PPP Loan Forgiveness
The Paycheck Protection Program (PPP) was created to provide small businesses with the necessary funding to help keep employees at their current base pay and cover other essential business costs during these difficult times. These loans are eligible for 100% forgiveness, but only if certain qualifications are met and the loan forgiveness application is filled out in full. Read on to learn more about how to make sure you qualify for full forgiveness.
How to Apply for Loan Forgiveness
Just like your original PPP loan application, your loan forgiveness application will be submitted online and processed through CommunityAmerica. At this time, we are still awaiting any possible updates to the process as a result of Congressional action and further details from the SBA concerning loan forgiveness. Once we have final guidance, we will be emailing you with additional information and instructions on how to apply. If you have questions about loan forgiveness or the necessary qualifications, don't hesitate to give us a call at 913.905.7012, and we'd be happy to help.
To be 100% forgiven, 60% of funds must cover payroll costs, while up to 40% can be used for other qualifying costs (like rent, leases and utilities) over the now extended 24-week period starting the date the funds are received, or until December 31, 2020, whichever comes first.
The SBA defines qualifying payroll costs as:
- Full-time and part-time employee (who lives in the U.S.) compensation in the form of salary, wages, commissions or anything similar
- Cash tips or equivalent, based on employer records of past tips or reasonable, good-faith employer estimates if there are missing or no historical records
- Vacation, parental, family, medical or sick leave payments
- Healthcare coverage, including insurance premiums and retirement
- State and local tax payments based on employee compensation
- Wage, commission, income or net earnings from self-earners or similar compensation
No more than 40% of funds can be used to cover:
- Mortgage interest payments (not including mortgage prepayments or principal payments) - 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 - includes expenses such as electricity, water, gas, sewage, telephone services, internet and transportation costs, as long as service began before February 15, 2020
Costs that DO NOT meet PPP loan forgiveness requirements:
The SBA has also defined non-qualifying costs, so do not count them towards your average monthly payroll. Do not use your PPP loan to pay for the following:
- Employee compensation for workers whose main residence is outside of the U.S.
- Cash compensation for any individual employee in excess of an annual salary of $100,000 (prorated as necessary)
- Compensation for workers who receive 1099s instead of W-2s
- Federal employment taxes imposed or withheld between February 15, 2020, and June 30, 2020 — this includes the employee’s and employer’s share of FICA and Railroad Retirement taxes and income taxes withheld from workers
- Qualified sick and family leave costs for which credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act
PPP Loan Covered Period
Your PPP loan funds can now be used over a 24-week period, or until December 31, 2020, whichever comes first. The forgiveness calculation for your PPP loan begins on the date you receive the loan proceeds. If your loan was approved on April 10, and you received the proceeds of that loan on April 20, then the start of the 24-week calculation period is April 20. That period starts even if your business does not have employees currently on the payroll.
Maintaining Staff Levels and Salaries
In addition to ensuring PPP funds are spent only on the qualifying expenses outlined above, forgiveness is also based on maintaining, or rehiring, employees and salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.
You will need to rehire any staff that were laid off or furloughed and reinstate any pay that was decreased by more than 25% to be eligible for forgiveness. The rehiring eligibility window has now also been extended to December 31, 2020. Additionally, recent updates have removed some of the limits placed on potential forgiveness based on the rehiring of employees.
The SBA has made an exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that was declined. This provides coverage for the possibility that employees who were laid off or furloughed may not wish to return to work. If an employee rejects your attempt to rehire, you could be able to exclude this employee from forgiveness calculations by meeting these qualifications:
- Must have made a good-faith, written offer to rehire
- Must have offered to rehire at the same salary/wage level and number of hours as before the lay off
- Must have documentation of employee's rejection of the offer
- An exemption can also be made if any employee was fired for cause, voluntarily resigned, or voluntarily requested and received reduced work hours
Additional exceptions have now been made for the inability to find qualified employees to reach pre-coronavirus staffing levels, or if you were unable to restore business operations to February 15, 2020, levels due to COVID-19 related operating restrictions.
You must maintain at least 75% of employees' total salaries, which will be individually assessed for any employee that did not receive a salary of more than $100,000 in 2019. If you do not meet this 75% benchmark, your forgiveness amount will be reduced.
The SBA has provided updates that make payroll calculations more flexible, so please note that you DO NOT need to adjust your payroll schedule. The loan forgiveness application provides options for calculating payroll costs using an “alternative payroll covered period” that aligns with borrowers’ regular payroll cycles, such as a biweekly or more frequent payroll period (if utilizing an alternative payroll covered period, no supplement payrolls are necessary).
Practice Good Bookkeeping
You will need the following documents ready to fill out your loan forgiveness application:
- 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 eligible interest, rent and utility payments were active in February 2020
Keeping good records of your fund usage and tracking eligible costs and expenses is important for proving forgiveness requirements were met.
What happens to the loan amount that is not forgiven?
Any remaining loan amount, after forgiveness, will need to be repaid. You will not be required to start your PPP loan repayment until your forgiveness application has been completed and processed, and you will have up to 10 months after the end of your covered period to apply for forgiveness. After that time, you will be required to pay the loan back over the remaining 5-year period with a fixed interest rate of 1%.