Now that you have signed up for a PPP forgivable loan – what’s next, and how will the forgiveness process work?
The maximum amount of the PPP loan that is eligible for forgiveness is equal to the amount spent on qualifying expenses during the eight-week period beginning on the date on which the loan is funded. So you need to have a system in place to capture the qualifying forgivable costs before you get the loan as the receipt of the loan will start with that eight-week time frame.
Qualifying expenses include:
NOTE: It also appears that the non-payroll costs eligible for forgiveness will be limited to 75% of payroll costs. For example, if your payroll costs (including all of the items above) are, say, $125,000 and all of your non-payroll forgivable costs (interest, rent and utilities) are $52,000, then the non-payroll costs will be limited to 25% of payroll costs (25% * $125,000 =) or $31,250. So the total eligible for forgiveness would be $125,000 of payroll, plus $31,250 of non-payroll costs, for a total of $156,250.
Forgiveness will be reduced if you cut staff or reduce wages
The PPP loan program is designed for employers to keep their employees working. Accordingly, loan forgiveness will be reduced if either of the following occurs:
While this may seem confusing at this early point, we are hopeful that regulations will be issued to provide further examples and guidance on how the salary and workforce reduction rules will apply.
Relief for Rehiring
How will we apply for forgiveness?
A PPP loan recipient seeking loan forgiveness will be required to submit a forgiveness application to their lender. We expect that applications will require the following supporting documentation:
The PPP lender is required to make a decision on loan forgiveness no later than 60 days after an application has been submitted. PPP loan amounts forgiven will be paid by the Small Business Administration (SBA) directly to the lender.
While there are still a number of unanswered questions as to how the loan forgiveness process will play out, we recommend clients take the following proactive measures to ensure their best chance of forgiveness:
What happens to the loan amount that is not forgiven?
The amount of the PPP loan that was not spent on qualifying costs in the qualifying eight-week time frame will be treated as a two-year term loan at a 1% interest rate. The loan will require no payments for the first 6 months. We have read some guidance that the loan will only require payments of interest only with the principal due 2 years after loan funding, but we cannot really confirm the accuracy of that at this point. Clients should probably count on the unforgiven portion to be due in 18 monthly installments of principal and interest starting 6 months after you receive your loan.
As a more practical example, if a business applied for and received a PPP loan in the amount of $125,000 and the amount of costs qualifying for forgiveness incurred during the eight-week test period starting when they received the loan was only $105,000. Then the business will have a term loan in the amount of $20,000, requiring 18 monthly payments beginning six months after receiving the PPP loan at a 1% interest rate.
The SBA continues to produce new and revised guidance on this program, which will result in changes to the above. Borrowers should work with their lenders to determine the forgivable amount of their loan. We need you to really understand that the above is based on preliminary guidance. This is a fast-changing situation and both the banking system and the SBA are ill-prepared. We have had a difficult time getting guidance as the SBA has been slow to release guidance and then in many circumstances the guidance has later been changed in very material ways.
NOTE: The above was written on April 14, 2020, based on the information available to us on this date. Please be alert for changes to guidance and we take no responsibility to update this document at a later date.