How the PPP Forgiveness Process Works

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:

  • Payroll costs (up to a maximum annualized amount of $100,000 per employee). These include:
    • Salary, wage, commission, or similar compensation (limited to that $100,000 annualized cap per employee);
    • Payment of cash tip or equivalent;
    • Payment for vacation, parental, family, medical, or sick leave;
    • Allowance for dismissal or separation;
    • Company payment required for the provisions of group health care benefits, including insurance premiums;
    • Company payment of any retirement benefit;
    • Payment of state or local tax assessed on the compensation of employees – state unemployment and workers comp are the most common examples
    • For self-employed or partnerships paying guaranteed payments (only) – compensation to or income of a sole proprietor or partner compensated with guaranteed payments that is a wage, commission, income, net earnings from self-employment, or similar compensation.
  • Interest on debt obligations (for debt obligations in place prior to February 15, 2020)
  • Rent (for lease agreements in place prior to February 15, 2020)
  • Utilities (for services in place prior to February 15, 2020)

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:

  • You have a workforce reduction
    • The amount of the loan forgiveness is reduced by the quotient of the following: Monthly average full-time equivalent (FTE) employees during the Covered Period divided by the monthly average FTE employees of either February 15, 2019 – June 30, 2019 or January 1, 2020 – February 29, 2020.
    • For seasonal employers, the measurement period is February 15, 2019 – June 30, 2019.
      Example: ABC Company receives a PPP loan. After the Covered Period, ABC Company determines its potential loan forgiveness amount is $100,000. The average number of FTEs during the Covered Period (the eight weeks post-loan origination) is 100. The average number of FTEs from February 15, 2019 – June 30, 2019 is 200. The quotient of 50% (calculated as: 100 / 200) is multiplied by the loan forgiveness amount of $100,000. In other words, the amount of loan forgiveness is $50,000.
  • You have a salary reduction
    • In addition to workforce reduction, a salary reduction may also cause a reduction in the loan amount forgiven.
    • The amount of loan forgiveness is reduced by any reduction in the salary of certain employees (only employees that earned less than an annualized rate of $100,000 a year during 2019 are counted) that is in excess of 25% of the total salary of the employee during the most recent full quarter during which the employee was employed.
    • Example: XYZ Company receives a PPP loan. After the Covered Period, XYZ Company determines that its potential loan forgiveness amount is $100,000. Employee A worked for XYZ Company last year. Employee A has a salary of $80,000. During the first quarter of 2020, Employee A’s salary was $20,000. If XYZ Company reduces Employee A’s salary by more than $5,000 a quarter (more than 25% based on most recent full quarter salary, calculated), the amount in excess of $5,000 must reduce the loan forgiveness.

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

  • If the business is able to rehire employees and restore salaries by June 30, 2020, the business is not required to reduce the loan forgiveness.
  • It is important to note that furloughing or laying off employees prior to the PPP does not prohibit a business from applying or receiving a loan. However, the amount of forgiveness may be substantially diminished.

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:

  • Documentation supporting payroll and covered expenses (see above for the list of costs)
    • Payroll registers and ACH transfers to the payroll company. If you work with a PEO you will want to save your payroll invoice supporting the payroll costs, employee benefits, and retirement benefits paid
    • Utility bills and invoices from your electric, gas, and heating supplier
    • Rent statements and/or coupons and receipts showing rent was paid during the forgiveness period
    • Mortgage and/or other debt coupons or monthly statements showing these obligations were paid during the forgiveness period
    • Certification from the company affirming the extent of requested loan forgiveness
    • Any other documentation the SBA determines necessary

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:

  • Deposit the PPP loan proceeds in a separate bank account so that these funds are not commingled with normal operating funds.
  • Use the PPP loan proceeds for covered expenses and retain documentation supporting each component of covered expenses.
  • Although not recommended, if PPP loan proceeds are used to pay for non-covered expenses, retain documentation supporting these amounts.
  • Larger companies may want to establish account codes or sub-codes in your accounting system to track the payment of forgivable costs.

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.