Professional Advice

PPP Loan Forgiveness, Part 4 

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Newsletter from

Steve Richardson & Company

Certified Public Accountants

May 11, 2020

Dear Clients and Friends:

In my last newsletter, Gina got onto me about over-simplifying the FTE discussion. This newsletter will try to rectify that deficiency.

I can guarantee you that my understanding of the CARES ACT and the related Rules and Regulations is limited and flawed. New information is released every day! Whatever is said here is subject to rapid change.

A Full Time Equivalent (FTE) Employee
As defined by the SBA, a full time equivalent employee is:

  • A full-time employee is one who works 30 hours per week or more. This is equal to one FTE for each fulltime employee.
  • The aggregate of employees who work less than 30 hours per week whose hours, when added together, total at least 30 hours per week. You can add part-time employees’ hours together to get blocks of 30 hours; each block of 30 hours is equal to an FTE.
  • Temporary employees, independent contractors (Form 1099) and leased employees are not considered in the FTE calculations.

The SBA, in an effort to get guidance to the public as quickly as possible, borrowed its definition of FTEs from the Internal Revenue Code, Section 4980H.

This defines an FTE. It’s not hard or tricky. It is, however, precise!

FTEs are Important!
If you have a reduction in FTEs, you will need to reduce your eligible costs as follows:

  • Divide your average number of FTEs during the 8-week covered period by the lesser of:
    • The average FTEs from 02-15-2019 to 06-30-2019, or
    • The average FTEs from 01-01-2020 to 02-29-2020
  • Subtract 1 from the above calculation. If you have had a reduction in FTEs, this will be a negative number.
  • Multiply your eligible costs by the result above and reduce your eligible costs by this number.

There are two ways to calculate the ‘baseline’ FTEs (also correctly called “denominators”). These calculations are in the above bullet points.

  • Calculation number 1: The average FTEs from 02-15-2019 to 06-30-2019, or
  • Calculation number 2: The average FTEs from 01-01-2020 to 02-29-2020

For example, in a bi-weekly payroll, calculation number 1:

For example, in a bi-weekly payroll, calculation number 2:

Like the above table says, choose the lower denominator or baseline FTE number.

Finally, calculate your 8-week disbursement period FTEs:

The FTE Reduction Calculation
If your 8-week FTEs fall below your baseline FTEs, you will need to do an FTE reduction calculation.

The following shows an example of how this is to be calculated.

Change the facts only slightly, the outcome could be substantially different.

Budget!
I strongly recommend that you set an FTE budget and run these calculations in advance!

Even if you do have a portion of your PPP Loan unforgiven due to an FTE calculation, there may be an out. However, the “out” only works if you have an FTE budget, run the calculations, and know in advance that you have a problem. You can exempt yourself from the FTE reduction if:

  • On April 26, 2020, you had a reduction in FTEs as comparted to the number of FTEs on February 15, 2020; and,
  • You restore your FTE number back to February 15, 2020 levels not later than June 30, 2020.

A failure to budget FTEs, in this case, is a plan to fail.

Keep Compensation Steady
If individual employee’s compensation is reduced by more than 25% you will need to reduce your eligible cost calculation.

  • Determine each employee’s average pay for the first quarter of 2020 and the 8-week covered period.
  • For each employee with a reduction greater than 25% of the first quarter 2020 pay, determine the reduction in excess of 25%
  • Reduce your eligible costs by the sum of each employee’s excess reduction in wages over the 25%.
  • Only count employees who earn less than $100,000 during 2019.

This is not complex math. This calculation does lend itself well to an eligible costs budget spreadsheet. If you are reducing employee compensation, you may want to call me.

Even here there is an exception (a get-out-of-jail-free card): You are exempt from the reduced individual employee compensation reduction if:

  • On April 26, 2020, an employee had a reduction in pay compared to their pay on February 15, 2020, and
  • You restore their pay back to February 15, 2020 levels not later than June 30, 2020.

What Do You Need to Be Doing?
Calculate you FTEs for your two baseline periods.

Document all eligible costs:

  • Payroll records
  • Cancelled checks
  • Payment receipts
  • Account transcripts, and
  • Other documentation to verify payments

Make budgets to steer you clear all the way to a 100% loan forgiveness.

Budgets are essential to your success.

Sincerely,

Steve Richardson, CPA

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