Last Updated: 8/6/2020
As of June 4, the Small Business Administration had approved 4.5 million Paycheck Protection Program (PPP) loans, with an average loan size of $113,228. 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?
The primary goal of PPP loans is to keep employees of small businesses on the payroll without causing undue burden for their employers. The current rules governing PPP loans were created by the CARES Act on March 27, 2020 and updated by the Paycheck Protection Program Flexibility Act June 4, 2020. They specify that PPP loans may be forgiven if the loan is spent on payroll expenses within a 24-week “Covered Period” after receiving the loan. The covered period for those expenses cannot extend beyond December 31, 2020.
So, there are three big requirements to keep in mind to determine whether a PPP loan may be forgiven:
- The funds from a PPP loan must be spent within the 24-week Covered Period. The Covered period may either begin the date the loan was received, or employers can start calculating expenses using the “Alternate Payroll Covered Period”, which starts at the beginning of the first payroll cycle after the loan is received. See more on this below.
- PPP loan borrowers should spend at least 60% of the loan amount on payroll. However, employers will remain eligible for partial forgiveness even if they do not spend at least 60% of the loan funds on payroll costs. The remaining 40% 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. For example, if full-time equivalent employee headcount is not restored by December 31, 2020, there may be penalties (although there are a few exceptions, detailed below). 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?
There are two applications available for small business owners to use to apply for PPP loan forgiveness. The SBA updated its PPP loan forgiveness application and accompanying guidance on June 16, 2020. It is similar to the initial 11-page version of the form, but does not contain all of the instructions in the new five-page format. Other updates include:
- All borrowers will now have the option to use a 24-week Covered Period. If loans originated prior to June 5, 2020, loan recipients can elect to use the initial 8-week Covered Period. The updated application instructs the borrower to choose their Covered Period — either eight or 24 weeks.
- Health insurance costs for S corporation owner-employers cannot be included when calculating payroll costs nor are they eligible for forgiveness.
- Retirement costs for S corporation owners are eligible costs. Clarification issued on June 22, 2020 from the SBA explained that the employer portion of retirement plan funding for owner-employees of S-Corporations and C-Corporations is now capped at 2.5 months’ worth of the 2019 contribution amount.
- Prior to this latest guidance, owner compensation was limited to eight weeks’ worth (8/52) of 2019 net profit up to $15,385. PPP loan borrowers using the 24-week Covered Period can now include 2.5 months’ worth (2.5/12) of 2019 net profit up to $20,833.
- Borrowers don’t have to wait until December 31, 2020 to apply for forgiveness to use safe harbors for excluding salary and hourly wage reductions and reductions in the number of FTE employees from loan forgiveness reductions. Safe harbors can be applied for on the date the loan forgiveness application is submitted.
- Payroll costs including salary, wages and tips are still capped at $100,000 of annualized pay, but now instead of a max of $15,385 per individual ($100,000/52 x 8), the new maximum forgiveness cap $46,154 ($100,000/52 x 24) per employee for 24 weeks.
The SBA also released the PPP Loan Forgiveness Application Form 3508EZ (Form EZ) at the same time. The EZ Form is a simplified version of the application and is an option for PPP loan recipients who are able to certify they have meet any one of the following conditions:
- They are sole proprietors, independent contractors, or self-employed individuals with have no employees.
- They did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees.
- They experienced reductions in business activity as a result of health directives related to COVID-19 from the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, the Occupational Safety and Health Administration, or standards of sanitation, social distancing, and any other work or customer safety requirement related to COVID-19 and did not reduce the salaries or wages of their employees by more than 25%.
When can I apply for loan forgiveness?
Employers can apply for forgiveness at any time on or before the loan maturity date. However, if an employer applies for forgiveness before the end of the Covered Period and has reduced any employee’s salaries or wages by more than 25 percent, the employer will need to account for the excess salary reduction for the full 8-week or 24-week Covered Period. Consult your accountant or tax advisor for any disadvantages to applying for loan forgiveness early.
When does the PPP forgiveness period begin?
The new SBA guidance gives business owners two options for calculating payroll expenses: 1) They can use the Covered 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 for when the Covered Period may begin. 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 Covered Period that begins 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 US 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?
A borrower has up to five years to pay off any portion of a PPP loan that’s not forgiven. 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 received a PPP loan and repaid 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?
The deadline for PPP loan applications is August 8, 2020. 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.