What you need to know about applying for PPP loan forgiveness
Since this article was published, Congress has passed and the president has signed into law the Paycheck Protection Flexibility Act of 2020 (PPFA), which makes changes to the loan forgiveness provisions discussed below. To read more about those changes, read our update on the PPFA here.
On May 15, 2020, the Small Business Administration (“SBA”) published the Paycheck Protection Program (“PPP”) loan forgiveness application and related documents. On May 22, 2020, the SBA issued an interim final rule on the loan forgiveness process. We have reviewed the interim final rule and loan forgiveness application and have summarized what borrowers need to know below.
Where to submit the PPP loan forgiveness application. The borrower must submit the application to the lender that made the PPP loan or, if the loan was sold, to the lender servicing the loan. The lender that made the PPP loan can provide information about the servicing lender.
Department of Treasury Review. The SBA, in consultation with the Department of Treasury, announced it will review all loans in excess of $2 million and will review loans under $2 million as appropriate, following the lender’s submission of the borrower’s loan forgiveness application. You can read the SBA’s updated frequently asked questions for PPP loans here (last updated May 27, 2020 as of the date of publication).
Covered Period. For the loan to qualify for forgiveness, the loan proceeds must be spent during the “covered period,” which is the eight-week period beginning on the date the borrower received the loan proceeds (“funding date”). The borrower may use an “alternative payroll covered period,” which is the period that begins on the first day the borrower’s first payroll began after the funding date. Borrowers who elect to use the alternative payroll covered period may apply it where there is a reference in the application to the “covered period” or the “alternative payroll covered period,” but must use the covered period where there is a reference to the “covered period only.”
Forgivable Costs. Costs available for forgiveness are payroll costs; interest (not principal) on business real estate mortgages or their equivalent, or interest on collateralized business loans paid or incurred during the covered period; business lease or rent payments; and utility costs. The nonpayroll cost obligations (such as lease agreements, mortgages, and utilities accounts) must have been in place before February 15, 2020 and paid during the covered period or incurred during the covered period and paid on or before the next regular billing date (even if the billing date is after the covered period). Nonpayroll costs cannot exceed 25% of the total forgiveness amount.
Potential reduction on forgiveness amount. A reduction on the loan forgiveness amount may apply if the borrower reduced wages or reduced the number of employees.
Wage Reduction. If applicable, the wage reduction calculation is used to determine whether the loan forgiveness amount must be reduced by the amount an employer reduces compensation for any of its employees by 25%. This calculation is made on an individual basis, rather than on combined employee wages. The employer must determine whether each employee’s individual wages (salary or hourly wages) have decreased more than 25% during the applicable covered period or alternative payroll covered period compared to January 1, 2020 through March 31, 2020. This calculation does not apply to employees paid $100,000 or more in 2019.
FTE Reduction. A borrower’s loan forgiveness amount may be reduced if the borrower’s average weekly number of FTE employees during the covered period or the alternative payroll covered period is less than during the borrower’s chosen reference period. Under the FTE reduction safe harbor, the loan forgiveness amount will not be reduced if the borrower reduced the number of FTE employees in the period beginning February 15, 2020 and ending April 26, 2020 but restores the number of FTE employees not later than June 30, 2020 to the FTE employee levels in the borrower’s pay period that included February 15, 2020.
Documents to submit with application for loan forgiveness.
Payroll costs. Borrowers must submit documentation verifying the eligible cash compensation and non-cash benefit payments made during the covered period or the alternative payroll covered period. Nonprofits should be prepared to submit:
- Bank statements or third-party payroll provider reports showing the amount of cash compensation paid to employees;
- Payroll tax filings with the IRS (typically Forms 941) and state wage reporting and unemployment insurance tax filings for the periods that overlap with the covered period or the alternative payroll covered; and
- Payment receipts, cancelled checks, or account statements documenting the amount of employer contributions to employee health insurance and retirement plans the borrower included in the forgiveness amount.
FTE calculation. Borrowers must submit documentation showing the average number of FTE employees on payroll per month employed by the borrower between February 15, 2019 and June 30, 2019 or between January 1, 2020 and February 29, 2020. Alternatively, seasonal employers may calculate the average number of FTE employees on payroll per month for any consecutive twelve-week period between May 1, 2019 and September 15, 2019. The selected time period must be the same time period selected for purposes of completing PPP Schedule A, line 11. Documents submitted may cover periods longer than the specific time period.
Nonpayroll costs. Borrowers must submit documentation verifying the existence of the nonpayroll obligations and services prior to February 15, 2020, as well as eligible payments made during the covered period, such as:
- Mortgage amortization schedules and receipts, cancelled checks, or lender account statements verifying interest amounts and eligible payments;
- Copies of current lease agreements and receipts, cancelled checks, or lessor account statements verifying eligible payments; and
- Copies of utilities invoices from February 2020 and those paid during the covered period and receipts, cancelled checks, or account statements verifying those eligible payments.
Other documentation borrowers must maintain. PPP borrowers must maintain the PPP Schedule A Worksheet or its equivalent, along with documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 1, including the “Salary/Hourly Wage Reduction” calculation, and PPP Schedule A Worksheet Table 2. Borrowers must also maintain documentation regarding employee job offers, refusals, firings for cause, voluntary resignations, and employee requests for reductions in work schedule, as well as documentation supporting the PPP Schedule A Worksheet “FTE Reduction Safe Harbor.”
Borrowers must retain all records relating to the PPP loan and the forgiveness application for 6 years.