Paycheck Protection Program (PPP) Loan Forgiveness

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Now that many business owners are past the stressful work of navigating the Paycheck Protection Program (PPP) application process, it seems like the hardest part is over. However, for businesses looking for loan forgiveness (which is pretty much everyone), the 8 weeks following the receipt of their funds will prove to be the most crucial. Below is the current guidance of what will be required for PPP loan forgiveness.

  1. As a reminder, the “8-week clock” will begin after the loan is disbursed and the loan forgiveness will be based on actual costs paid. Be sure you are planning ahead to capture as many payroll cycles as possible during this period. But DO NOT pre-pay your expenses. These amounts will not be included in the forgiveness.
  2. Loan forgiveness includes “payroll costs” and covered “non-payroll costs”. At least 75% of your loan proceeds must be used for “payroll costs” and no more than 25% can be used for covered “non-payroll costs”. If you do not meet this requirement, your loan forgiveness will be reduced proportionately.
  3. Because the purpose of this program is employee retention, you must maintain the same or increase your number of full-time employees. The headcount testing period will compare the number of full-time equivalent employees during your 8-week period and February 15, 2019-June 30, 2019, or January 1, 2020-February 29, 2020. If you do not meet this requirement, your loan forgiveness will be reduced proportionately.
  4. Your loan forgiveness will be reduced if you decrease the salary or wages of any employee earning less than $100,000 by more than 25%.
  5. Self-employed and sole proprietors: PPP loan proceeds for self-employed and sole proprietors are based on 2 ½ months of their 2019 average net income. However, the loan forgiveness for these individuals is based on 8 weeks of 2019 net income and the covered “non-payroll costs” previously deducted on the Schedule C. Unless further guidance is received, many who are self-employed will find they will have a loan balance to repay once the 8 weeks have ended; especially those who work from home.
  6. If you received an EIDL advance that wasn’t subtracted from the PPP loan proceeds, it must be subtracted from the amount of the loan forgiveness.
  7. The loan terms for any proceeds not forgiven will be 2 years and 1% interest. All loan payments will be deferred for 6 months.

Once the 8 weeks have ended, the loan forgiveness is not automatic. It is unlikely your banker will reach out to you. You must apply for loan forgiveness with the bank where your loan was processed. You will certify what the loan proceeds were used for and provide the necessary supporting documentation. Your lender will then have 60 days to respond to your application. It is important that you speak with your lender to determine exactly what documents will be required so as not to delay the process.

What documents will you want to start collecting now? Essentially, any document that will prove what the loan proceeds were spent on and your payroll records. Here are some examples of documents that will be requested:

  • Payroll documents that verify the number of employees and their pay for prior and current periods (see #3 above)
  • Payroll reports that verify the amount of compensation during the 8 week period
  • Documents verifying company health insurance contributions and proof of payment
  • Documents verifying company retirement plan contributions and proof of payment
  • Proof of payment for interest, rent, and utilities (canceled check, payment receipts, account statements)

It’s important that you carefully track your expenses during this 8 week period. Some advisors have even recommended opening a separate bank account and paying all your PPP related costs from this account. While we believe this may be overkill for some, it does emphasize the need to KEEP GOOD RECORDS. As the SBA continues to release additional guidance on some of the issues still in question, it is important that you continue working closely with your tax or accounting advisors. If you do not have an advisor you are working with, please reach out to a HAS team member for assistance.

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