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.
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
- Mortgage Obligations
- Rent Obligations
- Utility Payments
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.
Interest payments on any business mortgage obligation incurred before February 15, 2020.
This covers business rent or lease payments on agreements in force before February 15, 2020
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)
- Salary/Hourly Wage Reduction
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.
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
- Employee Refused to Return to Work
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.
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
In order for a loan to be forgiven, recipients must complete a PPP Loan Forgiveness Application form, provided by the Small Business Administration (S.B.A.). 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 S.B.A. may issue further, more detailed guidance in the coming weeks.
(The S.B.A. 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 S.B.A.:
- 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 forgivness within 10 months of the last day of the covered period.
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