How To Prepare for PPP Loan Forgiveness

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May 05, 2020
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As many businesses around the country receive and begin to use funds from the Small Business Administration’s (SBA) Paycheck Protection Program (PPP), attention will start turning to how those loans are forgiven. Perhaps the most important benefit of the PPP is that a business can have their entire loan amount forgiven if they use those funds for specific purposes and meet certain criteria, essentially turning the loan into a grant.

However, due to the confusion and issues most small businesses have had during the application and approval process, there is a growing concern that the forgiveness process could be even more frustrating. In this post, I will cover the rules around the program, and suggest five steps a business owner can take to prepare to have some, if not all, of their PPP loan forgiven.

What is the Paycheck Protection Program?

The Paycheck Protection Program (PPP) initially authorized up to $349 billion in forgivable loans to small businesses to pay their employees during the COVID-19 crisis. After the initial funds were depleted, an additional $310 billion was allocated to the program.

According to the SBA, PPP loans will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities as long as at least 75% of the funds are used for payroll costs. Forgiveness will also be based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.

How to Prepare for PPP Loan Forgiveness

While the details for how the SBA and lenders will work through the loan forgiveness process have not been fully defined to date, there are some steps you can take now to prepare for partial, or full loan forgiveness.

  1. Use your PPP loan within 8 weeks of receiving the funds
    Once you receive your first disbursement of funds from your PPP loan, an eight-week period starts in which eligible expenses can be considered for forgiveness.
  2. Track all use of PPP funds
    Once you start using your PPP loan to fund payroll or operational expenses, make sure you are keeping a detailed record of how you are spending those funds. For payroll costs, make sure you are tracking wages, payments for employee benefits, retirement contributions, and state and local payroll taxes assessed on the compensation of employees.
  3. Use at least 75% of funds for payroll costs
    While it is allowable to spend PPP loan funds on operating expenses such as rent and utilities, you must use at least 75% of the funds on payroll costs in order for your loan to be eligible to be fully forgiven. If at the end of the eight-week period you have used less than 75% of the funds for payroll, loan forgiveness will be reduced by the amount under 75%.
  4. Maintain full-time employee (FTE) head counts
    A principle goal of the PPP is to keep employees on the payroll. As such, the SBA has maintained that for a PPP loan to be fully forgiven the number of FTEs must not be reduced. The forgivable amount of the loan will be reduced if the average FTE employee count during the eight-week period is less than the average number of FTEs during either January 1, 2020 to February 29, 2020, or February 15, 2019 to June 20, 2019. If you have a 10% reduction in the average number of FTEs during the eight-week period, you can expect a 10% reduction in the amount of the PPP loan that can be forgiven. If you rehire and restore the number of FTEs by the end of the eight-week period then forgiveness eligibility is restored.
  5. Avoid cutting wages
    PPP loan forgiveness can also be reduced if an employee’s pay is reduced by more than 25% during the eight-week period compared to pre-pandemic payrolls. The rule specifies that if an employee’s wages are cut by more than 25% compared to the last full quarter that employee was employed, loan forgiveness will be reduced. It is not clear how the formula for determining rule will be calculated since wages paid during an eight-week period are less than wages paid during a twelve-week quarter without any reduction in pay. Several lobbying groups, including The American Institute of Certified Public Accountants, are urging the SBA to provide updated guidance on this rule.

What happens if my loan isn’t fully forgiven?

If your PPP loan is not forgiven, then you will need to repay the loan to the lender from whom you received the funds. Loan payments can be deferred up to 6 months, and the loan must be repaid within 2 years at an interest rate of 1%.

Closing Recommendation

The application, approval and disbursement of the SBA’s PPP loans has been a confusing and frustrating process for most small businesses and lenders, and it is likely that the process for loan forgiveness won’t be any smoother. You can expect the SBA to release additional guidance and information to lenders and small businesses further defining forgiveness eligibility over the next few weeks. Until then, the steps outlined above can help you maximize your eligibility for loan forgiveness at the end of the eight-week period.