Everything You Need To Know To Get Your Paycheck Protection Program Loan Forgiven
May 29, 2020
May 29, 2020
As of May 28, 2021, the Paycheck Protection Program has run out of funding. You can learn more about the PPP with our COVID-19 resource hub.
Most people who received loan funds from the CARES Act Paycheck Protection Program (PPP) are aware that a portion (or all) of the loan will be forgiven if the money is spent on allowable expenses within a defined time period.
What they donâ€™t know is what it takes to get the loan forgiven.
The good news: The Treasury Department and Small Business Administration (SBA) recently released instructions on PPP loan forgiveness along with the application form for getting loans forgiven.
The bad news: Itâ€™s likely that some rules related to PPP loan forgiveness could change in the future.
More good news: If changes are made, they will likely benefit borrowers.
Here are the steps you need to take to get your PPP loan forgiven, the rules associated with each step and what could change in the future.
Even though PPP loans are made and guaranteed by the SBA, youâ€™ll need to apply for loan forgiveness through the lender that processed your loan.
Start by determining the eight week period that covers the expenses youâ€™ll use to calculate how much of your PPP loan will be forgiven. It is:
Tip: Remember to count the date you received your PPP loan disbursement as part of the 56 days. Donâ€™t start counting the day after. All days must be included in the count, not just business days. For example, if you received your loan funds on April 20, the last of the 56 days is June 14.
If you incurred and paid any of the following expenses during your eight-week period, they are eligible for forgiveness:
Compensation (not to exceed $15,385 per employee) including:
If youâ€™re an independent contractor, sole proprietor or self-employed person you can only include wages, commissions, income or net earnings from self-employment â€” or similar compensation â€” in your payroll expense calculation.
If you are an independent contractor, sole proprietor or self-employee person, you must have claimed â€” or be entitled to claim â€” deductions for these expenses on your 2019 Form 1040 Schedule C in order to claim them for PPP loan forgiveness in 2020.
Once youâ€™ve determined all these non-payroll costs and added them up, youâ€™ve calculated your maximum amount of possible loan forgiveness. Now itâ€™s time to figure out how much it will be lowered.
This is where things get a little complicated. There are three steps to this calculation.
Figure out how much your PPP forgiveness is lowered based on a reduction of employee salaries during the forgiveness period when compared with average first quarter 2020 pay.
Safe harbor: Avoid having your loan forgiveness amount reduced by returning an employeeâ€™s pay to its original level. You can do this by restoring their annual salary or hourly wage on June 30, 2020 to a level equal to or greater than their annual salary or hourly wage on February 15, 2020. If you take this step, your loan forgiveness amount will not be cut back for that employee.
Remember: The SBA loans from the PPP program were intended to help keep people employed during the COVID-19 pandemic. Anything you do to support this will increase your forgiveness level.
Your loan forgiveness will be reduced if the average number of weekly full-time equivalent employees (fte) during your eight-week period is less than the average number of full time equivalent employees during any of the following periods of your choice:
Exceptions: You will not be penalized for any full-time employee headcount reductions if either of the following occurred:
Safe harbor: Your forgivable loan amount will not be reduced if you cut your number of ftes during the period beginning on February 15 and ending on April 26, 2020, but restore your number of employees by June 30 to the same level you had on February 15. Rehiring them could make a big difference in your final PPP forgiveness amount.
Now itâ€™s time to apply the 75 percent rule.
Your maximum loan amount could also be reduced if your eligible non-payroll expenses are greater than 25 percent of your total eligible expenses. In other words, the maximum eligible loan forgiveness level is your total payroll expenses divided by 0.75.
Example: If payroll expenses for your eight-week period total $75,000, your loan forgiveness canâ€™t be greater than $100,000. ($75,000 divided by 0.75 equals $100,000.) If itâ€™s higher than $100,000, it means your non-payroll expenses represent more than 25 percent of your total forgiveness amount.
Your absolute loan forgiveness amount will be the smallest of the following:
Remember: Once you complete your loan program forgiveness calculations, you need to complete your PPP loan forgiveness application and submit it to your loan provider.
For any part of your PPP loan thatâ€™s not forgiven, the original loan terms will apply. It will become a two-year loan with a one percent interest rate. Payments are deferred for six months. There are no prepayment penalties or fees.
You are required to submit certain documents with your loan forgiveness application including:
Congress is currently considering a number of changes to the PPP program, including eliminating the 75 percent rule and extending the eight-week period to up to 24 weeks. However, enactment of these changes is not guaranteed.
Until any changes are enacted into law or until the Treasury Department and Small Business Administration change any regulations and provide additional guidance, the current rules apply to all borrowers.