The Paycheck Protection Loan Forgiveness Explained - to the best of anyone's ability...
Note: As of April 24th, Congress passed legislation to continue funding the PPP program. It is expected to be depleted quickly, however, due to pending applications. Please contact MANP’s COVID-19 Loans blog post for more information.
The best part of the Paycheck Protection Program (PPP) is that 100% of the loan can be forgiven—if you meet certain criteria. Here’s our comprehensive guidance on setting yourself up for full loan forgiveness.
This guide reflects the most up to date guidance from the U.S. Treasury, published April 14, 2020. Final guidance is said to be forthcoming. For a deeper dive into the current inconsistencies of PPP forgiveness, please read this interpretation.
The conditions of the Paycheck Protection Program
Let’s first review the terms of the PPP.
The loan amount is based on your average monthly payroll cost for 2019. You can receive 2.5 times that amount, to help cover eight weeks of payroll.
The funds from the PPP can be used for the following purposes:
- Payroll—salary, wage, vacation, parental, family, medical, or sick leave, health benefits
- Mortgage interest—as long as the mortgage was signed before February 15, 2020
- Rent—as long as the lease agreement was in effect before February 15, 2020
- Utilities—as long as service began before February 15, 2020
All expenses that fall under those categories are eligible for forgiveness. The following conditions will also apply:
- Eight weeks of coverage
Eligible expenses are those that are incurred over eight weeks, starting from the day the first payment was made by your lender. This is not necessarily the date on which you signed your loan agreement. Depending on your payroll schedule, you may want to adjust the timing of your payroll date to accommodate as many payroll cycles as possible. For example, if your PPP loan gets deposited in your bank account on April 15, you could only use the funds on expenses incurred during the eight weeks following April 15.
- The 75/25 rule
At least 75% of your loan must be used for payroll costs. Payments to independent contractors cannot be included in the payroll costs.
- Staffing requirements
You must maintain the number of employees on your payroll.
Here is the calculation you can use to determine if you’ve met this requirement:
First, determine the average number of full-time equivalent employees you had for:
- The 8-week period following your initial loan disbursement, (A)
- February 15, 2019 to June 30, 2019, (B1)
- and January 1, 2020 to February 29, 2020. (B2)
Take A and divide that by B1. Do the same with B2. Take the largest number you obtain. If you’re a seasonal employer, you must divide by B1.
- If you get a number equal to or larger than 1, you successfully maintained your headcount and meet this requirement.
- If you get a number smaller than 1, you did not maintain your headcount and your forgivable expenses will be reduced proportionately.
- Pay requirements
You must maintain at least 75% of total salary.
This requirement will be individually assessed for every employee that did not receive more than $100,000 in annualized pay in 2019. If the employee’s pay over the 8 weeks is less than 75% of the pay they received during the most recent quarter in which they were employed, the eligible amount for forgiveness will be reduced by the difference between their current pay and 75% of the original pay.
- Rehiring grace period
You can rehire any staff that were laid off or put on furlough and reinstate any pay that was decreased by more than 25% to meet the requirements for forgiveness. You have until June 30th to do so.
[Note added 5/8/20]: The Small Business Administration (SBA) recently provided guidance that a borrower’s PPP loan forgiveness will not be reduced if the borrower laid off an employee, and makes a written offer of re-employment to the employee which the employee refuses and which refusal is documented by the borrower. Employees beware – employees who reject good-faith offers of re-employment may find themselves ineligible for continued unemployment benefits.]
Applying for loan forgiveness
Applications for loan forgiveness will be processed by your lender. They’ll provide you with instructions on how to apply. After you submit your application for forgiveness, your lender is required by law to provide you with a response within 60 days.
Recordkeeping and required documents for forgiveness
These are the required documents you will need to collect to provide with your PPP forgiveness application. Your lender may have additional requirements.
- Documents verifying the number of full-time equivalent employees on payroll and their pay rates, for the periods used to verify you met the staffing and pay requirements:
- Payroll reports from your payroll provider
- Payroll tax filings (Form 941)
- Income, payroll, and unemployment insurance filings from your state
- Documents verifying any retirement and health insurance contributions
- Documents verifying your eligible interest, rent, and utility payments (canceled checks, payment receipts, account statements)
Good recordkeeping and bookkeeping will be critical for getting your loan forgiven—you’ll need to keep track of eligible expenses and their accompanying documentation over the eight weeks. Your lender will likely require these documents in digital format, so take the time to scan any paper documents and keep backups of your digital records.
If you don’t have a reliable bookkeeping solution in place, now may be the time to consider getting one.
What happens if I’m not approved for forgiveness?
Your lender may allow you to provide additional documentation so they can reevaluate your request. Otherwise, your outstanding balance will continue to accrue interest at 1%, for the remainder of the 2-year period. There is no prepayment penalty. You can pay off the outstanding balance at any time with no additional fees.
Source: Bench Financial Services