We wanted to address some changes and updates to the Paycheck Protection Program (PPP) funding that have taken place since our first post on the subject back in April. While the application process for a PPP loan has remained largely the same, other aspects like documentation and forgiveness have seen new developments. We will highlight some of the new information below, but it is important to remember that this program is still developing rapidly. Your best resources are still your bank or lender, so continue to lean on them for the most up to date information.
On May 15, the U.S. Small Business Administration (SBA) released its application for loan forgiveness that borrowers must complete to have their Paycheck Protection Program loan forgiven. This application is very detailed and thorough, PPP Borrowers must apply for loan forgiveness with the lender that processed the loan.
TIP: Read through the application once in its entirety before you start filling in any information. When you are ready to fill in the information, start at the END of the application and work backwards towards the front.
If you have applied for PPP funding, you already know that using 75% of your loan for payroll costs and 25% for the other qualifying expenses is currently required for forgiveness.
In order to be forgiven, payroll costs must be incurred during the “CP” or Covered Period. The first day of the covered period is the same day the loan was disbursed. Payroll costs can include:
Salaries, wages, commissions or tips (not exceeding $15,385 per employee – this cap does not include health insurance and retirement contributions paid by the business)
Employee benefits (vacation, parental, family, medical or sick leave, but NOT sick and family leave wages paid under the Families First Coronavirus Response Act)
Medical insurance costs of employer contributions to a self-insured plan
State and local taxes assessed on compensation
You can give bonuses to employees, but not to business owners. Bonuses to employees earning over $100,000 per year will not be forgiven.
Payroll costs that are NOT eligible include federal taxes you withhold from employee wages (FICA tax and federal income tax) and your employer share of payroll tax.
What is the APCP? If you have a biweekly or more frequent payroll schedule, this allows you to begin your eight week period on the first day of your first pay period after receiving your first PPP loan disbursement. This was an important change since before this flexibility was added, certain businesses were only going to have three pay periods (or six weeks) covered instead of eight.
Rent* (It has been clarified that rent includes personal property items such as copiers, servers and autos that are leased by a business. Interest on these loans can also be forgiven).
Utilities* including electricity, gas, water, transportation, telephone and internet.
If you are in doubt as to what qualifies as a utility, go ahead and submit the expense and let the lender tell you if a portion is not eligible (e.g. you pay one bill for internet and telephone and it also includes cable). Transportation includes costs such as gas and other auto expenses that would be a deduction on a business tax return.
* Mortgages, leases, and utility service agreements must each be dated before February 15, 2020. Interest on business credit cards is not forgivable.
The purpose of the PPP is to keep people employed and off unemployment. Keeping the number of employees at the same level as when you applied is crucial to having your loan forgiven. You can lose part of your loan forgiveness if your headcount drops. The CARES Act looks at your average Full Time Equivalent (FTE) employee number during the covered period.
Note: you do not have to keep the same individuals, just the same number of FTEs.
FTE means Full Time Equivalent. Assign a value of 1 for each employee who works 40 hours or more per week and a value of .5 for employees who work less than 40 hours per week.
If you have reduced or furloughed your staff from 2/15/20 – 4/26/20 and have not replaced them to equal the FTE by June 30, 2020, then a loan forgiveness reduction percentage (LFRP) will be applied. This percentage is:
The average number of FTEs during your CP (Covered Period)
Averagae number of FTEs per month during one of two time periods*
*Time Period 1: February 15, 2019 – June 30, 2019 (seasonal businesses must use this)
*Time Period 2: January 1, 2020 – February 29, 2020
There are additional rules in the application guidelines that apply to the re-hire of laid off employees as well as what to do if you have reduced an employee’s wages by more than 25%. If someone resigns, you have to show in writing your “best efforts” to hire a replacement.
Keep copies of every expense you use your PPP loan to cover, no matter how small. Documenting everything will be much easier if you separate your PPP loan funds from your other funds.
Documents you will need in order to apply for loan forgiveness include those that evidence:
Payroll costs during the loan period (Payroll reports showing cash paid to employees, Payroll tax filings, e.g. Form 941. You may not have complete 941s to submit with the application until October even though your eight week period was up in July. We don’t yet know what flexibility the SBA will allow on this.)
Average number of FTE employees on payroll
Interest on mortgage payments (Lender amortization schedule)
Rent payments (Current lease agreement, cancelled checks)
Utility payments (Receipts, utility bills, bank statements)
The SBA has not released a set due date for this application, but we can assume that it will not be due until after June 30, 2020 as that is the time set for the eight consecutive weeks to end. Banks have 60 days to approve or reject the forgiveness request.
Her are the current payback terms on the PPP loan:
Two year loan term
1% interest rate (accruing immediately)
No additional loan “fees”
Six month payment deferral from the date of loan disbursement
No prepayment penalty
The major change that occurred approximately 2 weeks prior to the release of the loan forgiveness application is that the IRS has ruled that you CANNOT DEDUCT expenses paid for by a PPP Loan if those expenses are forgiven as part of your organization’s loan forgiveness.
Businesses with less than $2m in PPP loans do not have to show financial hardship to apply for forgiveness and are not likely to have their applications audited.
Amounts received through an EIDL advance are not forgivable.
There is a new PPP interim rule on increasing PPP loan amounts for small businesses that are structured as partnerships or classified as seasonal employers. The language states “this interim final rule authorizes all PPP lenders to increase existing PPP loans to partnerships or seasonal employers to include appropriate amounts to cover partner compensation […] or to permit the seasonal employer to calculate its maximum loan amount using the alternative criterion posted on April 28, 2020.”
Congress is currently considering a number of changes including: eliminating the 75% rule, extending the amount of time businesses have to rehire employees beyond June 30, 2020 and extending the 8 week period up to 24 weeks. However, none of these changes have been enacted.
The important thing to remember is that you got this loan to help your organization stay open during this difficult time in our economy. Don’t focus so much on whether or not your PPP loan funds will be forgiven that you lose sight of the big picture and don’t spend it. Use the money! Pay other expenses if needed even if that portion won’t be forgiven. If it is not 100% forgiven, the interest is only 1% and we all hope we will be in a better financial situation if and when any repayment is due.
Here are some links to the resources we used in gathering information for this post:
Covid19BizRelief is a nationwide volunteer group of individuals to help U.S. based businesses who need it during the COVID-19 pandemic.
U.S. Chamber of Commerce Guide to PPP Loan Forgiveness
PatriotSoftware.com – PPP Loan Forgiveness: How to Get Your PPP Loan Forgiven