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PPP Loan Forgiveness Application Guide

PPP loan borrowers are eligible for full loan forgiveness if they meet certain criteria as outlined by the U.S. Department of Treasury and Small Business Administration. Borrowers that do not satisfy requirements can have loan forgiveness reduced or denied. You must carefully evaluate the use of funds, navigate complex rules, prepare necessary supporting documentation, complete calculations, and application forms. In this blog post, we include frequently asked questions to help you understand the loan forgiveness process.

When can I submit my application for loan forgiveness?

You can apply for loan forgiveness any time before the maturity date of the loan. Payments will begin once the deferment period ends. If you do not apply for loan forgiveness within ten months after the last day of your cover period, then you will be required to start making payments for principal and interest. The loan interest rate is 1% on a non-compounding, non-adjusted basis.

Loan Maturity Date:

  • Loans made before June 5th, 2020 have a 2-year loan term from the date of origination. The loan term agreement can be extended to 5 years.
  • All loans made after June 5th, 2020, have a 5-year loan term from the date of origination.

What is the cover period?

The cover period is the period beginning on the date the lender disburses the PPP loan and ends on the date selected by the borrower that occurs during the period:

  • beginning on the date that is at least 8 weeks after the date of disbursement, and
  • ending on the date that is no more than 24 weeks after the date of disbursement

You can select to have either an 8- or 24-week cover period. Once you have chosen a cover period, you must spend the loan proceeds on qualified expenses within this timeframe to be eligible for loan forgiveness.

How do I apply for PPP loan forgiveness?

Apply for loan forgiveness by submitting a loan application and supporting documentation to your PPP lender. There are currently three forgiveness forms 3508S, 3508EZ, and 3508:

Form 3508S is the simplified form for borrowers who received a loan of $150,000 or less.

Form 3508EZ is for borrowers who received a loan greater than $150,000. This is the “easy” forgiveness form for borrowers who satisfy at least ONE of the following conditions:

  • The borrower is self-employed (includes sole proprietor, independent contractor, single-member LLC) and doesn’t have any employees.
  • The borrower has employees but did not reduce their salary or wages by more than 25% during the cover period compared to the most recent full quarter before the cover period and did not reduce employee headcount or reduce employee hours.
  • The borrower has employees but did not reduce their salary or wages by more than 25% during the cover period compared to the most recent full quarter before the cover period and the business could not operate as normal during the cover period as a result of COVID-19 health and safety requirements.

Form 3508 is the full complete application form that can be used for all other Borrowers who do not qualify for either the 3508S or the 3508EZ.

How do I spend loan proceeds to maximize PPP loan forgiveness?

You can qualify for full loan forgiveness by spending all loan proceeds on qualified expenses during the cover period in the following manner:

  • At least 60% of the loan proceeds must be used to cover eligible payroll costs.
  • The remaining 40% of the loan proceeds can be used for approved non-payroll costs.

What payroll costs are eligible for forgiveness?

Eligible Payroll costs include the following:

  • Cash Compensation: Salary, wages, commissions, payment of cash tip or equivalent, costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal
  • Non-Cash Compensation: Employer contributions for employee group health care benefits, including insurance premiums. Employer Contributions to retirement plans. State and local taxes assessed on compensation.
  • Owner Compensation: includes amounts paid to self-employed, owner-employees with 5% stake of ownership, or general partners; compensation for each individual owner is capped at the lesser of $20,833 ($15,385 if electing 8-week cover period) or 2.5 equivalent compensation of the year that was used to calculate the loan amount.

Non-Eligible Payroll cost includes the following:

  • Compensation of any individual employee in excess of an annual salary of $100,000 as prorated for the cover period; self-employed income in excess of an annual salary of $100,000 as prorated for the cover period.
  • The employer portion of FICA and FUTA taxes
  • Compensation for an employee who lives outside of the U.S.
  • Qualified sick leave wages for which a credit is allowed under the Families First Coronavirus Response Act
  • Qualified wages used to obtain the Employee Retention Tax Credit

What non-payroll costs are eligible for forgiveness?

Non-Payroll costs include the following expenses either paid or incurred during the cover period:

  • Mortgage Interest: Interest paid on a mortgage that originated before February 15th, 2020. A covered mortgage interest obligation specifically must be both: (a) a liability of the borrower; and (b) a mortgage on real or personal property on a security interest in personal property.
  • Interest: Interest paid on a debt that originated prior to February 15th, 2020. May include interest on auto loans or other business assets.
  • Rent and Leases: Payment of rent on a lease that began before February 15th, 2020. No prepayments on future rent
  • Utilities: Payment on any utility for which service began before February 15th, 2020. Utility payments include payments for the service of electricity, gas, water, transportation, telephone, and internet access.
  • Operational Expenditures: payments for business software or cloud computing service used to facilitate operations.
  • Property Damage Costs: costs related to property damage, vandalism, or looting due to public disturbance in 2020 not covered by insurance.
  • Supplier Costs Expenditures: for contractually purchased goods that are essential to the business.
  • Worker Protection Expenses: cost for items such as personal protective equipment to comply with health and safety guidelines issued by a State or local government.

Does a reduction in employee headcount reduce loan forgiveness?

Yes, loan forgiveness will be reduced if you decrease your average full-time employee (FTE) headcount in comparison to one of the two measurement periods before the shutdown. The two pre-shutdown reference periods are:

  • February 15th, 2019, and ending on June 30th, 2019, or
  • January 1st, 2020, and ending on February 29th, 2020.

You can calculate the average full-time equivalent employees FTEs using either method:

  • Calculate the average number of hours paid per week, divide this number by 40, and round the total to the nearest tenth (not > 1.0) for each employee
  • The other is a simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours

Calculate Reduction

Loan Forgiveness Reductions Percentage is equal to the average number of FTE during the cover period divided by the average number of FTEs during the select reference period. For example, an 30% decrease in Average FTE is equal to a 30% decrease in loan amount eligible for forgiveness.

Borrowers who have received a loan of less than 50,000 or less are exempt from FTE or salary/wage reduction to loan forgiveness amount. Additional safe harbor provisions help borrowers maximize forgiveness.

FTE Safe Harbor 1

The first safe harbor applies if a borrower can document the inability to return to the same level of business activity it was before February 15th, 2020 due to compliance with state or federal government guidance issued between March 1st, 2020 and December 31st, 2020 (or due to guidance issued between March 1, 2020, and the last day of the cover period for PPP loans made after December 27th, 2020).

FTE Safe Harbor 2

PPP Flexibility act extended time for borrowers struggling to restore their workforce. This safe harbor exempts borrowers from reduction if:

  • The borrower reduced its FTE employee levels in the period beginning February 15th, 2020, and ending April 26th, 2020, and;
  • The borrower restored its FTE employee levels in the borrower’s pay period that included February 15th, 2020 by no later than (i) December 31st, 2020, for a PPP loan made before December 27th, 2020, or (ii) the last day of the covered period, for a PPP loan made after December 27th, 2020.

FTE Reduction Exemptions

Full-time equivalent employee count is not reduced for borrowers that:

  • Made a good faith, written offer to rehire individuals who were employees on February 15th, 2020 and the borrower was unable to hire similarly qualified employees for the unfilled position on or before December 31st, 2020 (or on the last day of the cover period for PPP loan made after December 27, 2020).
  • Made a good faith written offer to restore hours for the same salary or wages and the same number of hours as earned by the employee during the last pay period before the separation or hours reduction, during the cover period, and the offer was rejected by the employee.
  • Maintained records documenting the offer and rejection, and the borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of such rejection.
  • For any employees fired for cause during the covered period, employees who voluntarily left employment during the covered period, or employees who voluntarily reduced their hours.

Can a reduction in employee wages affect loan forgiveness?

Yes, PPP loan forgiveness can also be reduced if a borrower decreases wages by more than 25% for any employee that made less than $100,000 annualized in 2019 (for all pay periods). If the PPP loan is less than $50,000 then the loan forgiveness amount will not be reduced by any reduction in salary/wages during the cover period.

The loan forgiveness amount will be reduced by the total dollar amount of the salary or wage reductions that are in excess of 25% of the base salary or wages of the employees during the most recent full quarter during which the employee was employed before the covered period.

Calculate Reduction

First, identify salary/wages for all covered employees; exclude any employee who received salary at an annualized pay rate in the amount made more than $100,000. Compare the average salary/ wages paid during the cover period for each employee to the average salary/wages paid during the most recent full quarter before the cover period. Determine whether the employee’s salary/wages decreased during the cover period by more than 25% of the salary/wages of the employee during the most recent full quarter. Then add all the amounts that were in excess of 25% for each employee.

Safe Harbor

A borrower loan forgiveness will not be reduced because of salary/wage reductions if they meet the following safe harbor requirements:

  • The borrower reduced the average salary/ wages paid in the period beginning February 15th, 2020, and ending April 26, 2020, and the borrower restored the average salary/wage by December 31, 2020 (or by the last day of the cover period for the PPP loan made after December 27, 2020).

What documentation will I need to qualify for loan forgiveness?

Borrowers must provide required documentation that verifies the proper use of funds. It’s important to verify what documentation your lender will require for the loan forgiveness application, they may have additional requirements. The list of required documentation may include but not limited to:

  • Documentation to support forgiveness applications such as payroll reports, tax forms, payment receipts, canceled checks, account statements, invoices, orders, purchase orders, and contracts.
  • Certification that all documentation is true and correct and the amount for which the forgiveness is requested was used for permissible purposes; and,
  • Any other documentation as required by the SBA and lender

Visit the SBA’s page dedicated to providing more information on the PPP. Please note that further changes to the forgiveness applications may be issued by the U.S. Treasury Department and the Small Business Administration. All borrowers must follow the rules and regulations in place at the time they apply for loan forgiveness. At this time it is critical to ensure you are appropriately tracking all loan expenditures and retaining all supporting documentation for your PPP loan forgiveness application.

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