COVID-19 Information Center

Coronavirus Aid, Relief, and Economic Security Act (“CARES”) Summary
March 28, 2020 (published) | May 19, 2020 (revised)
Raphael Moore, J.D., LL.M.
VIN General Counsel

Article Updated: April 23, 2020
May 7, 2020
May 18, 2020


PPP funding is still available.  The most recent updates to the CARES Act provisions as of May 18 include:

Rafi Moore's summary can be found here.

Click here to download a PDF version of the Coronavirus Aid, Relief, and Economic Security Act (“CARES”) Summary.

Click here to compare the Paycheck Protection Program Loan (PPP) and the Economic Injury Disaster Loan (EIDL).

The Coronavirus Aid, Relief, and Economic Security Act (“CARES”) was signed into law March 27, 2020 to help employers and employees weather the financial fallout from COVID. This is a summary of the relevant provisions from the Act that can affect the VIN community:

1. Use of Retirement Funds

The normal 10% penalty for early distributions from qualified retirement plans is waived for amounts withdrawn from your retirement account - up to $100,000 - in 2020, provided: 

  • You, your spouse, or your dependent are diagnosed with COVID; or 
  • You experience adverse financial consequences because of COVID related quarantine, furlough, lay off, reduction in work hours, inability to work due to lack of childcare, or closure of business.

You can repay these distributions within 3 years of withdrawal. Whether or not repaid, these distributions will be deemed taxable for federal income tax purposes, although you can spread the income over a 3-year period.

2. Interaction with the Families First Coronavirus Response Act (the paid leave act)

On March 18, a federal law known as the Families First Coronavirus Response Act (FFCRA) was enacted to provide paid leave for those who need to stay home to take care of a minor child whose school or day care closed, and for those who have COVID symptoms or are taking care of others with COVID symptoms (see summary here and full discussion here [VIN Community only]).

The CARES act amends portions of the FFCRA. Of special importance:

  • Employers covered by FFCRA can get an advance on the payroll tax credits they would be entitled to, to help cover the costs of providing employees with paid leave. So rather than waiting for quarterly 941 payroll tax filing/remittance, employers can ask for that money “now.” We are waiting for regulations, guidance, and forms from the Department of Labor (“DOL”) and IRS.

  • FFCRA coverage applies to employees who were laid off as of March 1, 2020, and onwards, provided they worked for the employer for at least 30 of the last 60 calendar days prior to being laid off, and were then rehired by the employer.

3. Student Loan Exclusion

Through year end, 2020, employers can provide their employees with a student loan repayment benefit of up to $5,250 per employee on a tax-free basis.

4. Unemployment Assistance

Unemployment insurance benefits are expanded under the CARES Act. In addition to adding coverage for those who are self-employed, it essentially increases the benefit any person gets by $600 per week (known as the Federal Pandemic Unemployment Compensation) - with the actual benefit dependent on state rules. The benefit applies to anyone who became unemployed, partially unemployed or is unable to work, due to COVID-19 on or after January 27, 2020, through year end.

5. Employee Retention Credit for Employers

While the FFCRA helps employers, who are required to pay employees on leave, the CARES Act aims at rewarding employers who keep employees by providing an Employee Retention Credit.

For wages paid after March 12, 2020 and through year end, covered employers are allowed a new refundable payroll tax credit equal to 50% of the qualified wages paid, with a cap of $10,000 in wages per employee – so the maximum credit is $5,000 per employee. To be eligible for this credit, the employer’s trade or business must either:

  • Be partially or fully suspended because of government order limiting commercial transactions, travel, or meetings; or 
  • Receive gross receipts for at least one calendar quarter that is less than 50% of the gross receipts received during the same calendar quarter in the prior year.  This qualifying event will be deemed continuous until the gross receipts exceed 80% of the gross receipts for the same calendar quarter in the prior year.

Note the calculation of this credit differs, depending on the number of employees the employer has:

  • For employers with 100 or less full-time employees in 2019, the sum of gross wages paid to all employees are eligible for credit.
  • For employers with more than 100 full time employees, qualified wages are limited to the sum of gross wages paid to employees who are unable to provide services due to the pandemic.

Also note that employers who receive some of the newly created or modified SBA loans (discussed below) are not eligible for the employee retention credit.

6. Delay in payroll and self-employment taxes

The FFCRA already allows employers to dip into payroll tax deductions and use them as a credit against paid leave (see summary here and full discussion here [VIN Community only]).

The CARES Act further provides that depositing the employer’s share of Social Security tax that would otherwise be due between now and year end can be delayed:

  • 50% of such taxes must be deposited by December 31, 2021, 
  • the remainder by December 31, 2022.

For those self-employed, the CARES Act provides that they must still pay 50% of the self- employment tax (i.e., the employee’s share) just as before, but they can similarly delay the other half as listed above.

Note that if an employer benefits from any SBA loan forgiveness (see below), they may not participate in this tax delay program.

7. SBA loan program

The US Small Business Administration (SBA) provides loans to small businesses. The CARES Act changes how the SBA loan programs function. There are multiple programs affected with very substantive changes.

The CARES Act requires the SBA to issue guidance and regulations on how these loans will be implemented within15 days of enactment, but they have 30 days to provide that guidance to the lending financial institutions, so none of this is expected to be immediate. Until we have more clarity as to how this will work for the VIN community, and by pulling the relevant provisions from both the current legislation and how the programs run now, we can provide this summary:

(a) Economic Injury Disaster Loans

The SBA’s Economic Injury Disaster Loan program (EIDL) is an existing program that is now available for COVID affected businesses. The CARES Act changes how it functions and who can apply:

  • An “eligible” entity now includes sole proprietors, whether or not they have employees. It also includes independent contractors, and any business with no more than 500 employees.
  • You need to have been in operation as of January 31, 2020 – the requirement of being in business for at least one year has been waived.
  • The requirement of not being able to get credit elsewhere has been waived.
  • It provides up to $2 million to pay accounts payable, payroll, and debt obligations that cannot be paid because of a declared disaster.
  • You can also apply for an advance of up to $10,000 to be funded within 3 days of submission, by certifying that you are eligible for the EIDL program. If you are later denied the full loan, you do not have to pay it back.
  • Interest rate is capped at 3.75%, with terms up to 30 years, and payment deferral for up to 12 months.
  • There is no application fee.
  • The underwriting standards have been modified, with current guidance stating that approval and funding will be done within three to four weeks. If an employer has a bridge loan from another source during this approval period, it is eligible to be refinanced with the EIDL funds.
  • The current guidance is also that real estate will no longer be needed for collateral. There is also no need for a personal guarantee, for loans of up to $200,000.
  • If an initial EIDL loan isn’t enough, additional funds can be requested to cover continuing injury.
  • You can apply for the loan, but later decide not to accept it, so it doesn’t hurt to get in the processing line. To apply, go here:

(b) SBA Express Loans

The SBA Express Loan program is also an existing program, but the CARES Act increased the amount available for loans from $350,000 to $1 million through December 31, 2020.

SBA is supposed to respond to these “express” loans within 36 hours, although they have yet to provide the mechanism for this

(c) Paycheck Protection Program

Under the SBA’s existing “7(a)” loan program, the CARES Act added a new “Paycheck Protection Program” (“PPP”) that has drawn lots of attention because of a potential for loan forgiveness.

PPP loans are available to all employers with no more than 500 employees, including self- employed individuals, sole proprietors, and independent contractors. Unlike the EIDL loans discussed earlier, which are funded through the SBA, these loans are run through financial institutions selected by the U.S. Department of the Treasury. These loans work as follows:

  • The amount of loan is based on the lesser of two and a half times the average monthly payroll costs during the previous 12 months or $10 million.
  • The proceeds can be used for payroll costs (excluding individual employee compensation above $100,000 per year), rent, mortgage or other debt interest (provided not “advanced payment of interest,” and provided the debt was incurred before February 15, 2020), and utilities.
  • The proceeds may not be used to cover qualified sick leave or FMLA wages for which a credit is allowed under the FFCRA (see summary here and full discussion here [VIN Community only]).
  • No personal guarantee is required
  • Repayment can be deferred for at least 6 months
  • Payments that are not forgiven are subject to maximum interest of 4%, with a maturity of up to 10 years

The PPP loan principal may be forgiven, dollar-for-dollar, for eligible costs and payments incurred during an 8-week period following loan origination. Stated another way, whatever you spend of the loan proceeds during the 8-week period following receipt of the funds will be forgiven, as long as you use it on the eligible items described above. If the loan is forgiven, it won’t be treated as taxable gross income to you.

But, there’s a catch to make sure there is an incentive to keep employees working. The amount of forgiveness will be reduced through a complex penalty system if the borrower reduces the number of employees, their salaries, or both, during the same 8-week period:

  • For terminations, the reduction will be based on multiplying the forgiveness amount by the quotient of the borrower’s average number of full-time employees per month during the 8 week period divided by either:
    1. the average number of full-time employees per month employed during the period of February 15, 2019, through June 30, 2019; or
    2. the average number of full-time employees per month employed during the period of January 1, 2020, through February 29, 2020.

The borrower can choose which period to use, and the “average number of full-time employees” is determined by calculating the average number of full-time equivalent employees for each pay period falling within a month.

For example, say the forgivable amount is $100,000 and the average monthly employment for the year prior was 10. If the number of employees during the 8-week period is 7, then only $70,000 is eligible to be forgiven (30% reduction in workforce = 30% reduction in loan forgiveness). 

  • If salaries are reduced, the amount of forgiveness will likewise be reduced. The amount of reduction will be based on any reduction in wages of employees earning $100,000 or less on an annualized basis using 2019 figures: For each such employee who has their pay reduced during the 8-week period, the amount of forgiveness will be reduced by the amount such reduction exceeds 25% of the employee’s pay for the quarter most recently completed prior to the loan origination.

For example, say an employee’s salary was reduced by 30% as compared to the most recent quarter. In that case, the forgivable amount would be reduced by 5% (i.e., 30% minus 25%).

If an employer is subject to forgiveness reduction but is able to increase their employee count and salaries by June 30, 2020, to the levels they had on February 15, 2020, they will not be subject to the reduction.

If both the number of employees and salaries are reduced, the amount of forgiveness will be reduced by both triggers (reduction of employees and reduction of salaries), if applicable.

A lender’s decision on forgiveness must be made within 60 days after the lender received a completed application for forgiveness. The application will need, at a minimum, verification of full-time equivalents (e.g., IRS payroll tax filings); proof of expenses (e.g., cancelled checks, receipts, etc., verifying rents, mortgage, etc.); and relevant certification and documentation as the SBA deems necessary once this program is fully implemented.

If the borrower received an advance under the EIDL program (discussed above), the amount of the advance will reduce the amount of allowable loan forgiveness. Furthermore, if an employer gets a PPP loan, they are no longer eligible for the employee retention credits and are not allowed to delay their share of payroll taxes under the tax delay program (both programs also discussed above).

8. Net Operating Loss rules

The CARES Act changes how a business can benefit from net operating losses (“NOLs”):

  • Losses arising in tax years 2018, 2019, and 2020 can now be carried back five years
  • The rule limiting NOLs to 80% of the taxpayer’s taxable income is suspended for tax years that begin prior to January 1, 2021, so that employers can completely offset their income both on a carryback and carryforward basis.

9. Other tax relief provisions

Several other provisions have been modified by the CARES Act to give businesses in unique situations better cash flow. These include:

  • The 30% limit on business interest expense deduction has been temporarily increased to 50% of adjusted taxable income (“ATI”) for taxable years 2019 and 2020, while allowing a business to use their 2019 ATI for 2020 if they wish. This reduces the cost of capital and increases liquidity.
  • An accelerated bonus depreciation is allowed for qualified improvement property, with retroactivity to 2018. This gives qualifying taxpayers the ability to get a refund opportunity by way of filing an amended 2018 return.
  • Refundable Alternative Minimum Tax (“AMT”) credits can be accelerated –making them fully recoverable in 2019, versus in 2021.

10. For those with student loans

The CAREs Act provides a number of relief measures to those with outstanding student loans, including

  • The Federal Government will suspend payments on federal student loans it owns (e.g., Direct Loans) through September 30, 2020. No interest, penalties, or late fees will apply, and the suspension period payments will “count” as a qualifying payment under loan rehabilitation and forgiveness programs.
  • No interest will accrue on any federal student loans, including those that are in default, through September 30, 2020.
  • Any student loan debt collections by the Federal government have been suspended. That mean garnishment of tax refunds, social security benefits, and wages, is being halted.

Note that the above ONLY applies to Federal student loans owned by the government (e.g., Direct Loans). This does not apply to private loans. For more detailed discussion of the impact of COVID on student loans, see the VIN Foundation Blog as well as the VIN Student Debt Folder [VIN Community only]).


Updated April 23, 2020

The SBA has issued the 3rd “Interim Final Rule” to provide further guidance for the PPP program. Of specific interest to the VIN community, this one attempts to clarify issues related to self-employment and partnerships.

1. Eligibility of self-employed

The new rule provides that an individual is eligible if they were in business February 15, 2020, have self-employment income, have their principal place of residence in the US, and file (or will file) a Form 1040 Schedule C for 2019. Of course, this may be an issue for those who were in business in 2020, but not in 2019 (since they won’t have 2019 returns covering the business… ever), and the SBA noted it will need to provide further clarification on that front.

The SBA added that regardless of whether a 2019 tax return has been filed, the applicant “must provide the 2019 Form 1040 Schedule C” with the PPP loan application to substantiate the loan amount, along with “a 2019 IRS Form 1099-MISC detailing nonemployee compensation received (box 7), invoice, bank statement, or book of record that establishes you are self-employed.”

2. How to calculate amount of loan for those self-employed

The SBA provided two ways to calculate the maximum loan amount, depending on whether or not the business employs anyone (other than the owner) – in each case, the SBA looks to average net profits:

  1. For a business with employee(s) – the maximum loan amount is 2.5 times the sum of monthly average net profit, gross wages and tips, plus certain benefit contributions; plus the amount of any EIDL made between January 31 and April 3, 2020 that the business wishes to refinance; minus the amount of any EIDL advance.
  2. For a business without employees - the maximum loan amount is simply the monthly average net profit, multiplied by 2.5, and again the EIDL loan is added, and any advance is subtracted.

3. How can PP loan proceeds be used by those who are self-employed

The proceeds can be used to pay the owner(s) based on 2019 net profits, along with all the other eligible categories (wages, mortgage interest, utilities, other secured debt interest).

The SBA added that “interest on an auto loan for a vehicle you use to perform your business” is an allowed expense, that “business rent payment” include “the vehicle you use to perform your business”), and that “business utility payments” include “gas you use driving your business vehicle”.

However, the SBA also stated that you must have claimed or be entitled to claim a deduction for such expenses on your 2019 Form 1040 Schedule C for them to be permissible use during the 8 week period following disbursement of the loan. That is, if you didn’t spend the money on it in 2019, you can’t spend loan money on it now.

And just like with the others, self-employed folks are subject to the same requirement that at least 75% of the loan proceeds must be used for payroll costs.

4. How do general partners file?

Self-employment income of general active partners is to be reported as payroll cost, up to the $100,000 annualized cap, on the PPP loan application filed on behalf of the partnership. The partners are not to submit a separate application themselves as self-employed individuals. The same rule applies to LLCs filing taxes as a partnership – limiting to one PPP loan per entity.

5. What about forgiveness?

The same rules apply, with the clarification that the PPP proceeds eligible for forgiveness include the total amount paid on owner compensation replacement during the 8 week covered period (i.e., eight weeks’ worth (8/52 weeks) of 2019 net profit.)

Note that it appears there is a maximum threshold limitation based on net profits. The SBA noted that “Limiting forgiveness to eight weeks of net profit from the owner’s 2019 Form 1040 Schedule C is consistent with the structure of the Act…”.


Updated May 7, 2020

The SBA issued updated guidance regarding PPP funding, including how to deal with loan forgiveness and laid off employees. Here’s a quick summary of changes that may be especially relevant to the VIN community:

1. When does the 8 week period begin?

The amount of forgiveness of a PPP loan depends on the borrower’s expenses during an 8 week period, and there has been some debate as to when this period begins. The SBA now confirms that it begins when the lender makes the first disbursement of loan funds to the borrower – when money appears in your bank account.

2. How to deal with laid off employees – will it affect forgiveness if they refuse to come back?

If a borrower laid off an employee, then offered to rehire them at the same wage and with the same hours, but the employee refuses to return, that will NOT reduce the loan forgiveness amount. The SBA still intends to issue more ruling on this, but for now they have expressed their intent to provide this exception. To qualify, the borrower must have made a good faith written offer to rehire, and the rejection “must be documented by the borrower.” The SBA also reminds everyone that the employee who refuses to return may then forfeit their eligibility for unemployment benefits.

3. What about housing stipends?

On occasion, employers provide their employees with an allowance for housing. The cost of that stipend or allowance counts towards payroll costs (along with all other “cash compensation”, subject to the $100,000 annual cap.

4. What happens if a business was in operation February 15, 2020, but changed ownership thereafter?

The CARES Act approved PPP loans only to borrowers that were “in operation on February 15, 2020”, so the question arose as to borrowers who had a change in ownership between that date and now. The SBA clarified that as long as the business was in operation on February 15, it can still apply regardless of the change in ownership. They also added that if the change in ownership was done through purchase of substantially all of the assets of the business that was in operation on February 15, the business acquiring the assets is still eligible to apply even through the change in ownership resulted in a new tax ID number, and even though the acquiring business was not in operation until after February 15.

5. Clarification on audits

All loans “in excess of $2 million, in addition to other loans as appropriate” will be reviewed after a lender submits the borrower’s loan forgiveness application to ensure they made their certifications to get the loan in good faith, and that the proceeds were used properly. A safe-harbor was also established – any borrower who applied for a loan prior to April 24, and who repays the loan in full by May 14, will be deemed to have made all required certifications “in good faith”.


Updated May 18, 2020

The SBA has published a Loan Forgiveness Application form, which borrowers must turn in to their lenders once forgiveness is requested (lenders may issue electronic versions of these). The application does a flip-flop on many provisions from the Act, changes how FTEs are calculated, adds a new FTE safe harbor, while at the same time not only leaving huge gaps in missing definitions but adding even more confusion. But for now, this is the lay of the land, so we might as well dive into it.

Consider the following both a highlight of the crucial elements gleaned from the application and related instructions, as well as an attempt at providing a little handholding as you go through the application itself:

1. Loan Amount: While it appears to be an innocent and easy question at the top of the application, note that the SBA uses the amount of your loan as the maximum amount eligible for forgiveness. This is different than language in the SBA’s interim final rule, and so limits the forgiveness to the principal of the loan, which thus does not include any accrued but unpaid interest. I.e., your loan is accruing interest right now, and that interest is not forgivable as presented in the current application.

2. Irrelevant Questions: The SBA is asking for various data points from you that don’t appear anywhere in the calculations. For example, they ask for the number of employees at the time you applied for the loan, and at the time you ask for forgiveness. Don’t panic and don’t worry about it – just give them what they ask but be sure to remain consistent in your replies.

3. Alternative Payroll Covered Period: To maximize forgiveness, the Act required you to use the money within an 8 week period that started with the receipt of funds. But of-course payroll doesn’t necessarily line up with when funds were deposited to your account. The SBA now allows you to elect an “Alternative Payroll Covered Period”, which would be the first day of the first pay period following receipt of PPP funds. You would then count 56 days (8 weeks) from that day. Note that if you elect this alternative period, you must use it whenever the SBA calls for it – i.e., you need to pay attention to when they use the term “Alternative Payroll Covered Period”, versus “the Covered Period”. This alternative period only applies to payroll, and not to non-payroll eligible costs like mortgage interest, rent, or utilities (which must be paid or incurred during the “Covered Period” – not the “Alternative”).

4. Payroll costs “paid or incurred”: The SBA added a “paid or incurred” concept for payroll costs (and to non-payroll costs, as discussed next). Payroll costs are deemed “paid” on the day a paycheck is given or the day you issue an ACH for the funds to your employee. Say you got the PPP on April 27, and that day ran payroll as you usually do. If you are using the regular Covered Period, starting on the 27th when you got the funds, you would have “paid” payroll using PPP funds, and you would include that amount in your forgiveness calculation.

But at the same time, the SBA also defined the concept of “incurred”, noting that payroll costs are incurred on the day they are earned. They then added instruction that payroll costs incurred for the last pay period of the relevant covered period remain eligible for forgiveness as long as they are paid no later than by the next regular payroll date.

By way of quick reminder, “payroll costs” include gross salaries, wages, commissions, and tips (all capped at $100,000 on an annualized basis, per employee); employee benefits, including costs for vacation, parental, family, medical, or sick leave; payments for separation or dismissal; the employer portion of group health care benefits; employer portion of retirement benefits; and state/local taxes charged on compensation (like workers compensation payments).

5. Non-payroll costs “Paid or incurred”: The Act provided forgiveness of certain non-payroll costs, but the question arose as to whether you had to actually pay for those costs during the 8 week period, or if it was enough to just incur them (e.g., an electric bill for usage of utilities during the covered period, that is paid after the period ends). The new loan forgiveness application clarifies that non-payroll costs must either be paid OR incurred during the Covered Period and paid on or before the next regular billing date – even if that billing date is after the Covered Period. Again, note that the period is the original 8 week covered period starting with the date you got the loan, and NOT the “Alternative” period if you elected that for payroll purposes. This would apply to mortgage interest, rent/lease, and utility payments.

6. Business Mortgage Interest: as was alluded to in earlier guidance, the SBA now confirms that the interest you can list and use as an eligible cost to spend PPP funds on must be “business mortgage obligation on real or personal property”. One reminder - in past discussions it was noted that the reference to “mortgage” means there must be a security interest in the property – i.e. if you don’t pay, the lender can go after the property (whether it is realty or personal property). For instance, that imaging machine you bought last year with a payment plan may have an interest component – that would be considered a “mortgage” on “personal property” as long as the lender has the right to go after the machine if you fail to pay. This issue has not been addressed in this forgiveness application.

7. Illogical and inconsistent tables: The SBA requires you to list employees in two worksheet tables on Schedule A based on annualized compensation levels – in Table 1 you include those not employed in 2019, and those with “an annualized rate of less than or equal to $100,00 for all pay periods in 2019”. Table 2 includes those with “an annualized rate of more than $100,000 for any pay period in 2019”.  Note the underline I added: the SBA uses two different concepts, without explanation. Say you paid someone a $90,000 salary, but then gave them a bonus of $5,000 one month. For “all pay periods” they earned less than $100,000. But for the one pay period where you gave the bonus, they would have earned more on an annualized basis, thus triggered the “any pay period” – did the SBA really mean for that discrepancy? The other issue is that the relationship to the whole of 2019 is not apparent – the intent is to use these figures when calculating loss of forgiveness (see later discussion), but looking at the whole of 2019 does not follow the terms of the Act.

Note also that when listing employees in Table 1 and Table 2, you may not list any owner-employees, self-employed, or partners. They are dealt with separately in Line 9 of Schedule A. This has a number of consequences throughout the application process, even though not reflected in any of the instructions: these “owner” type folks are not included in the FTE reduction calculation (e.g., a shareholder-owner who reduces their own salary so that there will be sufficient cash flow for others); it also looks like non-compensation payroll costs for these “owners” – like employer health care insurance payments and retirement payments – are also not forgivable. Again, this is not explicitly detailed in the SBA application, so the argument to the contrary can still remain.

8. Calculating FTEs – the SBA did an about-face from standard Federal rules and decided to go with 40 hours (rather than 30) as the measure of 1.0 FTE. Why? They didn’t explain. But they did confirm that 1.0 is the maximum FTE for any single employee (i.e., a 45-hour employee is still just 1.0 FTE). They also provided a simplified alternative for doing the math: at your choice, you can decide to take every employee who works 40 hours or more and call them a 1.0 FTE and every employee who worked less than 40 hours a 0.5 FTE. Since you may get different results by using the simplified alternative, you may want to do the math both ways to see which puts you in a better position – I know… so much for “simplified.” Note that if you do the exact math, you are to round to the nearest tenth.

9. Reduction in wage test: we already know that if an employee’s wage is reduced during the relevant covered period (i.e., the 8 weeks starting with loan disbursement, or the “alternative” one) by more than 25% as compared to the wages paid between January 1, 2020, and March 31, 2020, then the amount of forgiveness will be reduced. However, the SBA only tests the employees in Table 1 – those with an annualized salary “of less than or equal to $100,000 for all pay period in 2019”. By definition, a reduction in wage of only those employees will trigger a loss of forgiveness.

10. The “safe harbor” rules, whereby you can “fix” a reduction in wages or a reduction in hours – have been adjusted beyond how they are described in the Act

  1. Wage reduction safe harbor: Remember the wage test noted above? You have a chance to “fix” it, and not suffer any reduction, if you meet a “Salary/Hourly Wage Reduction Safe Harbor”. For each employee, whose wage is reduced by more than 25% during the covered period as compared to the wages paid between January 1, 2020, and March 31, 2020, you do this:
    1. Step 1: look at the employee’s wage on February 15, 2020.
    2. Step 2: Calculate that employee’s average wage for the period of February 15, 2020, through April 26, 2020.
    3. If the Step 2 figure is greater than the Step 1 figure:  no safe harbor applies, and reduction in forgiveness applies.
    4. If the Step 2 figure is less than the Step 1 figure, determine the wage as of June 30, 2020. If that amount is equal to or greater than the Step 1 figure, the safe harbor applies, and you will not suffer any reduction in forgiveness under the wage test.

Let’s try and apply this “fix” to a real-life example.

Your clinic was doing just fine in January. February was a “so-so” month. By the time March came, you started getting hit with COVID restrictions and had to start reducing the base pay for Wendy, your one and only associate. By the time April and May rolled around, things were pretty dismal, and you had to reduce Wendy’s pay even more. But then you got your PPP funds, restrictions eased up, and you were able to increase Wendy’s salary by end of June.

Assume Wendy was paid $8,750 in January; $6,250 in February; and $5,000 in March. So her total for the period of January 1, 2020, through March 31, 2020, was $20,000. On an annual basis, that would be an $80,000 salary ($20,000 times 4).

Wendy’s earnings continued to slide into April, and her average annualized salary between February 15 and April 26 was $55,000.

As noted, that slide in pay continued as the effects of COVID got worse for your clinic. By the time you got your PPP funds and started the “covered period”, business was really slow. Over the 8 week period, you paid Wendy only $7,000. That is equivalent to an annualized salary of $45,500 ($7,000 divided by 8, multiplied by 52).

Things then started getting better for your practice, and by June 30th, you got her pay up to $75,000 per year. Not quite the $80,000 she earned in the first quarter of 2020, but certainly better than what she was earning in April and May.

So the first step would be to apply the reduction in wage test.

  • You paid Wendy a salary equivalent to $80,000 during January 1, 2020 through March 31, 2020.
  • You paid Wendy a salary equivalent to $45,500 for the 8 week covered period.
  • That is a reduction to 56.875% ($45,500 divided by $80,000) or her January through March salary.
  • That is less than 75% (i.e., you reduced her earnings too much), so you failed the test, and a reduction in forgiveness is required.
  • The reduction would be $2,230.77 ($80,000 times 75% = $60,000; $60,000 minus $45,500 = $14,500; $14,500 divided by 52 multiplied by 8 = $2,230.77).

But now let’s see if we can “fix” that reduction, by falling into the wage safe harbor. Following the steps described above:

  • Step 1: What was Wendy’s wage on February 15, 2020? It was $75,000 per year ($6,250 times 12).
  • Step 2: What was Wendy’s average wage for the period of February 15, 2020 through April 26, 2020? We said it was $55,000.
  • Step 2 is less than Step 1, so we need to continue to see if the safe harbor applies.
  • What was Wendy’s wage on June 30, 2020? It was $75,000 per year. Even though it didn’t hit the $80,000 she was earning during the first quarter of 2020, you were able to get her salary up to the level it was on February 15, 2020, and so the safe harbor applies, and you will not suffer any reduction in forgiveness under the wage test.

b. FTE reduction safe harbor: we already know that you will also suffer a loan forgiveness reduction if you lower your FTEs. But you can ignore that reduction if you fall into an “FTE Reduction Safe Harbor”.

  1. Step 1: Determine the average FTEs for the period of February 15, 2020, through April 26, 2020.
  2. Step 2: Determine the FTEs for the pay period that includes February 15, 2020.
  3. If the figure in Step 1 is less than the figure in Step 2, then you will suffer a reduction unless the FTEs on June 30, 2020, equal to or are greater than the Step 2 figure – i.e., that is the FTE safe harbor. Note that a second safe harbor is provided later in the application, and will be discussed in this summary.

11. Exceptions to FTE Reduction for certain departing employees: in addition to the FTE safe harbor discussed above, the SBA had provided an exception for an employee that left and refused to return to work with the same hours/wage when presented with a written offer to do so. Now, the SBA has expanded that exception to include employees fired for cause, those who voluntarily resigned, and those who voluntarily asked to have their hours reduced. Any employee who falls into those categories during your relevant covered period (the actual one, or the “alternative”, if you chose that), will not cause your FTEs to be reduced.

12. Owner-employees, self-employed individuals, and general partners: The SBA application uses a “Schedule A Worksheet” – this is the one that has the “Table 1” and “Table2” listing compensation of employees. But then, separately, it asks for the “Compensation to Owners” (Line 9 of Schedule A). These individuals are thus NOT included in Table 1 or Table 2, and instead, get listed here separately. And note that the line asks for “amount paid to owners”, rather than “compensation” – so in theory the like of guaranteed payments to partners would be includable. But the instructions do not clarify this point. They do, however, add a limitation: there is a cap of $15,384 or the 8 week “equivalent of their applicable compensation in 2019”, whichever is lower. That is, you can’t claim more than you received in 2019. Note that the SBA had stated it will issue additional guidance for the situation where a business was not in operation in 2019, but that hasn’t happened yet.

13. Second FTE Safe Harbor: Just when you thought you were done, after Line 10 in Schedule A there is yet another FTE calculation to provide a second chance at an FTE Safe Harbor. First, you are asked if you had a reduction in “the number of employees) or the average paid hours of your employees between January 1, 2020, and the end of the Covered Period.”  Dissecting this sentence, note that the SBA now uses the words “number of employees”, rather than FTEs, and the real “Covered Period” rather than the “Alternative” you may have picked. Why a new reference to a completely new period? Why a reference to a reduction in employees rather than FTEs? No one knows.

It is also not clear how the “or” should be read in the sentence “If you have not reduced the number of employees or the average paid hours” should be read. Is the intent that if you didn’t do one of these, you get to put a 1.0 in line 13, and meet the safe harbor?  Or is it the requirement that you meet both? That is, did the SBA mean “If you have neither reduced the number of employees nor the average paid hours…”? The distinction is an important one – do you get an automatic “1.0 pass” and meet the second FTE safe harbor if you neither had a drop in employee headcount nor a drop in wages? Or do you get it if you did not have a drop in just one of those?

Confusion aside, the SBA does give you a second chance at avoiding a reduction in forgiveness amount. If you meet the qualification of having not reduced employees/hours by comparing your numbers on January 1, 2020, and at the end of the “Covered Period”, you fall into this second FTE Safe Harbor, and will not experience a reduction in forgiveness. Otherwise, Lines 11 through 13 of Schedule A have you doing the “normal” calculation:

  1. Step 1: Choose one of your historical average FTEs as the base period (either the February 15, 2019, through June 30, 2019 period; or the January 1, 2020, through February 29, 2020 period).
  2. Step 2: Quote your total average FTEs for the “real” Covered period or the “Alternative” – whichever you used in Table 1 and Table 2.

  3. Step 3: divide the figure from Step 2 by the figure from Step 1. If the number is less than 1.0, you will experience a reduction in loan forgiveness.

14. Usage Forgiveness Test: The SBA has again confirmed what many have missed in their various explanations/calculators –no more than 25% of the total forgiveness amount may be attributable to non-payroll costs. That is – it is not enough that you used 75% of the loan amount on payroll. The final calculation (Line 10 of the forgiveness form) requires you to quote a figure representing your payroll costs divided by 0.75, and the final forgiveness amount is limited by that figure (Line 11 of the forgiveness form).

15. Documentation: With the new Loan Application, the SBA has provided a list of required documents that must either be submitted or must be maintained (but not submitted).

The “required to be submitted” list is broken down by the type of information being substantiated:

  • To prove payroll, you need to provide documents verifying compensation and non-cash benefits. This includes (a) bank statement or third-party payroll reports, (b) tax forms (payroll tax filing reports – like Form 941, and quarterly wage reports and unemployment tax filing), and (c) receipt, canceled checks, or account statements showing payments to health insurance and retirement plans.

  • To prove FTEs, documentation like payroll tax filings reports and quarterly wage reports and unemployment tax filings showing the number of average FTEs on payroll for the relevant base period elected (February 15, 2019, through June 30, 2019; or January 1, 2020, through February 29, 2020).

Note that for both payroll and FTEs, the above documents should be provided for every relevant period. That means (a) for the 8 week covered period (the “real” one, or the “Alternative”); (b) for the relevant base period elected (February 15, 2019, through June 30, 2019; or January 1, 2020, through February 29, 2020); (c) for 2020 Q1 (assuming that is the last full quarter prior to the covered period); (d) and for February 15, 2020 through April 27, 2020.

  • To prove non-payroll eligible expenses, documents showing (a) the existence of the obligation prior to February 15, 2020, and (b) proof of payments during the Covered Period. For mortgage interest, this specifically means either a copy of the lender amortization schedule along with receipts or canceled checks showing payments, or lender account statements from February 2020 and the months of the Covered Period through one month after, showing interest amounts. For rent or lease payment, you need to provide a copy of the lease along with receipt or canceled check, or an account statement from the lessor – again for February 2020 and the months of the Covered Period through one month after. For utility payments, you need to provide copies of invoices from February 2020 along with those from the Covered Period, together with receipt, canceled checks, or account statements showing payments.

The “must maintain but not required to submit” list are items that help substantiate various other elements in the application. They must be kept for 6 years after the forgiveness date or full repayment. These include:

  • Any documents or calculations used to show the listing and math-related to Table 1 and Table 2 (e.g., salary/wage reports showing reductions; wage lists showing those earning more than $100,000; reports showing who worked in 2019)
  • Proof of job offers and refusals; for cause terminations; voluntary resignations; and requests from employees for reduction in hours
  • Any safe harbor calculations and related reports (e.g., employee count and wages on January 1, 2020)
  • All documents related to the PPP loan application itself, and to necessity for the loan.

To discuss the above, please use this VIN discussion thread (open to VIN members only). 


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