The Paycheck Protection Program is intended to protect ongoing operations of businesses during government mandated stay at home orders that have greatly shuttered businesses nationwide. These loan proceeds may be forgiven if businesses maintain similar levels of employees and compensation of those employees during a covered period.
Some businesses may be wondering, for various reasons, if they can increase compensation during the covered period with Paycheck Protection Program funds.
First, we encourage you to tread carefully. What do you mean by increase? Is the increase considered an expansion? If so, that will probably not be allowed. However, there are some scenarios that would be allowed. For example, if you increase wages for employees to compensate for lost or decreased tips, that is a covered payroll cost and can be forgiven. Additionally, one employee may be working additional hours to compensate for another employee who is required to be in isolation due to COVID-19 exposure or caring for family members at home. The employee working more hours may easily have higher pay than she did in January or February, particularly if she is a part-time employee. That is also probably a permissible increase in payroll costs.
Further, the Small Business Administration’s own calculations in the Interim Final Rule support that payroll costs must be slightly increased to get to the full forgiveness amount. Their example, their calculation shows that employers keeping headcount and salary the same during the covered period will use about 74% of their proceeds for payroll costs. Full forgiveness is only achieved if at least 75% of the proceeds are used for payroll costs. Thus, a slight increase for reach 75% of the proceeds used for payroll costs is probably considered okay, especially if you are compensating an employee.
How about if an owner’s compensation is increased? We encourage you to tread more carefully so that this loan is not considered a windfall for the owner. Sole proprietors are explicitly only allowed forgiveness for 8/52nds of their 2019 self-employment increased. For other business structures, what period is the increase compared to? If the increase is an increase from a very slow January and February, but in line with the average owner compensation over the last 12 months, that is probably okay. Given how owner compensation is viewed for sole proprietors, it makes sense that owner draws for a small company would be allowed to reach the average compensation over the year. However, if you’ve fired all of your employees and are using the entire PPP funds to pay yourself, you will automatically have a reduction in forgiveness for having less full-time equivalent employees during the covered period.
Continue monitoring your business payroll and compensation throughout the 8 week covered period to ensure that unexpected scenarios do not sneak up on you and affect the forgiveness of your loan. Give us a call if you need help weeding through these requirements.
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