The American Institute of Certified Public Accountants (AICPA) is urging the Treasury Department and the U.S. Small Business Administration (SBA) to release key guidance on Paycheck Protection Program (PPP) loan forgiveness calculations. “CPA’s and their clients say that the lack of guidance makes it difficult for them to make critical decisions on important matters, such as staff retention.”
The recommendations from the AICPA to the Treasury Department and SBA include the following:
Recommendation 1: Align beginning of 8-week covered period with beginning of a pay period, rather than the date loan proceeds are received.
We recommend beginning the calculation of the 8-week covered period as the date of either the beginning of the payroll period during which funding was received, or the beginning of the next payroll period, at the borrower’s discretion. For example, if funding is received on April 10 and the borrower’s normal pay cycle is semi-monthly, the borrower could elect to start the 8-week covered period on April 1 or April 16. Using this approach, rather than beginning the covered period when funding is received, will provide borrowers more opportunity to use the PPP funds for their primary purpose – keeping employees on the payroll. Additionally, using an approach that aligns to the borrower’s operations will result in a more efficient, consistent approach.
Recommendation 2: Begin the 8-week covered period when operating restrictions are lifted, rather than the date loan proceeds are received.
If a borrower receives PPP funding while its operations are shut down due to shelter-in-place orders or essential business restrictions, etc., we recommend the start of the 8-week covered period be based on when the restrictions are lifted and the borrower is allowed to operate – using either the beginning of the payroll period during which operating restrictions were lifted, or the beginning of the next payroll period, at the borrower’s discretion. This allows funding to be used to quickly get the borrower back up and running, rather than limiting the use of the funds to a time period when they are not permitted to operate.
Recommendation 3: Defining Full-time Equivalents
Because the CARES Act does not define how to calculate a full-time equivalent (FTE), we recommend following the definition under the Affordable Care Act (ACA) of 30 hours.
Also because hours are not always collected for certain types of employees (e.g. salaried workers or those paid by piecework), we recommend using a wage-based proxy for determining FTEs.
- If hours worked are not available, employees would be deemed an FTE if earnings are over $217.50 – the Federal minimum wage x 30 hours a week [$7.25 x 30 = $217.50]. Employees earning less than $217.50 /week would be considered a prorated FTE; e.g., an employee that earns $200/week would count as 0.92 of an FTE ($200/$217.5 = 0.92).
- This approach allows for a straightforward calculation that consistently measures the number of FTEs based on the Federal minimum wage and a standard definition of the number of hours worked to be considered an FTE.
- It’s important to recognize that any measure used to determine FTEs will work since it is not the measure, but the comparison of measured results from the two periods that will result in potential reduced forgiveness. Consequently, selecting a measure that is simple, consistent and able to easily be applied across all employee types and all time periods is paramount.
- We strongly believe this recommendation meets that goal by being very straightforward. Any decrease in compensation does not factor into this data point, therefore, this simple approach leads to a result that identifies any reduction in employee headcount when consistently applied to the various time periods.
Recommendation 4: Payroll reduction calculation should be done based on the average payroll per employee per week rather than the total compensation per employee in an 8-week period versus the prior quarter.
The CARES Act includes a provision for a reduction in loan forgiveness for any employee whose compensation decreased by more than 25% from the 12-week quarter and the 8-week covered period. However, 8 weeks will naturally have 33% less payroll due to the fewer number of weeks in the time period.
Additionally, individuals who were employed during the most recent full quarter may be unable or unwilling to return to work.
We strongly recommend using an average payroll per employee per week comparison as that approach is in line with the intent of the CARES Act and provides a clear indication if an employee’s wages have been decreased.
We also strongly recommend that this calculation exclude employees who are not active employees throughout the covered period. For example, if someone worked Jan. 1 through March 31 and changed jobs in April, their pay during the covered period would appear to have been reduced by well over 25% compared to the base period. Any reduction in headcount is measured separately; therefore, we recommend only including employees who were active through the entire 8-week covered period.
NOTE: AICPA has requested further clarification on how reductions in forgiveness are to be applied.
Clarity needed regarding how reductions in forgiveness are to be applied.
- Some of the forgiveness requirements cause a dollar reduction while others produce a percentage reduction. The order in which these are applied can have a significant impact on the forgiveness amount.
- Clarification is necessary to know if the Act lists forgiveness reductions in the intended order of application.
We will continue to keep you updated as information becomes available.