Paycheck Protection Program (PPP) Loan Forgiveness

As part of the Coronavirus Aid, Relief, and Economic Securities (CARES) Act, the Paycheck Protection Program (PPP) offers $350 billion in forgivable loans to small businesses to help keep workers on payroll. As of April 15, close to $250 billion had been distributed to more than 1 million small businesses.  Due to the program’s magnitude, there were procedural challenges and some banks were not prepared to accept applications. Nevertheless, the government will forgive the loan if certain conditions are met.
The Small Business Administration (SBA) released an Interim Final Rule addressing eligibility issues and requirements for certain pledges. The CARES Act requires the SBA to issue additional guidance on rules for loan forgiveness by April 27, 2020.
What part of the PPP loan is forgivable?
For a PPP loan to be forgivable, a business has eight weeks, known as the “covered period,”  to spend the loan proceeds on payroll costs, mortgage interest, rent and utilities. The bank is required to make the disbursement within 10 days of loan approval and the eight week period begins when disbursement of the funds are received. Also, the covered period applies even if the business has not restarted operations.
The sum of the following “costs incurred and payments made” will be eligible for forgiveness:

  • Payroll costs;
  • Any payment of interest on any mortgage obligation, not including any prepayment of or payment of principal on a mortgage obligation, that was incurred before February 15, 2020;
  • Any payment of rent under a leasing agreement in force before February 15, 2020; and
  • Any utility payment, including payment for distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

For a business with employees, payroll costs are equal to the sum of:

  • Salary, wage, commission, or similar compensation. For a partnership, payroll costs include not only guaranteed payments to a partner, but any partner’s share of income of the partnership subject to self-employment income. These amounts are subject to a per-employee or per-partner cap of $100,000.
  • Payment of cash tip or equivalent.
  • Payment for vacation, parental, family, medical, or sick leave.
  • Allowance for dismissal or separation.
  • Payment required for the provisions of group health care benefits, including insurance premiums.
  • Payment of any retirement benefit.
  • Payment of State or local tax assessed on the compensation of employees.

Payroll costs do NOT include:

  • The compensation of an individual employee, or the self-employment income of a partner in a partnership, in excess of $100,000, as prorated for the covered period;
  • Taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code during the covered period;
  • Any compensation of an employee whose principal place of residence is outside of the United States;
  • Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act; or
  • Qualified family leave wages for which a credit is allowed under section 7003 of that same Act.

How does staffing impact forgiveness of the loan?

You should understand rules about reduced employees’ pay and maintaining the same number of full-time equivalent employees you had during either the period from February 15 to June 30, 2019, or January 1 to February 29, 2020. These rules can change your forgivable costs.

  • Your loan forgiveness will be reduced if you decrease your full-time employee headcount or decrease salaries and wages by more than 25% for any employee who made less than $100,000 annualized in 2019. You have until June 30, 2020, to restore your full-time employment and salary levels for any changes made between February 15, 2020, and April 26, 2020.
  • If your business retained its employees, payment of payroll costs will make it easier to use the funds as intended by the government. If you laid-off employees, there are challenges with bringing back employees. Some nonessential businesses may remain shut down, creating a challenge to bringing back employees when they are not allowed to do their jobs. Some may be able to work remotely, others cannot due to the nature of their job. The eight week window to spend PPP funds to qualify for loan forgiveness will require some businesses to make staffing decisions before restarting operations.

It would be good business practice to create a plan to use the funds by June 30, 2020. Specifically, your plan should include paying wages to workers; maintaining payroll benefits; making interest payments; and paying lease payments and utilities. Maintain documentation supporting reasons for applying for PPP funding. Retain customer lists, employee records, and other documents to serve as back up in case your loan is challenged.


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