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Paycheck Protection Program (PPP): Loan Forgiveness

UPDATE DECEMBER 21: The latest COVID-19 stimulus package passed by Congress, which assigned a further $284 billion PPP funds, also clarified an important aspect of loan forgiveness. It’s now official that businesses can deduct business expenses paid with forgivable loans, contrary to the previous position help by the Treasury Department.

UPDATE OCTOBER 21: The SBA has published updates to its frequently asked questions on loan forgiveness.

UPDATE OCTOBER 12: The SBA have released a further, simplified form (Form 3508S) for loans of $50,000 or less. Businesses can access the form here. The official announcement—with instructions on completing the form—can be found here. The actual text of the new interim ruling is here.

UPDATE JUNE 22: The SBA have released a new “borrower-friendly” loan forgiveness application form and have also created the simplified SBA Form 3508EZ for loan recipients who have not reduced the salaries or hours of employees by more than 25%.

UPDATE June 05: This article has been updated to include changes in the loan forgiveness process specified in the Paycheck Protection Program Flexibility Act.

The Paycheck Protection Program (PPP) has provided an essential lifeline to lucky businesses who were successful with their applications—and the good news is, these loans are forgivable. However, businesses can’t breathe easy yet. Business must first apply for loan forgiveness, provide documentation of spending and prove that the bulk of the received funds were spent on eligible costs.

Payroll Protection

The Paycheck Protection Program was established as part of the Coronavirus Aid Relief & Economic Security (CARES) Act, to offer small business low interest and forgivable loans that allow them to keep their employees on payroll (though certain other essential expenditures are permitted).

After the initial $349 billion was exhausted within two weeks, applications reopened on April 27 with further funding of $310 billion. This later funding has aimed to support smaller businesses without existing banking relationships, who initially struggled to apply.

What Costs are Eligible for Forgiveness?

While loan forgiveness is not limited to payroll expenditure, payroll costs must be 60% or more of any forgiven amount. All costs, payroll and non-payroll, are only forgivable if paid or incurred during the borrower’s chosen ‘Covered Period’ of 8 or 24 weeks after the receipt of loan funds.

  • Payroll Costs
  • PPP loans recipients are eligible for forgiveness on payroll spending during the ‘Covered Period’ or, for firms with bi-weekly payroll, an ‘Alternative Payroll Covered Period’. Forgivable cash compensation cannot exceed $100,000 prorated for the covered period. Forgivable cash compensation includes salary, wages, commissions, tips, paid leave and any allowance for separation or dismissal. Eligible non-cash compensation (not capped per employee) includes health insurance contributions, retirement plan contributions and employer taxes at state and local level.

    Note: payroll costs for employees whose principle place of residence is not in the United States are not covered.

  • Mortgage Obligations
  • Interest payments on any business mortgage obligation incurred before February 15, 2020.

  • Rent Obligations
  • This covers business rent or lease payments on agreements in force before February 15, 2020

  • Utility Payments
  • Business utility payments for distribution of electricity, gas, water, transportation, telephone or internet access for services begun prior to February 15, 2020

Reductions to Forgivable Amount

The forgivable amount will be reduced if during Covered Period, when compared to the period January 1, 2020 through March 31, 2020, there is:

  • Reduction in Average Full-Time Equivalency (FTE)
  • Forgiveness reduces if the workforce is reduced. To calculate the number of FTEs, take the number of hours worked per week for each qualifying employee and divide by 40, then round to the nearest tenth. The maximum equivalency for each employee is capped at 1.0. If borrowers choose, they can calculate every employee who works fewer than 40 hours per week as 0.5.

  • Salary/Hourly Wage Reduction
  • Forgiveness will be reduced if there is a reduction of more than 25% of total wages or average salary for any employee. This does not apply to employees who received a wage or salary at an annualized rate of higher than $100,000 during any pay period in 2019.

Exemptions to Reductions

However, there are a couple of important exemptions that can work in borrowers’ favor:

  • Safe Harbor Exemption
  • Loan forgiveness will not be reduced if an employee initially reduced their FTE employee levels between the February 15, 2020 and April 26, 2020 but then restored their FTE employee levels by no later than December 31, 2020. However, no partial exemption is possible: if an employer fails to completely restore FTE levels then no exemption applies. Safe harbor also applies on an individual employee basis to salaries/hourly wages which are reduced then restored.

  • Employee Refused to Return to Work
  • Employers do not need to be concerned if an employee refuses an offer to return to work. Reductions to FTE employee levels do not reduce loan forgiveness if an employee rejects a good faith offer to be rehired at the same hours at the same rate and if no replacement was hired.

    There are further exemptions if an employee is fired for cause, resigns voluntarily or voluntarily requests a reduction in their number of hours.

How to Apply for PPP Loan Forgiveness

UPDATE OCTOBER 21: The SBA have published new guidance answering many frequently asked questions on the loan forgiveness process.

UPDATE OCTOBER 12: The SBA have released a further simplified loan forgiveness form for loans of $50,000 or less. Businesses can access the form here. The official announcement—with instructions on completing the form—can be found here. The actual text of the new interim ruling is here.

UPDATE JUNE 22: The SBA have released a new “borrower-friendly” loan forgiveness application form and have now also created the simplified SBA Form 3508EZ for many businesses.

Business owners can use the new EZ form if they meet any of the following criteria:

  1. They are self-employed and do not have any employees
  2. Any employees they do have did not have hours or salries reduced by more than 25%
  3. Employees did not have hours or salaries reduced by more than 25% and business operations were reduced due to shelter-in-place laws or similar covid-related health directives

In order for a loan to be forgiven, recipients must complete a PPP Loan Forgiveness Application form, provided by the Small Business Administration (SBA). However, as with the initial loan, the application for forgiveness much be submitted directly to your lender.

The form requires business owners to calculate the forgivable amount and any possible reductions. The document offers guidance on how to complete the worksheet but the SBA may issue further, more detailed guidance in the coming weeks.

(The SBA is expected to provide an updated application form which accounts for the changes to the loan forgiveness process detailed in the PPP Flexibility Act.)

Here’s the information you’ll need:

  • Basic identifying information about your business
  • SBA PPP Loan Number (you may need to request this from your Lender)
  • Lender PPP Loan Number
  • The total loan amount
  • The date you received your loan proceeds
  • Total number of employees at the time of loan application
  • Total number of employees at the time of forgiveness application
  • EIDL Application Number and Advance amount, if applicable
  • Payroll Schedule
  • Details of compensation and hours worked for individual employees

Business owners will need to provide the following documentation:

  • Proof of cash compensation to employees (either bank account statements of third-party payroll service provider reports)
  • Tax forms (or third-party payroll service provider reports) for the Covered Period relating to all payroll tax filing reportable to the IRS and employee wage reporting and unemployment insurance tax filings reportable to the state.
  • Proof of any forgivable employer contributions to health insurance and retirement plans
  • Copy of lender amortization schedule for business mortgages and proof of mortgage interest payments
  • Documentation relating to rent or lease payments including copies of relevant lease agreements and proof of payment
  • Proof of business utility payments

The following is not required but may be requested by the SBA:

  • Documentation relating to employees who were fired for cause, resigned, request reductions in work hours or refused a good faith job offer.
  • Documentation supporting individual employee payroll listings.

Borrowers must apply for forgiveness within 10 months of the last day of the covered period.

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