The Paycheck Protection Program (PPP) is a loan program worth nearly $670 billion.
It was enacted by the U.S. Federal Government under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
With a PPP loan, small business owners could have access to the funds required to keep their operation afloat throughout the COVID-19 pandemic. To achieve loan forgiveness and avoid repayment, there are several important steps that these business owners must follow.
Today, we’re taking a closer look at those steps, sharing insight into how you can get your PPP loan forgiven.
What Is a PPP Loan?
A PPP loan is a monetary incentive given to U.S. business owners by the U.S. Small Business Administration (SBA) 7(a) small business lending program.
The goal of a PPP loan is to allow those business owners to keep their employees on payroll while navigating the operational setbacks associated with COVID-19.
Under the program, qualifying borrowers could apply for a loan amount up to 2.5 times their average monthly payroll. With a per-borrower cap of $10 million, the funds could be used to cover multiple business expenses, including:
- Mortgage interest
Applicants were encouraged to apply by the loan deadline of June 30, 2020. The final cutoff date to use the loan for eligible expenses is December 31, 2020.
For the SBA to extend forgiveness on a PPP loan, business owners must be able to prove that they have met certain employee retention criteria. In addition, they must be able to demonstrate that they have used the allocated funds to cover appropriate, approved expenses.
On June 5, President Trump signed the Paycheck Protection Flexibility Act.
This extended the coverage period of PPP loans, as well as the eligibility period for loan forgiveness. Now, business owners can choose to take 24 weeks to maintain coverage and seek forgiveness, up from the previously-allowed eight weeks.
If you do not apply for loan forgiveness or are not approved for it, your PPP loan will function similarly to a business loan. So, if your loan was issued prior to June 5, it has a maturity of two years. If it was issued after June 5, your loan has a maturity of five years.
All PPP loans carry an interest rate of one percent.
Applying For Loan Forgiveness on a PPP Loan
The SBA’s instructions on how to apply for business loan forgiveness were updated on June 16, 2020.
To apply for forgiveness, borrowers have two options:
- Complete the Form 3508EZ Application
- Complete the Paycheck Protection Program Loan Forgiveness Application
The most challenging part of completing your application is calculating the numbers required under the payroll section.
Next, let’s take a look at all of the sections you’ll navigate. Note that these are general guidelines and it’s best to work through these sections with your business accountant or financial advisor.
The 8-Week vs. 24-Week Coverage Period
Not sure if you should take the eight-week period or the new 24-week option? As long as you received your PPP loan on or before the new rule came into effect on June 5, you can choose.
The advantages of the shorter time period include:
- Quicker loan forgiveness
- Easier to maintain employee staffing requirements
On the other hand, extending your loan period gives you more time to plan. You can also take advantage of the new payroll cost calculations.
There’s no right or wrong option, but you’ll need to weigh which one works best for your needs.
If you opt for 24-week coverage under the new rule, this period began on the date that your lender issued your first payment. Any payroll expenses that your workforce incurs over those 24 weeks are eligible for forgiveness.
Note that due to the December 31 deadline, if your loan is dispersed on or beyond July 16, you will not be able to take full advantage of the 24-week eligibility period.
The 60/40 Payroll Rule
Before the rule was modified, borrowers had to spend at least 75 percent of their loan amount on payroll costs.
Now, that number is reduced to only 60 percent.
This means that you must use 60 percent of your funds to maintain staffing levels, while the remaining 40 percent can be used on miscellaneous qualified expenses. Payments made to independent contractors do not qualify.
Your forgivable amount will scale to meet the amount you spend on payroll. For some business owners, this will equal 100 percent of the loan amount.
Throughout your lending period, you must keep the same number of full-time equivalent (FTE) employees on your payroll.
To make sure you meet this requirement, you can perform a few simple calculations.
Calculating FTE Employees
First, calculate the number of FTE employees you had on payroll during the initial 8-week period following your loan disbursement. This is known as Period A.
Then, calculate the number of FTE employees you had from February 15, 2019, to June 30, 2019. This is Period B1.
Finally, calculate the number of employees you had from January 1, 2020, to February 29, 2020. This is Period B2.
Determining Staffing Eligibility
Divide Period A by Period B1. Then, divide Period A by Period B2.
Take the larger of those two answers. Note that if you’re a seasonal employer only, you’re required to divide by Period B1 only.
Is the answer equal to or more than one? If so, you meet this SBA requirement, as you have maintained your headcount during the eligibility period.
If your answer is less than one, it reveals that you did not maintain your headcount. As such, the SBA will reduce your forgivable expenses.
Navigating Rehiring Refusals
There’s one important factor to understand when performing the above calculations.
To maintain staffing requirements, you might reach out to former employees who you furloughed or laid off due to the COVID-19 pandemic.
However, those employees are not obligated to continue working for your company and may reject your rehiring offer.
If this happens, you can exclude this employee from your calculations when you are determining forgiveness eligibility. To qualify for this exemption, these employees must have been on your payroll at least until February 15, 2020.
The SBA will grant this exemption if your circumstance meets the following qualifications:
- You submitted a written rehiring request in good faith
- If you offered to rehire at the same rate and hours as they had before the layoff
- You have documentation of the employee’s written rejection
Other reasons the SBA will allow you to exempt an employee from your payroll calculations include:
- If you fire an employee with just cause
- If an employee voluntarily resigns
- When an employee voluntarily requested and received a reduction in hours worked
If you have any unfilled positions, the SBA may require evidence that you attempted to fill them with similar talent but were unable to do so. You may also be able to demonstrate that your operating levels had to minimize for safety reasons.
The SBA requires that borrowers maintain at least 75 percent of total salaries during the loan period. This applies to every employee who received $100,000 or less in annualized pay in 2019.
What happens if an employee’s pay dips beyond that level?
If their compensation over the initial eight-week loan period is less than 75 percent of what they received over their most recent employment quarter, the eligible forgiveness amount is adjusted. In this case, it would be reduced by the difference between the employee’s current pay rate and the required 75 percent salary threshold.
Documents to Assemble Prior to Applying for Loan Forgiveness
When you’re ready to submit your application for PPP loan forgiveness, it helps to have all of the required documentation right in front of you.
The key forms to assemble include:
- Staffing documents revealing FTE employees on the payroll, including pay rates
- Payroll reports
- Insurance filings (income, payroll, and unemployment)
- Payroll tax filings
- Documents verifying contributions to retirement and health insurance plans
- Documents verifying active interest, rent, and utility payments for February 2020 and beyond
Keep in mind that over the course of your PPP loan, you’ll be required to take excellent notes and keep neat records. The SBA will require details and documentation on all eligible expenses.
In most cases, your lender will request these papers in digital format. If you have hard copies, scan them into your computer so you’ll be ready when the time comes. If you have an automated bookkeeping solution, this platform can help with the overall organizational process.
Understanding and Optimizing Your PPP Loan Forgiveness Plan
The SBA 7(a) PPP loan was designed to help U.S. business owners navigate the challenges and hurdles they might face in the wake of the COVID-19 coronavirus pandemic.
With shutdowns in place across the country, many businesses are operating under limited hours. Many have shut their doors altogether while they weather the storm. Meanwhile, they can continue paying salaries, administer benefits, and keep their office spaces functional thanks to this incentive.
As you apply for PPP loan forgiveness, remember to take it one step at a time. Your accountant can help you gather the necessary documents so you don’t miss a line.
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