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 don’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: It’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.
Applying for PPP loan forgiveness
Even though PPP loans are made and guaranteed by the SBA, you’ll need to apply for loan forgiveness through the lender that processed your loan.
Identify your eight week period for loan forgiveness.
Start by determining the eight week period that covers the expenses you’ll use to calculate how much of your PPP loan will be forgiven. It is:
- If you have a biweekly or more frequent payroll schedule, it’s the eight week period (alternative payroll covered period of 56 days) starting on the first day of the first pay period following the day you received your PPP loan funds.
Tip: Remember to count the date you received your PPP loan disbursement as part of the 56 days. Don’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.
Calculate the maximum amount of your PPP loan that could be forgiven.
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:
- Gross salary
- Gross wages
- Gross commissions
- Gross tips
- Vacation pay
- Parental leave, family leave, medical leave or sick leave pay (unless you were already reimbursed for these expenses under the Families First Coronavirus Response Act)
- Allowance for separation or dismissal
- Employer contribution for employee group health care (health insurance) coverage
- Employer contribution for employee retirement plans or group retirement benefits
- Payment of state and local taxes related to employee compensation.
If you’re an independent contractor, sole proprietor or self-employed person you can only include wages, commissions, income or net earnings from self-employment — or similar compensation — in your payroll expense calculation.
- Mortgage interest payments related to your business on real or personal property. Only interest payments on mortgage obligations incurred before February 15, 2020 are allowed.
- Rent payments related to your business on real or personal property. Only rent payments on lease agreements that were in effect before February 15, 2020 are allowed.
- Utility payments covering your business including electricity, gas, water, transportation, telephone and internet access. Payments are only allowed if utility service began before February 15, 2020.
If you are an independent contractor, sole proprietor or self-employee person, you must have claimed — or be entitled to claim — deductions for these expenses on your 2019 Form 1040 Schedule C in order to claim them for PPP loan forgiveness in 2020.
Once you’ve determined all these non-payroll costs and added them up, you’ve calculated your maximum amount of possible loan forgiveness. Now it’s time to figure out how much it will be lowered.
Calculate how much your loan forgiveness amount will be reduced.
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.
- Start by coming up with a list of employees and their salaries who earned $100,000 or less in 2019 or were not employed by you in 2019.
- Figure out their average pay from January 1 to March 31, 2020, then multiply it by 75 percent.
- Next, take the same list of employees and calculate their pay during your eight week covered period.
- Your maximum forgiveness amount will be reduced by how much you paid to each employee that is less during the forgiveness period when compared to the 75 percent quarterly average amount.
Safe harbor: Avoid having your loan forgiveness amount reduced by returning an employee’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:
- February 15 to June 30, 2019
- January 1 to February 29, 2020
- If you’re a seasonal employer, a consecutive 12-week period between May 1 and September 15, 2019.
Exceptions: You will not be penalized for any full-time employee headcount reductions if either of the following occurred:
- You made a good-faith, written offer to rehire an employee during the eight-week period that was not accepted by the employee.
- An employee was fired for cause, voluntarily resigned or voluntarily asked to have their hours reduced.
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 it’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 can’t be greater than $100,000. ($75,000 divided by 0.75 equals $100,000.) If it’s higher than $100,000, it means your non-payroll expenses represent more than 25 percent of your total forgiveness amount.
Calculate your final level of loan forgiveness.
Your absolute loan forgiveness amount will be the smallest of the following:
- The total value of your PPP loan
- The maximum loan forgiveness amount from Step One (above) minus any reductions from Step Two (above)
- The maximum loan forgiveness amount based on the 75 percent rule explained in Step Three (above).
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.
The portion of your loan NOT forgiven
For any part of your PPP loan that’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.
PPP loan record keeping requirements
You are required to submit certain documents with your loan forgiveness application including:
- Your bank account statement or payroll service provider reports that document the cash compensation you paid to employees.
- Your tax forms or equivalent payroll service provider reports that cover your eight week forgiveness period that include information about:
- Your payroll tax filings (typically Form 941)
- Your state quarterly wage reporting and unemployment insurance tax filings.
- Payment receipts, cancelled checks or account statements that prove you paid your employer contribution to employee health insurance and retirement plans.
- Documents that show your number of full-time employees for any claims you made in your forgiveness application including payroll tax filings (usually Form 941) and state quarterly wage reporting and unemployment insurance tax filings.
Non payroll expenses
- Business mortgage interest payment documentation such as your amortization schedule and cancelled checks or lender account statements from February 2020 covering your eight-week forgiveness period.
- Business rent and lease payment documentation including copies of your latest lease along with your receipts, cancelled checks or account statements from February 2020 and your eight-week period.
- Business utility payments including copies of your invoices from February 2020 and your eight week period along with supporting receipts, cancelled checks or account statements.
Possible changes to forgiveness reduction rules
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.