PPP Loan Forgiveness: How to Keep 100%

The best part of the Paycheck Protection Program is that 100% of the loan can be forgiven—if you follow the rules.

Although the Forgiveness will be judged by your local bank or lender, (and so could be slightly different), here’s detailed guidance for getting 100% loan forgiveness.

[ALSO — be sure to watch the free video and get our PPP Forgiveness Calculator — an XL sheet with all the instructions.]

Remember what you borrowed

Remember, the loan you received was based on your average monthly payroll cost for 2019. You should have received 2.5 times that amount. That means you received about 10 weeks of payroll, to help cover just eight weeks of payroll expenses.

The funds from the PPP can be used for the following purposes:

  • Payroll—salaries, wages, tips, commissions, all paid time off, retirement plan matching, and health benefits (but not QSEHRA)
  • Mortgage interest—for mortgage loans started before February 15, 2020
  • Rent—for lease lease agreements made before February 15, 2020
  • Utilities—if service began before February 15, 2020
  • BUT… Do NOT count the payroll tax that the employer pays to the federal government (FICA and FUTA)

All expenses that fall under those categories are eligible for forgiveness. The following conditions will also apply:

1. Eight weeks of coverage

Eligible expenses are those that are incurred over eight weeks, starting from the day the first payment was made by your lender. This is not necessarily the date on which you signed your loan agreement.

Depending on your payroll schedule, you may want to adjust the timing of your payroll date to accommodate as many payroll cycles as possible.

For example, if your PPP loan gets deposited in your bank account on April 15, you could only use the funds on expenses incurred during the eight weeks following April 15, which ends on June 10. If you have a payroll scheduled for June 15, we suggest you pay it on or before the 10th to be safe.

2. The 75/25 rule

At least 75% of your loan must be used for payroll costs. Payments to independent contractors cannot be included in the payroll costs. But all compensation counts, including tips, commissions, mileage reimbursement and more. Whatever you pay your employees (cash compensation) counts toward the 75%. And of course, you can pay employees MORE than 75% of the total.

3. Staffing requirements

You must maintain the number of employees you had on payroll prior to the Covid crisis. Fortunately, there’s some flexibility for calculating this.

Here is the calculation you can use to determine if you’ve met this requirement:

First, determine the average number of full-time equivalent employees you had for:

  • The 8-week period following your initial loan disbursement, (A)
  • February 15, 2019 to June 30, 2019, (B1)
  • and January 1, 2020 to February 29, 2020. (B2)

Take A and divide that by B1. Do the same with B2. Take the largest number you obtain. If you’re a seasonal employer, you must divide by B1.

  • If you get a number equal to or larger than 1, you successfully maintained your headcount and meet this requirement.
  • If you get a number smaller than 1, you did not maintain your headcount and your forgivable expenses will be reduced proportionately.

4. Pay requirements

You must keep paying at least 75% of total wages for all employees.

This requirement will be individually assessed for every employee that did not receive more than $100,000 in annualized pay in 2019.

If the employee’s pay over the 8 weeks is less than 75% of the pay they received during the most recent quarter in which they were employed, the eligible amount for forgiveness will be reduced by the difference between their current pay and 75% of the original pay.

5. Rehiring grace period

You have until June 30 to “remedy” any of the shortfalls under #3 or #4.

You can rehire any staff that were laid off or put on furlough and reinstate any pay that was decreased by more than 25% to meet the requirements for forgiveness. You have until June 30th to do so.

And according to the latest guidance from SBA (Q&A #40), all you have to do is OFFER the furloughed employee their job back. If they decline to return to work, you are still considered to have remedied the FTE shortfall. (Strange but true. Also, the employee may inadvertently disqualify himself from Unemployment Insurance by declining your offer!)

PPP Forgiveness for self-employed individuals

If you are self-employed, your loan will follow different rules.

You may use the PPP loan to replace lost income due to the impacts of COVID-19. However, you are not entitled to use the full amount to replace pay. Only 8 weeks worth of your 2019 net profit will be eligible for forgiveness. Since you could have borrowed more than 10 weeks of income, you will either have some left over or have to show how you used the rest for qualified expenses.

If you have mortgage interest, rent, or utilities expenses, you must have claimed or be entitled to claim a deduction for those expenses on your 2019 Form 1040 Schedule C in order to claim them for forgiveness.

For example, if you worked in an office space in 2019 and did not have a home office, you could not have claimed a deduction on your home mortgage interest. Even if you are currently working at home now, you are not eligible to claim home mortgage interest payments for forgiveness.

After the eight weeks: applying for PPP loan forgiveness

Applications for loan forgiveness will be processed by your lender. They’ll provide you with instructions on where to apply

After you submit your application for forgiveness, your lender is required by law to provide you with a response within 60 days.

Recordkeeping and required documents for PPP loan forgiveness

These are the required documents you will need to collect to provide with your PPP forgiveness application. Your lender may have additional requirements.

  • Documents verifying the number of full-time equivalent employees on payroll and their pay rates, for the periods used to verify you met the staffing and pay requirements:
    • Payroll reports from your payroll provider
    • Payroll tax filings (Form 941)
    • Income, payroll, and unemployment insurance filings from your state
    • Documents verifying any retirement and health insurance contributions
  • Documents verifying your eligible interest, rent, and utility payments (canceled checks, payment receipts, account statements)

If you are a sole proprietor, you can have eight weeks of the loan forgiven as a replacement for lost profit. But you’ll need to provide documentation for the remaining two weeks worth of cash flow, proving you spent it on mortgage interest, rent, lease, and utility payments.

Good recordkeeping and bookkeeping will be critical for getting your loan forgiven—you’ll need to keep track of eligible expenses and their accompanying documentation over the eight weeks. Your lender will likely require these documents in digital format, so take the time to scan any paper documents and keep backups of your digital records.

If you don’t have a reliable bookkeeping solution in place, Bench can do your bookkeeping for you, all online. Learn more.

What if I’m NOT approved for PPP Loan Forgiveness?

Your lender may allow you to provide additional documentation so they can reevaluate your request.

Otherwise, your outstanding balance will continue to accrue interest at 1%, for the remainder of the 2-year period.

There is no prepayment penalty. You can pay off the outstanding balance at any time with no additional fees.

FAQs

Can I prepay my rent or mortgage?

No, prepayment is not an allowed use of the PPP and andy pre-paid rent will not count toward PPP Loan Forgiveness.

What counts as mortgage interest?

Any interest paid on mortgage on property used for business purposes is an eligible expense that the PPP can be used for, and qualifies for forgiveness.

Acceptable examples include:

  • Mortgage interest on a warehouse you own to store business equipment
  • Auto loan interest on a car you own to make business deliveries

How is eight weeks of net profit from 2019 calculated?

Your net profit that was reported on your Form 1040 Schedule C is multiplied by 8/52.

PPP Update 04-13-2020: Rules, Resources & Links You Need Now

COVID virus from NIH
NIH scan of Coronavirus

[ Last updated: 9:00am April 13, 2020 ]

Quick Recap: There are already 3 major federal legislative responses to the Covid Crisis, and each is full of opportunities — and responsibilities — for small business owners.

  1. Covid Preparation Act that created the Covid Disaster Loans
  2. The Families First Act (FMLA and Sick Time)
  3. And the CARES Act that created the Payroll Protection (PPP) loans.

We’ve covered all 3 here. Scroll down to see the PPP.

Or Watch the Webinar Recording … or Download the PPP FAQ.

1. SBA DISASTER RELIEF LOANS (also called “EIDL” – Economic Injury and Disaster Loans)

The SBA Disaster Relief Loans are already being processed. Apply for up to $2 million at https://covid19relief.sba.gov/#/ (an online-only version). Do NOT use the PDF version (previously www.sba.gov/disaster/apply-for-disaster-loan/index.html)

  • These loans may be used to pay fixed debts, payroll, accounts payable, working capital, and other bills that can’t be paid because of the disaster’s impact. The interest rate is 3.75% for small businesses. The interest rate for non-profits is 2.75%.
  • SBA offers loans with long-term repayments in order to keep payments affordable, up to a maximum of 30 years. Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay.
  • Be sure to request the $10,000 emergency money! It will be sent to you quickly (3 to 10 days in our experience) and the $10k will be forgiven, however it will be deducted from any forgiveness you get through the PPP below (you can’t have it twice!).
  • The CARES ACT modified the Disaster Loan Program as follows:
    • Created the $10k emergency check mentioned above.
    • Waived rules related to personal guarantees on advances and loans of $200,000 or less for all applicants;
    • Waived the “1 year in business prior to the disaster” requirement (except the business must have been in operation on January 31, 2020);
    • Waived the requirement that an applicant be unable to find credit elsewhere; and
    • Allows lenders to approve applicants based solely on credit scores (no tax return submission required) or “alternative appropriate methods to determine an applicant’s ability to repay.”

2. THE FAMILIES FIRST ACT (including Paid Sick Leave and FMLA)

Paid Sick Time Off and FMLA were the key features of the Families First Act, enacted in early March. The U.S. Department of Labor Published their Guidance on Paid Sick Leave and Expanded FMLA (Family and Medical Leave Act) under the Families First Coronavirus Response Act.

  • There are some exemptions for companies with fewer than 25 employees.
  • Fact Sheet for Employers
  • Fact Sheet for Employees
  • Poster for Employees
  • Note: “Every dollar of required paid leave (plus the cost of the employer’s health insurance premiums during leave) will be 100% covered by a dollar-for-dollar refundable tax credit available to the employer.” (source: SBA.gov) This means that you may not have to go out-of-pocket to pay for this if you are careful. Consult your payroll provider first.
  • Note: “Certain provisions may not apply to certain employers with fewer than 50 employees. See Department FFCRA regulations (expected April 2020).” (sourece: SBA.gov)

3. THE NEW CARES ACT and the “forgivable PPP loan” program

The CARES Act and Payroll Protection Loan Program (PPP) was signed into law on Friday March 27. Here’s the Full Text of the law from Congress.gov and the Summary from GovTrack. Also, here’s a quick PPP FAQ we put together for you and the full webinar.

  • The PPP application form is available for download. This is NOT the full application, which will happen through your bank’s website.
  • The SBA guidance confirms that loan proceeds must be used “at least 75%” for payroll only. (The other 25% can be used for rent & utilities, etc.)
  • Several banks are still not ready to accept applications. We’re recommending a “wait” strategy for now — the loan application will go better through your current banking relationship. But non-bank lenders are breaking through. PayPal was approved as a lender (04/10) and Intuit QuickBooks appears to be up next.
  • Some banks have released their own application forms, although I have found blatant errors in them. Take these with a grain of salt.
  • You should apply ONLY at a bank where you already have a client relationship. Most banks are not accepting apps from non-clients. And you should not apply more than once. (You cannot get more than one loan anyway.)
  • Some banks are MISTAKENLY saying that you cannot apply for BOTH the PPP and the Disaster Loan (EIDL). The law says you simply cannot apply for two loans for the same purpose, but the EIDL loan is for working capital, and the PPP loan is for Payroll. You CAN apply for both. This is confirmed in the IFR document. The SBA has told me that you may even use the Disaster (EIDL) loan for payroll AFTER the PPP money runs out. (PPP covers just 8 weeks. EIDL covers up to 6 months.)
  • If you applied for the Disaster loan (EIDL) at SBA.gov prior to 03/30, you should go back to the site and apply again. This will allow you to ask for the $10,000 emergency grant.
  • If you accept the $10k emergency grant it will REDUCE your PPP loan forgiveness (in other words, you can’t have both) although it will NOT reduce the PPP loan amount you receive.
  • If you RECEIVED an EIR loan before 04/03, you can and should roll it into the forgivable PPP. The new application form includes this option.
  • The term for the PPP loan is 2 years at 1% interest. No payments are due during first 6 months, but interest still accrues. [This is different than the 10 year repayment at 4% we initially expected. AND also different than the 2 years at 0.5% proposed on 04/02!]
  • PPP Loan Forgiveness will include both principal and interest — including interest that accrues during this 2 month period.
  • Small businesses can borrow up to 2.5x (Two and One Half times)* their average monthly payroll (average during 2019). Alternate calculations are available for certain businesses. [*NOTE: This amount changed in the final signed law. It had been 4x in the Senate bill.]
  • Independent Contractors can now apply for the PPP loan, but not all banks are ready for them. As with employers, the loan to independent contractors is eligible for forgiveness with documentation of how you spent the money.
  • Forgiveness of the loan (cancellation of the debt) will be granted in the percentage of the employees you maintain during the 8 week period after you get the loan versus the average FTEs in 2019. More specifically, the average number of Full Time Equivalent (FTE) employees per month after you get the loan this year compared to the average FTEs in 2019. If you’re a new or seasonal business, there are other options.
  • The forgiven amount is non-taxable.
  • Any un-forgiven loan is becomes an SBA 7(a) loan. Repayment terms are 2 years at 1%. No payments are due during the 6 months following receipt of the loan, although interest does accrue. No penalty for early re-payment.
  • You’ll need to collect at lest the following documents:
    • (1) 941s, W3, or other payroll tax reported to the IRS;
    • (2) The dollar amount the employer paid for State payroll, and unemployment insurance filings (SUTA) or local taxes;
    • (3) Financial statements verifying healthcare & retirement benefits paid during 2019
    • (4) any other documentation the Bank determines necessary.
    • (5) To get forgiveness you’ll need payroll details to show how many people you employed, how many hours they worked, and how much was paid to each. Keep track!

YOUR LOAN STRATEGY MATTERS

The CARES ACT Payroll Protection Program is completely unprecidented and has $350 billion to loan.

Be careful with your strategy, however, as it may not be possible to take advantage of all of these opportunities. Before you lay off employees, consider all the angles.

Want to keep reading? Here’s a really great PDF Summary of Covid Crisis Loans, which comes from the US Chamber of Commerce.

Want to Talk? Please call me, David Worrell, anytime at 704-614-2701 (or email [email protected]).

Also, Fuse is offering to help with any part of your loan application processes for low hourly rate. Hope we can help you weather the storm ahead.

Stay well,
David Worrell


3 Small Business Must-Do Tactics for Uncertain Times

During the Covid Crisis, small businesses are facing an unprecedented challenge. And the threats they face are coming not only from the Corona virus itself, but also from the way we are adapting. Remote work, declining sales, and social distance are creating challenges that require strong leadership and new tactics.

To make it through the coming months, effective business leaders will need to foster better communication, address worker safety, and bolster online security.

1. Communicate More

During uncertain times (and these times are uncertain!), a company needs strong leadership more than ever. One of the most effective ways to provide some certainty is through clear and honest communication. Executives should craft and broadcast weekly communications to share the company’s short-term targets, strategies, successes — and even the challenges. Post information in a highly visible area such as the company intranet, or through Slack, or a Facebook channel.

Don’t forget to add an earnest touch to your communications. Jeff Bezos’ letter to his global Amazon team is a moving example. He wrote: “There is no instruction manual for how to feel at a time like this, and I know this causes stress for everyone. My list of worries right now — like yours I’m sure — is long: from my own children, parents, family, friends, to the safety of you, my colleagues, to those who are already very sick, and to the real harm that will be caused by the economic fallout across our communities.”

Following Bezos’ example, it’s not necessary to “puff up” the corporate image. Clients and staff know that businesses are struggling. Many individuals would be skeptical to hear otherwise. Instead, communicate how your business is taking action. Even if the communication shares struggles such as seeking emergency funding, the message should emphasize that the company is proactive and resilient, providing a feeling of stability that will boost morale for employees, clients, and vendors.

2. Address Fears

No company wants a public relations disaster where it’s perceived as making employees work in a dangerous environment. Such damage to a firm’s reputation could cost it clients and future business.

Working remotely is the safest solution to #SlowTheSpread, when it’s possible. But for employees who have come to work, implementing stronger safety measures is crucial to the team’s peace of mind. Promote a sense of safety in the workplace with company-wide COVID-19 testing, free access to gloves and face masks, regular disinfection of all areas, distanced desks and work stations, and smaller corporate meetings (or video conferences), and all-around social distancing in the workplace.

But social distancing doesn’t mean company-wide inclusiveness isn’t possible. Empowering employees to safeguard their health (and the health of others) could lead to greater team co-hesion and new, stronger relationships between teammates.  Treat this challenge as an opportunity to renew the company’s commitment to inclusiveness and make use of every team members unique talents. Get them involved in their own safety planning!

3. Beef up Security

We are now living through the “largest work from home experiment” in history – which will be a challenge for your IT security.

Workers around the globe now access company data remotely more than ever, threatening security breaches and theft of sensitive business data. The most recent threat happened to users of Zoom, the video conferencing app. Among some of the Zoom security violations includes traffic routed to Chinese servers, accounts sold on forums, hackers accessing video calls, and even posting the chats publicly.

Prioritize IT issues during this transition. Ensure company firewalls and antivirus software is up to date. And don’t forget — 80% of cybersecurity breaches come from employees. As more workers access sensitive company information while they work from home, training and compliance of security protocols is more important than ever. Give employees the tools – and the knowledge – they need to stay safe online.

A remote worker manual would be helpful to train employees on basic threats, including phishing, spyware, and password creation. Implementation of an enterprise virtual private network (VPN) to encrypt sensitive data as it transfers between remote workers and the company headquarters is also a viable solution, as long as the VPN provider guarantees regular security updates.

Adaptability Is Key

Corporate leaders and small business owners need to adapt to the sudden changes to business, finance, and employee relations to weather the storm and come out stronger when it’s over.

Contributed by Sam Bowman, guest blogger. Reach same at samlbowman92 (at) gmail.com.