Last Updated: 5/26/2020
As of May 23, the Small Business Administration had approved 4.4 million Paycheck Protection Program (PPP) loans, with an average loan size of $116,000. That’s $511 billion in funding — and, depending on how the money is spent, many of those small business loans could be forgiven.
Small businesses have a huge incentive to follow the requirements from the Small Business Administration (SBA) and the Department of Treasury, but there are a lot of details to keep in mind. So, let’s start at the beginning.
What expenses do PPP loans cover?
PPP loans were designed to cover up to eight weeks of employment expenses for small businesses. The primary goal was to keep employees of small businesses on the payroll without causing undue burden for their employers.
So, there are three big requirements to keep in mind:
- The funds from a PPP loan must be spent within roughly eight weeks of when the loan was made, depending on your payroll cycle.
- A PPP loan may only be wholly forgiven if at least 75% of it is spent on payroll-related expenses. The remaining 25% can only be spent on things like rent, mortgage interest, or utility bills.
- Employers generally need to maintain their employee count and the amount of money they spend on payroll during the duration of the forgiveness period.
If a PPP loan recipient doesn’t meet one of those requirements, the amount that can be forgiven will decrease. We recommend talking to your bookkeeper or accountant to make sure you’re calculating your expenses correctly, but here’s more detail on how it works.
How do you apply for loan forgiveness?
The SBA issued its PPP loan forgiveness application and accompanying guidance on May 15, 2020. After the eight week period is complete, small business owners can complete the application and file it with their lender. The deadline for submitting a loan forgiveness application is October 31, 2020.
When does the eight-week PPP forgiveness period begin?
The new SBA guidance gives business owners two options for calculating payroll expenses: 1) They can use the eight week period immediately following the issuance of the loan; or 2) If their pay periods don’t line up exactly with the date they received their loan, business owners may use the Alternative Payroll Covered Period, which begins the first day of the first new pay period following the PPP loan disbursement date.
In its forgiveness application, the SBA offered an example that might be helpful. If a borrower “received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20.” The SBA has said that it considers payroll costs to be paid on the day that paychecks are distributed (or when the payroll-related ACH credit transaction occurs).
While payroll expenses may be based on the Alternative Payroll Covered Period, businesses may also seek forgiveness for expenses related to mortgage interest, rents, and utilities. Any of these non-payroll expenses must be either incurred or paid within the eight week period immediately following the date the loan was disbursed — not the Alternative Payroll Covered Period.
How much of my PPP loan can be forgiven?
According to the SBA and the U.S. Department of the Treasury, up to 100% of a PPP loan may be forgiven if all these conditions are met. Forgiveness includes both the principal and interest on the loan.
What if your PPP loan isn’t forgiven?
You will be required to pay back any outstanding portion of your loan within two years. The interest rate specified by the PPP program is just 1% per year, so it’s relatively inexpensive debt. At the same time, it’s worth making the effort to document your expenses because loan forgiveness is a much better outcome.
How does the SBA determine eligibility for a PPP loan?
Although the CARES Act does suspend the ordinary requirement that borrowers must be unable to obtain credit elsewhere, you’ll still need to certify “in good faith” that the PPP loan request is necessary for you to maintain ongoing operations — or get back up and running. Now this means that small business owners must confirm their need for the loan by certifying that the lack of funds would be “significantly detrimental” to their business.
For loans of $2 million and less, the SBA has offered additional guidance to say that it will consider owner certification that the loan was “necessary to support ongoing operations” to have been made in good faith. There have been some suggestions that this means that there will be no forgiveness reviews of loans of this size, and that has not specifically been stated by the Administration, so it’s important to continue with compliance and documentation efforts. The SBA determined that this safe harbor is appropriate because “borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment.”
What if an employee doesn’t return to work?
If employers have made a good faith effort to rehire a worker, but that employee can’t or won’t come back, the SBA has clarified that employers generally can exclude that employee as part of a reduction in full-time equivalent employee headcount. Here’s how this works:
- the employer made a good-faith, written offer to return or rehire the employee (or restore their reduced hours) during the covered period or the alternative payroll covered period
- the offer was for the same salary or wages and same number of hours as earned by the employee in the last pay period before the furlough, layoff, or reduction in hours
- the offer was rejected by the employee
- the employer maintained records documenting the offer and its rejection, and
- the employer informed their state unemployment insurance office within 30 days that the employee has rejected their offer of reemployment
What if your business returns the loan? Could you still be eligible for the Employee Retention Credit?
Yes. An employer that receives a PPP loan and repays the loan by the safe harbor deadline of May 18, 2020 will still be eligible for Employee Retention Credit if they meet the other eligibility requirements.
What if my business hasn’t applied for a PPP loan yet?
You can still apply by completing the Paycheck Protection Program loan application and submitting it with the required documentation to an approved lender. Here’s a downloadable copy of the application and a list of lenders participating in the Paycheck Protection Program by state. And we’ve broken down how to calculate your average monthly payroll costs for your PPP loan.
We’ll continue to update this article and our COVID-19 resource center as new developments are made public.
This article is for informational purposes only and should not be relied on for, tax, legal or accounting advice. If you have questions about how the CARES Act impacts your business, please consult your legal advisor or tax professional, or review detailed guidance about PPP payroll cost reports from the Treasury Department and from the SBA.