Understanding PPP Loan Forgiveness Provisions
Designed to keep employees on the payroll during the COVID-19 crisis, Paycheck Protection Program loans have been touted as loans in name only. According to the prevailing wisdom, as long as they are spent on payroll, rent, utilities, and mortgage interest, they won't have to be repaid.
As an added bonus, loan forgiveness won't even have to be reported as income on tax returns.
And indeed, that is generally true. However, once you drill down, the details of forgiveness become more complex. If you applied for a PPP loan before the initial $350 billion in funding ran out -- or if you are considering applying once a possible appropriation of another $250 billion is approved -- it would pay to fully understand the exact terms for PPP loan forgiveness.
Understanding the terms will help you maximize your benefit and eliminate taking on unnecessary debt at a critical time. Bear in mind that if your business doesn't meet the criteria for loan forgiveness, it will be on the hook to repay the loan within two years at a 1-percent interest rate, with a six-month payment grace period.
The PPP's main goal is to provide funds to keep employees on the payroll. To that end, 75 percent of the forgivable loan amount must go to payroll costs. The Small Business Administration, which is administering the program, defines payroll costs as gross salaries and wages, employer-paid health insurance, employer-paid 401K matching contributions, employers' state and local payroll taxes, and vacation, parental, family, medical, or sick leave. Employer Social Security and Medicare tax expenses are not included.
Secondly, your business is required to maintain pre-COVID-19 employee headcount and salaries to qualify for complete loan forgiveness. If you experienced reductions, the amount of loan forgiveness will be reduced. Businesses have until June 30, however, to restore full-time employment and salary levels for any changes made between Feb. 15 and April 26.
Only companies categorized as small businesses are eligible to participate in the PPP, and the loans apply only to those earning $100,000 or less in salary.
A key provision of forgiveness is that employee expenses must be paid during an eight-week "covered period" after receiving the loan proceeds. The same goes for the rent, utilities, and interest expenses. Any expenses paid outside that eight-week window would have to be paid back within the two-year timeframe.
To be eligible for loan forgiveness in the rent category, the lease agreement must have been in effect prior to Feb. 15. Utilities--defined as electricity, gas, water, transportation, telephone, and Internet service--must have also been in service before Feb. 15 to be eligible for loan forgiveness.
The interest eligible for loan forgiveness includes interest on a mortgage or line of credit taken out before Feb. 15. Principal payments or prepayments are not eligible for loan forgiveness.
If you reduced your headcount during the covered eight-week period, you must complete a calculation that will reduce the forgivable amount. To complete that calculation, divide the average number of Full-Time Equivalents during the period by the average number of FTEs during a base period.
You have two options for the base period: the average number of FTEs per month between Feb. 15 and June 30, 2019; or the average number of FTEs per month between Jan. 1 and Feb. 29, 2020. You must also calculate your actual salary expense.
To seek forgiveness, submit a request to the lender servicing the loan, including documents to verify the number of employees and pay rates, as well as payments on lease, mortgage interest, and utilities.
You must certify the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on the forgiveness within 60 days.
To simplify this process for you, we have created an Excel calculator that will help you estimate your potential loan forgiveness. We recommend using this calculator and then working with your CPA to verify the exact amount that make be forgiven. Get the calculator.
More information on PPP loan forgiveness can be found on the U.S. Treasury Department website.
Due to the rapidly changing guidelines around the available relief programs for small business owners, we recommend you consult your CPA for further guidance.
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