How to Ensure Paycheck Protection Program (PPP) Loan Forgiveness

Business owner investigating the PPP loan and pursuing PPP loan forgiveness by caudell and associates in houston, texas.

Last updated: June 18, 2020. We will continue to update as changes are made to the PPP program.

Applying for and receiving a Paycheck Protection Program (PPP) loan has been like a rollercoaster ride for many business owners.

Things sped up very quickly from the time the PPP loan was introduced by the Small Business Administration (SBA) to the time that you could apply for the loan. Then, things slowed to a crawl as business owners worked through follow-up questions from bank representatives, then waited some more before finally receiving funding to support operations.

Now, business owners that have been approved for and received funding through a PPP loan need to consider the next stage of this process: the PPP loan forgiveness process.

As you get ready for this next potential twist and turn on the PPP rollercoaster, we want to prepare your business to satisfy all future loan forgiveness requirements.

*Keep in mind that the regulations are currently moving targets. Dates and requirements do have the potential to change but this is what we know right now.

Paycheck Protection Program (PPP) Loan Considerations

When thinking through the implications of a PPP loan for your business, it’s important to identify the starting point and walk through the process of PPP loan forgiveness to ensure that your business is protected. Consider these four stages of the PPP loan process:

  • Establishing PPP intent
  • PPP forgivable purposes
  • Reductions to PPP forgiveness
  • Requesting PPP loan forgiveness

1. Establishing PPP Intent

The intent of the Paycheck Protection Program is to provide a loan of up to $10MM for qualifying small businesses to navigate economic uncertainty during this year’s health crisis.

To qualify, the business must have fewer than 500 employees and the business must certify that economic uncertainty makes the loan necessary to support the ongoing operations of the business.

Additionally, the intended use of the PPP loan is primarily for the business to use funds to retain workers and maintain payroll. The funds may also be used for secondary purposes of making mortgage payments, lease payments, and/or utility payments.

An important financial element of a PPP loan also needs to be addressed. The loan carries an interest rate of 1% with a two-year term. No payments are due for the first six months after funding. However, the business will not be responsible for any loan payment (principal or interest) if the business uses all of the loan proceeds for forgivable purposes.

2. PPP Forgivable Purposes

The Paycheck Protection Program contained initial guidelines of forgivable purposes. Those guidelines were adjusted through the Paycheck Protection Program Flexibility Act, which was signed into law on June 5.

  • The minimum amount that must be devoted to maintaining payroll is 60% (reduced from the initial threshold of 75%).
  • Other allowable expenses include mortgage interest, utilities, and rent or lease payments.

Within this breakdown are key considerations for what goes into each category.

Payroll Costs (60%) include:

  • Up to equivalent of $100k annual salary per employee ($8,333.33/month).
  • PTO for sick leave, medical leave, family leave, or vacation.
  • Benefits for health insurance, employer contributions, and/or defined contribution retirement plans.

Other Forgivable Costs (40%) include:

  • Rent for agreements that pre-date February 15, 2020.
  • Mortgage interest on loans that pre-date February 15.
  • Utilities (electricity, gas, water, telephone, and Internet) for agreements that pre-date February 15.

Are there any expenses that are specifically excluded from the Forgivable Purposes? There are two specific types of expenses:

  • The employer portion of employment taxes.
  • Qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.

3. Reductions to PPP Forgiveness

Once your business receives the PPP funds, you want to position your business to meet the qualifications for PPP loan forgiveness by using all of the loan proceeds for forgivable purposes.

Keep in mind these important elements that will determine whether you are eligible for PPP loan forgiveness.

  • The forgiveness timeframe is now 24 weeks after initially being limited to 8 weeks. It is measured starting from the date your loan is funded.
    • For loans that funded prior to June 5, you may choose an eight-week or 24-week covered period.
    • For loans that funded after June 5, you must use a 24-week covered period.
  • There are reduction factors. Forgiveness will be reduced in any of these scenarios:
    • If you do not maintain employee headcount through the forgiveness period.
    • If an employee who made less than $100k in 2019 has their salary reduced by more than 25% during the forgiveness period.
    • If you received an EIDL loan through the SBA. Proceeds from an advance on an EIDL loan will be deducted from the loan forgiveness amount.
  • Keep in mind December 31, 2020. You have until this date to restore headcount and compensation for any changes made between February 15 and April 26. (Previously, employers had until June 30 to restore headcount.)

4. Requesting PPP Loan Forgiveness

The SBA will not be providing automatic loan forgiveness. You will need to document the proceeds used for payroll costs and other forgivable costs to determine forgiveness. Then, you will need to prepare and submit your forgiveness application.

Consider these important actions to protect your business:

Keep track of the timeline. Create a timeline documenting key events and the corresponding dates that apply to your business.

Capture the economic uncertainty. When you applied for a PPP loan, you certified that economic uncertainty made the loan necessary to support ongoing operations of the business. When building out your timeline, include the date that your PPP loan application was submitted and describe the economic uncertainty that your business faced at that time.

Always remember the forgiveness timeline. As we captured earlier, the forgiveness period starts on the date your loan was funded. Keep a record of this date on your timeline and keep this date in mind over the forgiveness period when you pay bills, submit payroll, and make other business decisions.

Keep supporting documents. Make sure you keep great records throughout the loan forgiveness period. This should include payroll reports, bank statements, vendor invoices, canceled checks, and any other documents that relate to payroll costs and other forgivable costs.

On June 16th, the Small Business Administration (SBA) and the Treasury department released a New EZ loan forgiveness application. The loan forgiveness application, “PPP Loan Forgiveness Application Form 3508EZ,” is significantly simplified for borrowers that meet certain criteria.

Have questions about using the EZ form? Call us.

Find Support for PPP Loan Forgiveness

Our CPA firm has performed significant research to gain a deeper understanding of the Paycheck Protection Program, the Paycheck Protection Program Flexibility Act, and how the loan forgiveness process will work.

Now, we want to provide support to your business to ensure that your PPP loan is forgiven. Specifically, we created a template to help business owners monitor progress toward PPP loan forgiveness.

We are also available to provide support on the specific elements of the PPP loan, including how the PPP loan forgiveness requirements apply to your business.

Call us today to discuss your business needs after receiving PPP loan funding. We can help.