Your application for a Paycheck Protection Program (PPP) loan was approved and the first disbursement of much-needed proceeds for your business is now in your hands. At the end of the 8-week period from your first receipt of PPP loan funds, you will be able to submit an application to your lender seeking forgiveness of potentially your entire PPP loan balance. That forgiveness will take the form of the SBA’s payment of your loan.
Forgiveness requires documentation that you used the PPP loan funds for “allowable uses” (i.e., “Specific Expenses” described below) incurred and paid within the 8-week period following your receipt of the PPP loan funds. Although you can use PPP loan funds for Specific Expenses after the 8-week period and before June 30, 2020, that portion of the loan will not be forgiven and you will need to repay that portion of the loan within 2 years of the date you received the PPP loan, at 1% interest.
What Reduces the Amount of Forgiveness?
Although your goal is to have the full amount of the PPP loan forgiven, the amount of loan forgiveness may be reduced pursuant to formulas found in the Coronavirus Aid, Relief, and Economic Security(CARES) Act for (1) any reduction in the number of full-time equivalent employees (FTEs), which occurs during the 8-week loan period compared to a pre-shutdown measurement period (described below), and (2) any reduction in salary or wages of any employee during the covered 8-week loan period that exceeds 25% of the total salary or wages of that employee during the most recent full quarter before the 8 week PPP loan period. For a detailed discussion of these calculations, read this post about calculating the forgiveness of your PPP loan.
The two pre-shutdown measurement periods you can select from are:
- The period commencing on February 15, 2019 and ending on June 30, 2019, or
- The period commencing on January 1, 2020 and ending on February 29, 2020.
An optional measurement period is available for seasonal businesses.
Obviously, you will select the pre-shutdown measurement period for the FTE calculation that provides you the most loan forgiveness.
It is important to note that if you experienced a reduction in FTE employees or in the salary of one or more employees in excess of 25% between February 15, 2020 and April 26, 2020, the amount of loan forgiveness will be determined without reference to the reduction(s) if you eliminate the reduction(s) by June 30, 2020.
Documentation Needed For Forgiveness of PPP Loan Balance
The Coronavirus Aid, Relief, and Economic Security (CARES) Act identifies the type of documentation that you must submit to your PPP lender with your forgiveness application:
- Documentation verifying the number of full-time equivalent employees on payroll and pay rates for the pre-shutdown measurement period you select (discussed above) as well as for the 8-week loan period, including:
- payroll tax filings reported to the Internal Revenue Service; and
- State income, payroll, and unemployment insurance filings;
- Documentation, including canceled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments;
- A certification from a representative of the eligible recipient authorized to make such certifications that—
- the documentation presented is true and correct; and
- the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments; and
- any other documentation the SBA Administrator determines necessary.
Practical Steps For PPP Loan Forgiveness
Here are some practical steps you can take now to make the process of applying for PPP loan forgiveness a little easier:
- Deposit the PPP loan funds into a separate account and make sure that you use the PPP loan proceeds only for the following Specific Expenses:
- Payroll, including hourly wages and cash tips, employee vacation, group health insurance premiums, and paid parental, family, medical and sick leave, excluding qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act;
- rent under a lease agreement in force before February 15, 2020;
- utilities; and
- interest on mortgage and other debt obligations in effect prior to February 15, 2020.
- Do not use more than 25 percent of the PPP loan funds for non-payroll purposes, i.e. rent, utilities, and covered mortgage or other debt obligations.
- Spend the PPP loan funds within the 8-week covered period (which begins on the date you receive the funds) only on the Specific Expenses incurred within that same 8-week period.
- Hire back employees. Notify returning employees that they have been rehired. If employees are receiving unemployment benefits, it is their responsibility to notify the state unemployment insurance agency that they have been rehired. If your employees cannot work remotely, you can pay them to essentially do nothing. But this could also be the time that you ask employees to do the things that they never had time to do before, such as work on marketing materials, write blog articles, develop marketing plans, etc.
- Immediately check with your PPP lender to see what documentation it will require with your application for loan forgiveness.
- Get your FTE employee count and wage/salary levels back to the levels needed for full forgiveness as soon as possible, but no later than June 30, 2020.
- If you received an Economic Injury Disaster Loan (EIDL) and refinanced portions thereof for payroll using your PPP loan, those amounts will be considered when calculating the percentage of the PPP loan utilized for payroll purposes. If you received an EIDL grant, the grant amount will reduce the amount of PPP loan forgiveness.
- Notify your CPA that you received the PPP loan proceeds and discuss internal accounting procedures and the calculations needed to determine what portion of your loan will be forgiven. Understanding those calculations will help you make spending decisions within the 8-week period. Ask your CPA about setting up a payroll code to track hours and compensation incurred and paid in the applicable eight-weeks.
Call Us for Assistance With Loans Related to COVID-19
We know this is an unprecedented, challenging, and uncertain time for business owners. Kreis Enderle remains steadfastly committed to providing guidance, counsel, and advocacy to help our clients weather the storm. We’ve also created a COVID-19 Resource Center to provide additional information and insights.
If you have questions regarding the Paycheck Protection Program or have any other concerns or issues related to the COVID-19 pandemic, please contact the Business Law Practice Group at Kreis Enderle today.