19 May 20 Boxelder Consulting
When Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, it allocated $350 billion to the Paycheck Protection Program (PPP), a loan program designed to provide small businesses with eight weeks of cash-flow assistance. The most attractive aspect of the PPP is that the loans, which are backed by the Small Business Administration, are 100 percent forgivable.
Now that the SBA has released its PPP Loan Forgiveness Application, we wanted to walk you through the criteria you must meet in order to have your loan forgiven. Here’s everything you need to know about PPP loan forgiveness.
What is the PPP
The Paycheck Protection Program originated as part of the CARES Act, which was signed into law on March 27. The initial $350 billion was depleted within a month, after which Congress replenished the bill with an additional $310 billion under the “Paycheck Protection Program and Health Care Enhancement Act.”
Here are the highlights of the program:
- All small businesses are eligible, as are sole proprietorships, individual contractors, and other self-employed individuals.
- The loan covers expenses for eight weeks.
- The loan has a maturity rate of 2 years and an interest rate of 1 percent.
- No payments are required for the first 6 months.
- The loan can be 100 percent forgiven.
What are the conditions of the PPP
Your loan amount is based on your average monthly payroll cost for 2019. You can receive up to 2.5 times that amount, so as to cover eight weeks of expenses. To be eligible for forgiveness, you can use the funds for the following purposes:
- Payroll — this includes salary; wages; commission; and employee benefits, including vacation, parental, family, medical, or sick leave, as well as health care and retirement benefits
- Mortgage interest payments
- Rent and lease payments
- Utilities payments
The following conditions also apply:
1. Eight weeks of coverage — Only expenses incurred within eight weeks of the first payment are eligible for forgiveness. Note that the date of your lender’s first payment may be different from the date you signed the loan agreement.
2. The 75 percent rule — At least 75 percent of your loan must be used for payroll costs. Payments to independent contractors are not eligible.
3. Staffing requirements — In order to have your loan forgiven, you must maintain the number of employees on your payroll. To determine if you meet this requirement, complete the following calculations:
- Determine the number of full-time equivalent (FTE) employees you had for:
- The eligible eight-week period following the first loan payment (x)
- February 15, 2019 – June 30, 2019 (y)
- January 1, 2020 – February 29, 2020 (z)
- Calculate (x/y) and (x/z) and take the larger result. Note: If you are a seasonal employer, you must use (x/y)
- If your result is equal to or greater than 1, you qualify for full forgiveness.
- If your result is less than 1, your forgivable expenses will be reduced proportionately.
- Determine the number of full-time equivalent (FTE) employees you had for:
If an employee who was originally laid off or furloughed rejects your offer for re-employment, you may be able to exclude them when calculating forgiveness. To qualify:
- You must have made a written re-hiring offer.
- Your re-hiring offer must reflect the same salary and hours as before the employee was laid off.
- You must provide written documentation of the employee’s rejection.
4. Pay requirements — You must maintain at least 75 percent of total salary for each employee. If the employee’s pay is less than 75 percent of what they received during the most recent quarter in which they were employed, the eligible amount for forgiveness will be reduced by the difference between their current pay and 75 percent of their original pay.
5. Re-hiring grace period — You have until June 30 to rehire laid off or furloughed staff and reinstate any pay that was reduced by more than 25 percent.
How to calculate forgiveness reductions
If all goes according to plan, you’ll be able to have 100 percent of your PPP loan forgiven. Unfortunately, if you aren’t able to meet all of the requirements, you’ll have to make some reduction calculations. Here’s how to do so:
As we mentioned above, if you fail to maintain the number of employees on your payroll, your forgivable expenses will be reduced proportionately.
So, let’s say you have 6 employees, each of whom made $4,000 a month. This results in a full PPP loan amount of ($4,000 x 6 x 2.5) = $60,000
When COVID-19 hit, you were forced to lay off all 6 employees, but with assistance from the PPP, you managed to hire back 4. This results in 67 percent of your original headcount.
You spend $40,000 of the loan on your payroll and $20,000 on other eligible expenses. Non-payroll expenses are limited to 25 percent of the total loan ($15,000), the total forgivable amount comes to: 40,000 + 15,000 = 55,000.
Furthermore, because your headcount is only two-thirds of what it was originally, you must reduce this amount further: 55,000 x 0.67 = $36,850 of your loan is forgivable.
As we’ve covered, if an employee’s new pay is less than 75 percent of what they received during the most recent quarter in which they were employed, the eligible amount for forgiveness will be reduced by the difference between their current pay and 75 percent of their original pay.
So, taking the same example from above, let’s say you hire back all six employees, but for just $2500 a month. Assuming you still spend $20,000 of your total $60,000 on eligible non-payroll expenses, your total forgivable amount still comes to $55,000.
Now, each employee’s original pay was $4000, so 75 percent of that would be $3000. You’re paying each of your six employees $500 less than that, so you need to deduct another ($500 x 6 = $3,000) from your total forgivable amount. Therefore: $55,000 – $3,000 = $52,000 of your loan is forgivable.
PPP forgiveness for the self-employed
Self-employed individuals can use the PPP loan for lost compensation. However, only eight weeks worth (8/52) of your 2019 net profit (as reported on your Form 1040 – Schedule C) will be eligible for forgiveness.
Other eligible expenses, such as mortgage interest, rent, and utilities, will only be forgiven if they were eligible for a deduction on your 2019 Form 1040 – Schedule C. If you usually work out of an office space but are now working from home, you cannot claim home mortgage interest payments for forgiveness.
What you need in order to apply
Your lender will process your forgiveness application, which can be found here. After you submit it, your lender must provide a response within 60 days.
You will need to collect the following in order to demonstrate your eligibility:
- Documents that verify you’ve met the staffing and pay requirements (see above), including:
- Payroll reports form 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 your eligible interest, rent, and utility payments (such as payment receipts and account statements)
As you can see, the key to loan forgiveness will be meticulous bookkeeping. For the eight weeks of your loan, be sure to keep track of all eligible expenses and their accompanying documentation. If you don’t already have a reliable bookkeeping system, Boxelder’s certified bookkeepers are here to help.
What if you’re not approved
Your lender may allow you to provide additional documentation and have your application reevaluated. If not, your outstanding balance will continue to accrue interest at 1 percent for the remainder of the 2-year period. There is no prepayment penalty, so you can pay off the outstanding balance at any time.
For information on IRS Collections during the pandemic, click here!