When the Coronavirus Aid, Relief, and Economic Security Act (also known as the CARES Act) was passed in late March, there was one element of the legislation that got a huge amount of attention from the small business community—the Paycheck Protection Program.
And for good reason. The emergency lending initiative, which is administered by the U.S. Small Business Administration (SBA) and oversees approximately $610 billion in small business loans (originally, the Paycheck Protection Program was funded with $350 billion for PPP loans—but after those funds were depleted in less than two weeks, the program was replenished with an additional $310 billion to fund further PPP loans) has one major draw for small businesses—if loan proceeds are spent on approved expenses within the covered period, up to 100 percent of the loan amount is forgivable.
Millions of business owners jumped at the chance to apply for a PPP loan and secure the funds they needed to keep their business moving forward during COVID-19—and not have to worry about taking on additional debt in order to make that happen.
But for the small business owners that have received loans through the Paycheck Protection Program, the question is—at what point during that covered period are those funds actually forgivable? Can PPP borrowers apply for forgiveness once they’ve exhausted their funds—or do they have to wait until the end of the covered period to apply for loan forgiveness?
Let’s take a look at when employers can submit their PPP loan forgiveness application, figure out their total forgiveness amount, and ensure their PPP loans are forgiven (and take a huge weight off their shoulders in the process):
When employers are eligible to submit the PPP loan forgiveness application
As mentioned, PPP funds are eligible for loan forgiveness if they’re spent on approved expenses during the covered period. When the CARES Act passed, the covered period was the eight-week period following loan origination. But when the Paycheck Protection Program Flexibility Act was signed into law in early June, the covered period was extended to 24 weeks—meaning any expenses incurred in the 24-week period following loan origination are eligible for loan forgiveness.
At first, there was a bit of confusion around when businesses could apply for loan forgiveness, with many small business owners acting under the assumption that they had to wait until the end of the covered period to apply for loan forgiveness—even if they exhausted those funds well before the covered period was finished.
But as it turns out, that’s not the case. According to the New Interim Final Rule (available on the Treasury website), “A borrower may submit a loan forgiveness application any time on or before the maturity date of the loan – including before the end of the covered period – if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness.”
Or, in other words, you can apply for loan forgiveness as soon as you’ve spent your Paycheck Protection Program loan proceeds—regardless of whether you’re at the end of the covered period or only a few weeks into it. So, if you’ve spent your PPP loan proceeds and are ready to apply for forgiveness, you can proceed with your loan forgiveness application at any time.
Now that you know when you can apply for PPP loan forgiveness, let’s cover how to apply.
Confirm you qualify for loan forgiveness
Before you move forward with your loan forgiveness application, it’s important to make sure you qualify for forgiveness. In order to qualify for loan forgiveness, there are a few different requirements you’ll need to meet, including:
- The PPP loan proceeds were spent on approved expenses. Approved expenses include payroll costs (including wages; health care costs like employee health insurance and health insurance contributions; sick leave; and employer contributions to employee retirement plans), including utility payments, rent payments, lease payments (if the company has existing lease agreements), and mortgage interest payments.
- 60 percent of loan funds were used for payroll costs. To qualify for the maximum PPP loan amount of forgiveness, proceeds must be spent at a 60/40 ratio—at least 60 percent on payroll costs and the other 40 percent can be used to cover eligible non-payroll costs. (Originally, the ratio to qualify for full loan forgiveness was 75 percent payroll costs and 25 percent approved non-payroll costs, but the Paycheck Protection Program Flexibility Act amended the ratio to 60/40 to give small business owners more flexibility in how they spent their PPP funds.)
- The PPP loan proceeds were used to cover expenses during the 24-week covered period following loan origination. Again, only expenses that small businesses incur during the 24-week time period after they receive their PPP loans are eligible for forgiveness. Businesses with irregular payroll expenses or payroll schedule (for example, seasonal employers or businesses that mostly employ part-time workers with varied hours each pay period), may qualify for an Alternative Payroll Covered Period. If your business qualifies, the covered period would start the first payroll/payroll date following loan disbursement.
Keeping your staff on payroll and maintaining employee headcount also plays a role in qualifying for PPP loan forgiveness. In order to qualify, businesses must maintain both their number of full-time equivalent employees (FTEs) and the compensation levels (including employee salaries and hourly wages) provided to their workers prior to the COVID-19 pandemic.
If your company reduced FTEs or cut annual salary or hourly wages for your employees, the amount of loan forgiveness you’ll qualify for will be reduced in proportion to the reduction in headcount or employee wages. There are, however, a few notable exceptions to these loan forgiveness reductions:
- If your workforce reduction was temporary, under the FTE Reduction Safe Harbor, you have until December, 31 2020 to restore your workforce and rehire your laid-off or furloughed employees before facing reduced loan forgiveness.
- If you extend an employment offer to an employee during the covered period and the employee rejects that offer, you will not face an FTE reduction and your loan forgiveness amount will not be reduced (as long as the written offer had no salary/hourly wage reduction and was consistent with the number of hours the employee was working prior to being furloughed or laid off; if the offer was for a wage reduction or for fewer hours, it wouldn’t qualify).
- If you can document in good-faith that you are unable to return to your standard level of business activity due to COVID-19 safety protocols (like social distancing or other customer safety requirements), you can still qualify for the full loan forgiveness amount—even if you’re unable to restore your pre-COVID number of employees by December 31. The same is true if you’re unable to rehire former employees or to find qualified workers to accept open, unfilled positions.
Calculate your FTE to meet the loan forgiveness requirement
Once you’ve confirmed your expenses qualify for loan forgiveness, you’ll need to calculate your FTEs for the SBA loan forgiveness application form.
There are two loan forgiveness calculations you can use to calculate FTEs: the average FTE calculation, which divides the average number of hours paid to an employee each week by 40 and rounds to the nearest tenth (total number of hours paid / 40 = FTE) or the standard FTE calculation, which assigns an FTE of 1 to the total number of employees that work 40 hours or more per week and an FTE of 0.5 to the total number employees that work less than 40 hours per week. (If you work with independent contractors, it’s important to note that they should not be included when calculating FTE employees.)
Which formula you decide to use to calculate FTEs is entirely up to you; the SBA permits businesses to use either calculation on their PPP loan application for forgiveness, as long as that calculation remains consistent.
Submit your forgiveness application
Once you’ve confirmed your expenses are eligible for forgiveness and you’ve calculated your FTEs, you can fill out and submit your PPP loan forgiveness application form (including requested information from the PPP Schedule A worksheet, which is included in the application)—whether you’ve reached the end of your covered period or you’ve exhausted your loan proceeds prior to the end of your covered period and want to get the process started.