Application was based on 2.5 times the average monthly wages, state taxes and benefits, but the forgiveness application is based on 8 weeks of wages, state taxes, benefits plus rent and utilities. As a result, the wages may be less than those in the application (because 8 weeks is a shorter time frame than two months) and one-half month’s wages are more than enough to cover rent and utilities.

We’re encouraging clients to take advantage of the opportunity provided by the very delayed roll out of the forgiveness applications to forgo the 8-week calculation and make application underneath the available 24-week period. Let me explain:

The 24-week coverage period is roughly 3 times the 2 months used for the loan application.  As a result, in many cases, wages alone are more than enough of a basis to have the entire loan forgiven and no real estate or utilities expenses must be included.

Restaurants are among those for whom there might be an exception to the 24-week recommendation.

Businesses who might not use the 24-week forgiveness period would be people who saw a significant drop in the number of employees on their payroll. Remember, the purpose of the entire program was to keep workers on the payroll. If your business was adversely affected such that your payroll levels have dropped noticeably, the 24-week period likely will not work for you.

If your employee base has remained largely the same for the duration of the period and you didn’t reduce wages substantially, MarathonHR recommends that you use the 24-week model with one exception: If you did something specifically during the 8 week period to ensure forgiveness and spend the loan in entirety, like extend a hardship bonus to employees, then the 8-week application remains a good choice for your business.

If your banker is calling you asking questions and requesting documentation, take a pause to reach an agreement on which path is best for you and limit the headaches of producing then reproducing reports. And remember, there is no prize for first place completion of your PPP forgiveness application. The SBA and U.S. Treasury allow for 10 months from the end of your (8 or 24 week) coverage period to apply.