A Simple Guide to PPP Loan Forgiveness

This article may be out of date as the U.S. Senate recently passed the Paycheck Protection Program Flexibility Act of 2020 on June 3, 2020. Please this our latest post on the topic.

Congrats! You’ve been approved for a Paycheck Protection Program (PPP) loan but now comes the tough part. You need to strategize how your company will use the funds to keep your business going while ensuring that you qualify for full loan forgiveness. Unfortunately, many business owners will fail to do this causing their loan to come due (in part or whole) even though they’ve already spent the money. Don’t let that happen to you.

Here’s our simple step-by-step guide on how to manage your loan and keep your expenses organized so you can easily complete the loan forgiveness application.

Paycheck Protection Program (PPP) Conditions

The Small Business Administration SBA will forgive loans if all employees are kept on the payroll for eight weeks and the money is used for:

  • Payroll Costs — including salaries, wages, commission, vacation, parental, family, medical or sick leave, health benefits, state and local taxes
  • Utilities—electricity, gas, water, transportation, telephone and internet as long as service began before February 15, 2020
  • Business Rent/Leases—only on agreements in effect before February 15, 2020
  • Mortgage Interest—incurred before February 15, 2020

Let’s take a closer look at the Small Business Administration’s (SBA) conditions:

1. The Eight Week (56-day) Covered Period

All eligible payroll and non-payroll costs must be paid or incurred during the eight-week (56-day) Covered Period (or Alternative Payroll Covered Period) .

Alternative Payroll Covered Period – You may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of your first pay period following their PPP Loan Disbursement Date.

Example: If your business received its PPP loan proceeds on Monday, May the 4th (be with you — Star Wars joke!), and your first pay period following PPP loan disbursement is Saturday, May 9, the first day of your elected Alternative Payroll Covered Period is May 9 and the last day of the Alternative Payroll Covered Period is Friday, July 3.

2. The Payroll Cost 75%/25% Requirement

At least 75% of your loan expenses must go towards eligible payroll costs. Furthermore, a maximum of 25% can be used for non-payroll costs such as utilities, rent and mortgage interest.

Question: What happens if you don’t meet the requirement?

Any amount that doesn’t meet the requirement will not be forgiven and will become a loan with a maturity of 2 years, deferred for six months and an interest rate of 1%.

3. Maintain Employee and Compensation Levels

EMPLOYEES—You must maintain your full-time equivalent (FTE) employee headcount during the covered period (i.e. do not decrease your staff). If your FTE is reduced, your loan forgiveness will be reduced proportionately. Learn how to calculate your FTE here.

Question: What if an employee refuses to return to work?

The SBA will allow you to exclude an employee from loan forgiveness calculations if you made a good-faith, written offer of rehire that was rejected. You should obtain documentation of the employee’s rejection of that offer. The employee may be excluded from collecting unemployment benefits.

COMPENSATION—Along with maintaining your employee levels, you must also maintain at least 75% of your total payroll during the covered period, compared to the previous quarter. If not maintained, your loan may be reduced by the difference of 75% of your payroll and current payroll.

Question: Can I raise my employees’ salary or hourly rate to maximize the loan forgiveness?

The SBA isn’t very clear on whether salary increases are allowed. However, you may consider increasing the amount of hours worked for hourly workers which ultimately increases their total wages.

4. The Rehire Period (ends June 30)

You have until June 30, 2020 to rehire employees, who were laid off or furloughed, and to restore employee compensation levels for any changes made between February 15, 2020 and April 26, 2020.

What Happens After the 8-Week Period?

To apply for forgiveness of your PPP loan, you must complete the SBA’s loan forgiveness application and submit it to your Lender (or the Lender that is servicing your loan).

The PPP loan forgiveness application has the following components:

  • The PPP Loan Forgiveness Calculation Form
  • PPP Schedule A
  • PPP Schedule A Worksheet
  • The PPP Borrower Demographic Information Form (optional)

You are only required to submit the PPP Loan Forgiveness Calculation Form and PPP Schedule A.

What Do You Need to Complete the Loan Forgiveness Application?

Good record-keeping during and after the 8-Week period is crucial to maximizing your PPP loan forgiveness. Many business owners will fail to do so causing their loan(s) to come due, in part or whole. Make sure your documents are in digital format since lenders require digital uploads.

Required Documents

  • Payroll reports verifying the number of employees on your payroll, their pay rates, and the total amount you paid them
  • Form 941 – Payroll tax filing
  • Payroll Processor Report
  • State income, payroll, and unemployment insurance filing
  • Records of payments for other eligible non-payroll expenses, including receipts, invoices, and account statements
  • Mortgage payment statements

If you need help with record-keeping or managing your expenses to maximize your loan-forgiveness, email us at info@horsfordcpa.com.

Have You Maximized PPP Loan Forgiveness?

If your answer to the following questions is YES, then you should qualify for full loan forgiveness:

  • Did you use at least 75% of the total loan amount on payroll costs?
  • Did you maintain your full-time employee equivalent throughout the 8-Week Covered Period?
  • Did you maintain at least 75% of your payroll cost during the same period?
  • Did you rehire employees by June 30, 2020 and obtain documentation for those that refused your offer of re-employment?
  • Do you have digital copies of the required documents mentioned above?

If you answered NO to any of the previous questions, your loan may not be fully forgiven. What happens now?

Your loan forgiveness may be reduced proportionately by the following amounts:

  • The percentage of funds you used for non-payroll costs over the 25% threshold
  • The percentage of employees you reduced from your FTE-based averages
  • The dollar amount that you reduced any employee’s salary

Terms of the PPP Loan

The terms for any amounts not forgiven are as follows:

  • 1.00% fixed interest rate
  • 2-year term
  • 6-month deferral following the date of disbursement of the loan
  • No collateral is required
  • No personal guarantee is required
  • No prepayment penalty

What Happens After You Submit Your Application?

Your lender will have 60 days to make a decision on the amount of your loan forgiveness based on your application. Good luck!

If you have questions or would like to discuss your PPP loan or business with us, please email us at info@horsfordcpa.com or call us at (347) 201-2045.

This post was adapted from the latest SBA/Treasury updates as of May 15, 2020. It is intended to be used for informational purposes only and does not constitute legal, business, or tax advice. It is always best to consult with a qualified professional before making decisions with respect to matters referenced in this post.

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