Updated June 22, 2020
On June 5, 2020, the President signed into law the Paycheck Protection Program Flexibility Act (PPP Flexibility Act) to provide businesses with greater flexibility and more time to maximize forgiveness of loans received under the Paycheck Protection Program (PPP).
Of particular interest to the restaurant industry, the material changes made to the PPP by the Flexibility Act include:
- Extension of the expense forgiveness period from eight weeks to 24 weeks, but that 24-week period cannot extend beyond Dec. 31, 2020.
- Reduction of the payroll ratio requirement from 75% to 60%, allowing restaurant businesses to use up to 40% of funding for non-payroll expenses such as rent, mortgage interest or utilities. As currently written, the 60% payroll expense is a cliff, rather than a sliding scale as in the previous guidance, meaning that restaurant businesses must spend at least 60% on payroll or none of the loan will be forgiven. We do not believe that the intent of Congress was to make this cliff, so watch for potential future updates on this item.
- Increasing the loan repayment period from two to five years on new loans. For any amount not forgiven, the interest rate remains at 1%.
- Allowing payroll tax deferment of the employer share of the Social Security tax for PPP recipients. The Act now allows for the deferral of such amounts through December 31, 2020, regardless of a company’s PPP loan forgiveness status. Deferred amounts are to be paid in two equal installments in December 2021 and 2022.
- Extension of the deadline for rehiring workers from June 30 to Dec. 31. The Act also allows exemptions from forgiveness requirements if employers can document in good faith their inability to rehire certain workers who were employed as of Feb. 15, or similarly qualified workers before Dec. 31.
The Flexibility Act also allows borrowers to adjust if they can document that they are unable to restore business operations to pre-pandemic levels because of COVID-19-related restrictions.
On May 15, the Small Business Association (SBA) released its Loan Forgiveness Application for the Paycheck Protection Program (PPP). On June 16, the SBA released two new applications: a revised full-loan application and the new EZ Forgiveness Application. The application outlines the computation for debt forgiveness. We have outlined below answers to some frequently asked questions as it relates to the guidance currently in place:
When does the 8 week forgiveness period begin?
As of June 5, the passing of the Paycheck Protection Program Flexibility Act of 2020 extends the 8-week forgiveness period to 24 weeks. The 24-week forgiveness period is referred to as the “Covered Period.” This is the timeframe in which you must utilize the PPP loan proceeds received. The first day of the Covered Period for your PPP loan must be the same as the PPP Loan Disbursement Date and extends over the 24-week Covered Period. For example, if you received the PPP loan proceeds on Monday, April 27, the first day of your Covered Period is April 27 and the last day of the Covered Period is Sunday, October 4.
Are there any alternatives available to the Covered Period?
Yes. Within the PPP loan forgiveness application, the SBA provided for an optional “Alternative Payroll Covered Period.” The Alternative Payroll Covered period may be utilized by borrowers with biweekly or more frequent payroll periods to calculate eligible payroll costs, but not non-payroll costs. This Alternative Payroll Covered begins on the first day of their first pay period following the date when the PPP loan proceeds were received. For example, if you received the PPP loan proceeds on Monday, April 27, and the first day of your payroll period following PPP loan disbursement is Sunday, May 3, the Alternative Payroll Covered period would be from Sunday, May 3 through Saturday, October 10.
What rent payments are eligible to be considered in the loan forgiveness calculation?
Covered rent obligations include business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020. Rent paid during the Covered Period is included in the forgiveness calculation; rent incurred during the Covered Period but paid in the next billing cycle after the end of the Covered Period is also included. It appears that back rent and prepaid rent paid during the Covered Period are eligible. It should be noted that documentation of both the lease agreements in place from February 2020 through the covered period and copies of receipts or canceled checks will be required documentation to verify these rent payments were, in fact, eligible.
Should rent be paid or deferred during the Covered Period?
It would be a good planning opportunity to continue to negotiate for both rent reductions and also utility deferrals for your business. Renegotiating leases now, offering payment of current and past obligations while negotiating for reduced future rent or rent deferrals during a later period, is likely a wise plan. NOTE: The passing of the Paycheck Protection Program Flexibility Act of 2020 on June 5 allows for up to 40% of the loan amount to be used for non-payroll costs.
How are missing tips paid with supplemental wages accounted for in an FTE calculation?
Hourly wages paid to tipped employees during the elected covered period are eligible to be included in wages for the purpose of payroll costs in loan forgiveness. For restaurants that temporarily shut their doors and those which may still be closed, owners can consider paying additional wages to these tipped employees to compensate them for lost tips. This additional compensation would be considered supplemental wages and can be included in payroll costs for loan forgiveness purposes. Also, this type of supplemental wage compensation would allow for those tipped employees to have their compensation be equal to or greater than the employee’s hourly wages earned on February 15, 2020. The guidance has further explained that for employees who are not performing work but remain on the restaurant’s payroll, the payroll costs are incurred based on a normal established restaurant schedule that would be a typical schedule for those employees. Therefore, payroll costs incurred by the last pay period of the covered period are eligible for forgiveness.
How are wage reduction penalties calculated?
Headcount reductions are common within the restaurant industry. Restaurants determine whether or not they had a headcount reduction by comparing the average number of full-time equivalent (FTEs) during the covered period to the average number of FTEs during the selected reference period. The selected reference period can either be the period from 2/15/19-6/30/19 or 1/1/20-2/29/20. The total amount of eligible expenses available for forgiveness is proportionality reduced by the reduction in FTE employees.
FTEs are calculated by taking the average number of hours paid to each employee per week by 40. If an employee worked more than 40 hours per week during the covered period, they are considered 1 FTE. For employees that worked less than 40 hours per week, the FTE calculation can be determined either by the actual method or the simplified method to determined which is the most advantageous for your business. Current guidance also allows for the FTE reduction test to be performed on an aggregate basis and does not require a restaurant to look at this on an employee-by-employee basis.
If the average weekly number of FTEs in the covered period is less than the average weekly number of FTEs in the chosen reference period, a potential reduction penalty would be calculated. However, restaurants can include in their FTE headcount any employee for which a good-faith written offer was made to rehire the employees during the covered period and that offer was subsequently rejected by the employee.
For loan forgiveness, restaurants may exclude any reductions FTE headcount for a specific employee if the following criteria are met:
- There is a good-faith written offer to rehire a specific employee (or, if applicable, restore the reduced hours of the employee) during the elected payroll costs covered period;
- The offer provided to the employee was for the same salary or wages and the same number of hours as what was earned by the employee in the last pay period before the separation of employment or reduction of hours;
- The offer to return to hours and/or employment was rejected by the employee;
- The restaurant has documentation and records maintained in the file of both the offer and the rejection; and
- The restaurant informed the appropriate state unemployment insurance office of the employee’s rejected offer of reemployment within 30 days of the employee’s rejection.
It is important to note restaurants can avoid the reductions in loan forgiveness by restoring FTEs and salaries and wages by no later than December 31, 2020 (June 30 prior to the PPP Flexibility Act being passed), through two safe harbor options. The first safe harbor option provides if certain salary and wages of employees were reduced between February 15, 2020, and April 26, 2020 (the safe harbor period), but a restaurant eliminates those reductions no later than December 31, 2020, the restaurant is exempt from a reduction in loan forgiveness amount that would normally be required under the more than 25% reduction test. The second safe harbor provides if a restaurant eliminates any reductions in FTE employees occurring during the safe harbor period no later than December 31, 2020, or earlier, the restaurant is also exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in FTE employees. For restaurant owners that did receive their PPP loan prior to the Flexibility Act, there is still the option to keep the 8 week/June 30th safe harbor time frame if one chooses to do so.
Am I eligible to use the EZ Forgiveness application?
The SBA released the EZ Forgiveness Application as part of the most recent update to the Paycheck Protection Program Flexibility Act of 2020. This application requires fewer calculations and less documentation and will reduce the burden for smaller recipients. This new EZ application applies to borrowers that:
- Are self-employed and have no employees; OR
- Did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees; OR
- Experienced reduction in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of their employees by more than 25%.
What are considered utility payments?
Utility payments include electricity, gas, water, transportation, telephone, and internet. These utility payments are all eligible expenses for debt forgiveness. Payments for security systems, credit card processing, and waste removal are not specifically listed as eligible expenses within the forgiveness application.
As guidance for PPP loan forgiveness is ever-changing and evolving we highly recommend you connect with our PPP loan forgiveness team at email@example.com to discuss your specific circumstance.
William Vaughan Company and WVC Rubix Cloud are certified accounting partners of Restaurant365, an all-in-one accounting, operations, inventory and scheduling solution exclusively for restaurants. Schedule a demo today.
This post is to be used for informational purposes only.
Kristin Metzger, CPA, is the restaurant practice leader at William Vaughan Company, a full-service accounting and advisory firm. In addition to her leadership role, she also collaborates with the firm’s outsourced accounting affiliate, WVC RubixCloud. As part of that team, Kristin has been helping restaurant owners and operators gain a clear and accurate financial picture by streamlining the day-to-day accounting functions through hands-on expertise and advanced technology.