The forgiveness reduction analysis determines if your forgiveness amounts will need to be reduced.
First, is the FTE reduction test. There are several exemptions and safe harbors provided by PPP and the PPPFA that will allow you to avoid having a reduction in your forgiveness amount due to a reduction in FTE. If any of the three FTE Restoration Questions are answered with Y, the FTE reduction quotient for the calculation of your forgiveness amount will be 100% and there's no need to complete any of the FTE tabs. If you were not able to answer any of these questions with “Y”, then you will need to calculate the FTE Reduction Quotient:
- To calculate the FTE Reduction Quotient, you will need to calculate the average FTE for at least one of three possible reference periods, and the average FTE for these three reference periods are determined by what you enter on the different FTE tabs.
- You will also need to calculate the average FTE during your Covered Period or Alternative Payroll Covered Period on one of these FTE tabs (FTE20b).
- If A) the average FTE during the Covered Period or the Alternative Payroll Covered Period is lower than B) the lowest calculated average FTE from the reference period(s), then the FTE reduction quotient is calculated as “A” divided by “B”.
- If the average FTE during the Covered Period is greater than the lowest calculated average reference period FTE, then the FTE reduction quotient is 100%.
Second, the salary reduction calculation is calculated on the Salary Red Tab and is used to enter information for eligible employees that earn less than $100,000, who had a decrease in their compensation by more than 25%, even if it has been or is planned to be restored. Eligible employees are those employees whose principal residence is in the United States.
If you answer yes to any three of these FTE Reduction safe harbors and you have not had any salary reductions, you qualify to use the Form 3508EZ. A message will appear in this section of the “TOP” tab if this is the case.