Paycheck Protection Loan Forgiveness Playbook
How much of your loan will be forgiven?
The Paycheck Protection Program (“PPP”) provides that the loan will be forgiven if the loan recipient utilizes the proceeds for qualified expenditures within a given time frame. The Expected Forgiveness Amount is based on two factors: 1) type and amount of expenditures over an 8-week period and 2) not reducing employee headcount by more than 25%.
Relevant period for forgiveness is the 8-week period beginning on the date that PPP proceeds are deposited in your account. You cannot select any 8-week period. You should identify the beginning and ending date of your 8-week period.
SBA’s Interim Rule (and all subsequent SBA guidance) requires borrowers to spend at least 75% of the loan proceeds on “payroll costs,” as defined below.
The max loan forgiveness is the sum of the following expenditures during the 8-week period:
Payroll costs, which encompasses payments of:
- Employee wages, commissions, tips, vacation, sick pay, limited to $100,000 per employee prorated for the covered period (in other words, $15,385 max/per employee for the 8 weeks);
- Employer-provided group health care benefits during the covered period;
- Employer-provided retirement payments during the covered period; and
- Payment of state and local employer payroll taxes paid during the covered period.
Payroll costs DO NOT INCLUDE:
- Compensation of an individual employee in excess of $100,000 annually, as prorated in the covered period;
- Federal employment taxes imposed or withheld between February 15, 2020, and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and
- Qualified sick and family leave wages under the Families First Coronavirus Response Act (you are already getting a tax credit for these payments)
Plus other qualified expenditures (may not exceed 25% of total loan proceed expenditures)
- Payments of rent (for real property and leased equipment) for leases in force before Feb. 15, 2020,
- Utilities including electricity, gas, water, transportation, telephone or internet access for which service began before Feb. 15, 2020, and
- Interest (but not principal) on any debt under agreements that existed before February 15, 2020.
Keep in separate account.
- Deposit all PPP proceeds in a separate bank account and ensure that PPP loan proceeds are used only for expenditures that are eligible for forgiveness. Keep all related support to corroborate disbursement of such funds.
- For payroll funding, only payroll for amounts within the forgiveness parameters should be funded from the PPP segregated account. Ideally, employees making more than the threshold would receive two separate checks. Where circumstances do not permit this or where it is too impractical (e.g., if payroll must be funded into a single account), only funding within the forgiveness parameters should come from the PPP account, with the excess funded from non-PPP sources. It is key to understand that the $100,000 annual salary limit per employee is on gross compensation, so associated applicable withholding taxes should be paid from these funds.
Good recordkeeping will be critical for loan forgiveness. Over the eight-week period, keep track of eligible expenses and their accompanying supporting documentation. Lenders will likely require these documents in digital format, so take the time to scan any paper documents and keep backups of the digital records. The documentation should include:
- Payroll registers or ledgers
- Health insurance invoices and payments
- Payments for retirement amounts
- Support for rent expense (lease and cancelled checks/Automatic Clearing House (ACH) or wire transfer evidence)
- Support for interest paid on debt obligations
- Evidence of utilities paid including invoices
- State and local payroll tax payments (e.g., for New York State, the MCTMT and State unemployment insurance) supported by tax returns, vouchers, or other documentary evidence.
Maintain Employee Data
Maintain a headcount of all full and part-time employees on payroll. In many cases your payroll processing company will be able to provide this information. The company will need to account for the average number of full-time equivalent employees per month during:
- The eight-week period beginning with the receipt of loan proceeds (numerator)
- The period covering 2.15.19 to 6.30.19 (denominator benchmark 1)
- The period covering 1.1.20 to 2.29.20 (denominator benchmark 2)
Follow You Lender’s Advice:
Your lender will decide what portion of your loan is eligible for loan forgiveness. As such, its important to understand what information your lender will want to see in order to make that decision. Talk with your lender to get a better understanding of its view on eligible expenditures.
Applying for loan forgiveness:
Following the eight-week period in which you spend your PPP funds, you can submit a request to your lender for loan forgiveness.
The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. If you are a self-employed individual, you will rely on the 2019 Form 1040 Schedule C to determine the amount of net profit allocated to the owner during the eight-week period.
You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments.
The lender must make a decision on loan forgiveness within 60 days.
- Move loan proceeds to separate account
- Identify funding date and relevant following 8-week period
- Estimate payroll expenses for 8-week period
- Calculate budget for non-payroll expenses that will allow you to earn maximum loan forgiveness (8-week payroll figure /.75)
- Identify qualified non-payroll expenses that you’ll pay with loan proceeds
- Determine method of paying qualified expenses during 8-week period
- Track expenses and keep records
Keep in mind – loan forgiveness applies to qualified expenses for an 8 week period. So maximize your expenditures during that 8 week period.