It’s funny what a difference a few weeks make. Prior to June 6th, when the forgiveness period was only eight weeks, we were strategizing with our clients to try to determine which staff they needed to bring back to work, considering which base period would have the least impact on their FTE calculation, and determining if we should use the cash basis or alternate method for seeking payroll forgiveness? We were running simulations and impact studies to find which one who provide our clients with the highest level of forgiveness … and then the government did something that rarely ever happens; they passed new regulations that had a tremendous positive impact on most providers. So now, planning isn’t as important as it once was.
So, let’s look at the new regulations that were passed on Tuesday, June 6th:
- Probably the most important part of the regulations was extending the forgiveness period from 8 weeks to 24 weeks. Think about it, when you originally applied for the loan you received funding at 2 ½ months of full compensation, and the regulations gave you eight weeks to spend it in order to maximize forgiveness. For many providers that were tough, because they had already terminated employees, many of them were collecting unemployment, which included an extra $600 a week as a little something extra from Uncle Sam. They didn’t want to come back, or because of the shut-down, there was nothing for them to do. That left many providers scrambling to figure out not just how to spend the money, but also how to meet the complex FTE tests that existed in the regulations. It also posed a moral dilemma for many providers as they knew that if they rehired people, it would only be temporary because without revenue coming in, they couldn’t really afford to keep their staff after the PPP funds dried up. The 24-week forgiveness period makes it a lot easier to manage.
- You can operate without having to bring back staff that is not really necessary at this point to operate your school. This gives you the ability to cover your essential costs for a longer period of time. Because 24 weeks is significantly longer than the 2.5 month loan period, even if you don’t bring back all of your staff and find yourself in a penalty situation, it may not impact you at all.
- Consider this; you obtained a PPP loan for $750,000 when your payroll averaged $300,000 per month. Now your payroll is down to $200,000 per month because you had to let 1/3 of your staff go. Your payroll over 24 weeks would be approximately $1.2 million. Add to that $200,000 of utilities and rent, and your total forgivable loan amount is $1.4 million. Since you are only employing 2/3 of your staff, you would lose about $467,000 of your forgivable expenses, reducing your forgivable expenses to about $933,000, which is greater than the $750,000 loan amount … making your full loan forgivable. Easy-Peasy, no need to worry about FTE’s, rehiring, or anything.
The new regulations increased the amount of the loan and related forgiveness that can be charged to non-compensation related costs, including rent (real and personal property), utilities (heat, lights, power, phone, and internet), and mortgage interest from 25% to 40%. This is very beneficial to those providers that are operating at lower staff levels and are having a tough time covering their fixed costs.
- The regulations extend the loan period from June 30th, 2020, to December 31st, 2020. This is beneficial on two fronts:
- For those providers that haven’t applied for a loan yet, because they had terminated pretty much all of their staff and they wouldn’t have benefitted if they had to get a loan by June 30th, now that businesses are starting to re-open, it might make sense to apply for a loan over the next couple months to help get your feet back under you. While the loan can only be used to pay core expenses (staff salaries, rent, utilities), you can use the revenue you generate to catch up on the bills you couldn’t pay when there was no money coming in.
- The regulations move the safe harbor for rehiring staff from June 30th to December 31st. As long as you have the same number or more staff on December 31st as you did as of February 15th, there is no penalty to your forgiveness, regardless as to when they were rehired. Once again, very important for those providers that are going to need time to ramp up their staffing.
- For those of you who can’t get your full loan forgiven, the new regulations give you 5 years to repay the portion of the loan that is not forgiven as opposed to 2 years. At 1% interest, that provides tremendous benefit to providers.
- In addition to the new favorable provisions within the PPP loans, the new regulations open up the payroll tax deferment to all businesses, including the ones that received a PPP loan. As a result, you can defer paying your employer portion of FICA tax (Social Security and Medicare) incurred from now until December 31st, 2020 until December 31st, 2021 and December 31st, 2022, with 50% of the deferred amount due on each of those dates.
These new regulations should make it much easier for you to get a much larger portion of your PPP loan forgiven. Even so, we are still awaiting regulations from the New York State Education Department and the Department of Health to determine how these will need to be treated when completing your cost reports.