If you received a Paycheck Protection Program (PPP) loan, this article is for you! We put together a checklist and FAQs to help prepare to provide the right information to the SBA with the goal to maximize forgiveness. Working on this as early as possible will help make this easier when it comes time to submit your documentation. Some details and parts of the process are still being worked out, and we will keep this page updated when we receive more information.
Of course, this is our best attempt to summarize and share what we learned and does not constitute official or legal advice; make sure you confirm things with your lender and consult them with any detailed questions.
June 5th update:
The new Paycheck Protection Program Flexibility Act (PPPFA), signed into law on June 5th, significantly eases the requirements for reaching maximum forgiveness under the PPP Loan Program. Key highlights:
- Time period to use PPP funds is extended from 8 to 24 weeks. This will make it significantly easier to qualify for maximum forgiveness. If you already achieve maximum forgiveness under 8 weeks, you may still use the 8 week covered period.
- Amount of loan that needs to be spent on payroll is now 60%. The PPPFA reduces the amount of the loan needed to be spent on payroll from 75% to 60%, thus increasing the amount of funds available for other qualifying expenses from 25% to 40%.
- Safe harbor date to restore workforce levels to pre-COVID levels is pushed back from June 30 to December 31. As long as you restore your FTE employee levels by December 31, 2020 to your FTE employee levels in the pay period that included February 15, 2020, you can claim the FTE reduction safe harbour — meaning that you will then be exempt from loan forgiveness reduction. Note that salaries are still calculated the same way: employee compensation eligible for forgiveness is still capped at $100,000 annualized, and until further guidance, employer owners and contractors are still capped at $15,385.
- No reduction in forgiveness if business restrictions prevent you from restoring FTE levels. It seems like you may have a reduction in FTEs without seeing your forgiveness reduced if you are unable to restore FTE levels due to business restrictions – say, if you reopen at reduced capacity following your local health agency rules. This is in addition to the exclusions allowed for inability to bring workers back, termination for cause, or voluntary quit/hours reductions. Details are still unclear and we await further guidance. One thing is clear: you will certainly need to document in writing as thoroughly as possible your efforts to rehire through December 31.
- Loan repayment term extended from 2 to 5 years. You will now have 5 years at 1% interest to repay any unforgiven part of your loan, and the first payment will be deferred for 6 months after the SBA makes a determination on forgiveness.
- You can now delay the payment of your payroll taxes. The bill allows businesses that took a PPP loan to delay payment of their payroll taxes, which was previously prohibited under the CARES Act.
- The official text can be found here.
May 19th update:
The Small Business Administration released their official Loan Forgiveness Application. The document provides additional guidance as well as instructions to inform you (borrower) on how to apply for forgiveness of your PPP loan. Key takeaways include:
- An “Alternative Payroll Covered Period” is created for those of you with a weekly or biweekly payroll cycle.
- Costs incurred during the Covered/Alternative Payroll Covered Period can be included in the forgiveness amount if they are paid on or before the next regular payroll date or the next regular billing date, even if that date is after the Covered/Alternative Payroll Covered Period.
- A Full Time Equivalent (FTE) is defined based on a work week of 40 hours versus the standard of 30 hours for some other SBA programs and the Affordable Care Act.
- Covered rent obligations and covered mortgage obligations include both real and personal property.
In this article you’ll find:
- The Basics: PPP forgiveness rules
- The Checklist: recommended action steps and documents to start collecting
- The FAQs: the major questions we’ve heard so far
1. The Basics
1.1 Forgiveness amount
You, the borrower, are eligible for loan forgiveness equal to the amount you spent on the following items during the 24-week period (24 calendar weeks) beginning on the date of the origination of the loan (that is, the date when you receive loan proceeds on your bank account):
- Not more than 40% of the final amount forgiven may be for:
- Rent and utility payments
- Interest on the mortgage obligation incurred in the ordinary course of business
- Interest on other debt obligations, incurred before February 15, 2020
- At least 60% for payroll and payroll-related expenses, including:
- The sum of payments of any compensation with respect to employees, that is:
- Salaries, wages, or similar compensations – including overtime and normal commissions already structured as part of typical compensation (for ex: salespeople);
- Payment of cash tip or equivalent;
- Payment for vacation, parental, family, medical, or sick leave;
- Allowance for dismissal or separation;
- Payment for benefits including group health care and retirement benefits – including disability or life insurance contributions, 401K matches already in your normal benefits package, and payments to a Union to provide direct benefits to your employees especially medical (in that case and conservatively, we would not advise to include training benefits);
- Payment of state or local tax assessed on the compensation of the employee.
- For Sole Proprietors, Independent Contractors, and Self-Employed Individuals: A net income not more than $100,000 in one year.
- In each case, these expenses of course have to be thoroughly documented. You will definitely be audited if your PPP loan amount is over $2 million, but nothing says that you will not be audited if you receive smaller loan amounts, so better be prepared and conserve all the “proof of forgiveness” package you will put together.
NOTE 1: The following payroll costs are excluded from forgiveness calculations:
- Compensation of an individual employee in excess of an annual salary of $100,000 (Note: employer contributions to healthcare and retirement benefits are not part of amount deemed in excess of $100,000 annual salary);
- Employer portion of payroll taxes (FICA taxes);
- Any compensation of an employee whose principal place of residence is outside of the United States;
- Qualified sick leave wages for which a credit is allowed under section 7001 of the Families First Coronavirus Response Act (Public Law 116– 5 127); or qualified family leave wages for which a credit is allowed under section 7003 of the Families First Coronavirus Response Act;
- Software subscriptions or upgrading your internet (many have asked);
- It is currently not clear that paying independent contractors (1099s) would be forgiven. We are hoping there will be more detailed guidance, but a conservative approach would be to only use PPP funds for clearly approved payroll expenses and other allowed expenditures.
NOTE 2: The forgiven amount spent during the 24-week period should cover current expenses.
Even though there is no clear guidance as to whether you can pay the previous month’s rent using PPP funds, the spirit of this loan is to be forward-looking and not to help pay for past bills, and we recommend you take the safe and conservative approach and only include expenses incurred during that 24-week period in your forgiveness calculation.
1.2 Forgiveness reduction
The forgiveness amount (calculated using the information above) can be proportionately reduced based on the reduction in the number of your employees AND a reduction of greater than 25% in wages paid to employees:
- Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount.
- Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
- Re-Hiring: You have until December 31st, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020, in what case you should not incur any reduction.
You can calculate your forgiveness reduction step by step by completing the SBA’s official Loan Forgiveness Application.
NOTE 1: Calculating FTEs
- For hourly employees, a full-time week is comprised of 40 hours. Use that to convert the number of hours worked to FTEs. For example, if your payroll shows that the number of hours worked was 200 per week or 400 on a biweekly basis, the number of FTEs is 5 (200 divided by 40 or 400 divided by 80). For as long as you are consistent in all periods, you will be compliant with the PPP.
- For salaried employees, manually count the number of employees who were working 40+ hours a week. Make sure to avoid double counting.
NOTE 2: What counts here are numbers
FTEs and wage reduction are what counts, not which individual employees these numbers are tied to, so you can count existing or new employees when using PPP funds as long as they cover the same employment and pay levels as what you had before.
2. The Checklist
Here are the action steps we recommend and the list of documents you should start collecting.
- We recommend placing all funds in a business checking account that does not have any other money in it so it will be easy to track how you used the money. You will then make sure to draw from it for all your forgivable expenses and to also keep a copy of all the hard proof as outlined below.
- Make sure to follow guidelines for how the funds may be used:
- Funds are to be spent on qualified costs over the 24 weeks following your loan closing.
- Payroll costs must make up at least 60% of how you spend the funds in order to be forgiven.
- Limit mortgage interest payments, rent payments and utilities to no more than 40% of your loan amount.
- Document how all loan proceeds were spent:
- List of all employees on payroll the 24 weeks following loan with the dollar amount of payroll costs (defined below).
- Evidence of mortgage interest payments, rent payments and utilities paid during the 24 weeks following the loan:
- Copies of cancelled checks
- Bank statements with ACH info
- Utility Bills
- Mortgage Statements
- Lease Agreement
- Evidence that workers were kept on payroll or rehired once loan was received, including a calculation of the average monthly number of full-time equivalent employees for the period February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020 (you, the borrower, are to select the time period) and the average monthly number of full-time equivalent employees for the period of (borrower to select one) for the eight weeks following the date of the loan.
- Evidence of restoration by December 31st, 2020 of pay for any individual whose pay was reduced by 25% or more.
- Evidence of payroll costs, utilities, rent/lease payments and mortgage interest paid before February 15, 2020 to compare to what is paid or incurred during the 24 weeks following the loan closing to ensure it aligns. If self-employed, these expenses are allowed to the extent they are deductible on Form 1040 Schedule C.
- Copy of paperwork submitted to bank
- Copy of EIDL loan if refinanced with PPP loan (be sure to identify how much was an advance that does not have to be repaid)
- If you used PPP to refinance an EIDL loan, only the funds used for payroll costs will be forgiven so be prepared to provide documentation listed above for the EIDL loan, too.
- Evidence you were in business on February 15, 2020 and paid employees or independent contractors (Payroll Tax Filing for 1st quarter 2020)
- For borrowers who are self-employed, the forgiveness amount for owner’s compensation is limited to eight weeks’ worth of 2019 net profit and does not include covered benefits. It also excludes any qualified sick leave equivalent amount for which a credit is claimed under section 7002 of the Families First Coronavirus Response Act (FFCRA) (Public Law 116-127) or qualified family leave equivalent amount for which a tax credit is claimed under section 7004 of the FFCRA (similar rule as applies to employers with respect to pay for time for which a tax credit is claimed under FFCRA).
- If you use PPP funds for unauthorized purposes, SBA will direct you to repay those amounts. If you knowingly use the funds for unauthorized purposes, you may be subject to additional liability such as charges for fraud. If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.
Preparing for the Forgiveness Application as soon as your loan closes will be the best way to ensure as much of your loan’s principal and interest will be forgiven. If you are left with any unforgiven balance: starting on loan origination, you will have 5 years at 1% interest to repay any unforgiven part of your loan, and the first payment will be deferred for 6 months after the SBA makes a determination on forgiveness.
3.1. Are increased pay or bonuses forgivable?
Q. I have less employees now that I did before the crisis. Can I increase pay to maximize the use and forgivability of PPP funds until I can hire employees back?
A. Increasing pay should not be a problem at all as long as it is normal payroll or overtime – so basically, a normal practice for hourly, non-exempt employees. There is currently a grey area around the topic of bonuses and we recommend to take a careful approach and not count on bonuses as forgivable expenses. As of May 7th, we recommend simply increasing hourly rates and/or allowing your employees to work overtime.
NOTE 1: Don’t game the system.
If your plan is to use your PPP loan to overpay your employees for 8 weeks and then stop paying them, don’t. That is abusing the system, and a good way to get caught.
NOTE 2: Consider the unforgivable loan amount.
If you are still sheltered in place or with a reduced activity and many of your employees are receiving unemployment, you may end up with significant PPP funds that won’t be forgiven. Rather than returning that money, you should consider keeping it, given the 1% interest rate and pretty generous terms, as long as you should be able to deal with loan repayments after the 6-month deferment period.
3.2 What if employees don’t want to return to work since they are making more on unemployment?
The current additional UI benefit is great for employees during these unprecedented times, but creates difficult situations for employers of people making $25/hour or less who now want to hire them back to make the most of PPP forgiveness. Indeed, these employees are currently making more on unemployment than they would if they were employed.
We recommend to remind said employees that the extra $600/week in unemployment ends at the end of July, and that you will have to hire someone else if they don’t want to resume work. You can also explain the safety measures you are taking (make sure to send them in writing) and answer any questions they might have about safety.
The SBA has taken a pretty clear stance and have explicitly said that, if you make an employee an offer of employment and said employee refuses to come back to work for a non COVID-related reason, you as the employer are being asked to document it and will be allowed to count said employee as if they were employed; it will not negatively impact your loan forgiveness reduction calculation (but their hours will still have to be covered by someone else, either a new employee or an existing one covering for them, being paid overtime if necessary).
Employers have the option to report fraud to California EDD if they would like. The SBA has also implied that individuals turning down offers for non COVID-related reasons may forfeit eligibility for continued unemployment compensation. If the employee refuses for a COVID-related reason, they can be rehired and would be covered by the FFCRA program.
Your goal should be to get your former employees to decline their re-hired position by checking “No” on a re-hire offer letter. You should try multiple times to get them to formally decline their position, and document your attempts (for example sending a certified letter in the mail.) If after multiple documented attempts you don’t hear back, you can consider that they have declined to be re-hired.
3.3 Anything to be mindful of when we re-hire?
What to put in your re-hire offer letter:
- The question “Do you accept this position?” with a check box “Yes” or “No.”
- Your safety policy for returning to work re: COVID19
Document, document, document! Here are the paperwork requirements when rehiring – a list put together by our friends at Next Level Strategies:
- New Hire Checklist with signature line, like this one. Ask if anything on the checklist needs to be reissued. Issue anything missing. The asterisks denote required information. If any of this is not familiar to you, this is your opportunity to clean up your employee files and get yourself on the right track with required employee paperwork.
- Reverify/Rehire section of the I-9 form.
- 2810.5 for non-exempt employees (Wage Theft Notice, found here)
- We highly suggest an offer letter with an accept and decline line at the bottom, and to also attach your new safety protocol (blank protocol for SF here, subject to change). You can require use of PPE and other protocols and discipline if they aren’t followed.
3.4 Can I use Quickbook tags to track use of forgivable funds?
You can use Quickbooks tags for easy tracking, but note that these likely won’t be enough and you should still collect hard proof (payroll registers, rental invoices or any receipts of forgivable expenses, as mentioned above).
3.5 How will we transmit and report all this forgiveness documentation?
Using the SBA’s loan forgiveness application as a base, it will be up to each lender to ask for specific documentation (type and level of specificity), to setup a system to collect them and to verify these documents — not up to the SBA. We recommend to ask your lender early on if you have any specific questions, and to be on the lookout for more guidance regarding proof of forgiveness.
3.6 What’s the timeline for paying back the unforgiven part of the PPP loan before it accrues interest?
You start accruing interest right when you receive the loan but no payment is due in the first 6 months (deferment of 6 months) and after that, you will have 54 months to repay the loan with a 1% interest (5-year term).
3.7 How does the PPP interact with the SBA EIDL loan advance?
The EIDL loan advance is the part that functions as a grant, for which you typically get $1,000 per employee after applying for a disaster loan directly from the SBA.
Unfortunately, the EIDL loan advance reduces your loan forgiveness by that exact amount. You will basically have to repay the EIDL advance with PPP funds, so don’t forget to take it into account if you were approved for both programs.
3.8 How does the PPP interact with the Employee Retention Tax Credit?
The ERC and the PPP program are 100% mutually exclusive, so if you received a PPP loan and intend to use that money (you can always return it by the safe harbour date, now extended to May 14th), you will not be able to take advantage of the ERC.
The ERC provides for up to $5,000 per employee in tax credit over the course of the rest of the year and it may make sense depending on your very personal situation; for most manufacturers we’ve spoken to who have crunched the numbers, the PPP program seems like a safer bet than the ERC.
3.9 How do we know if we really “need” PPP funds, according to the SBA?
We hear that many companies are turning back their PPP funds because they can’t prove they need it, or plan to by the safe harbor date.
We mostly hear this from large, public or well-funded companies or big franchises, creating concerns for smaller businesses that still had money on their bank accounts… We do not believe that the level of oversight will be that deep. The current mandatory audit threshold is for PPP loan amounts of $2 million or more, but even so, we recommend that the businesses that receive less than $2 million (the vast majority of the companies we work with) prepare to be able to substantiate the following that we believe are all good, real evidence to prove your need:
- You were shut down by a public health order;
- Your sales were off by a large percentage compared to the same period last year;
- Orders were cancelled;
- You had to lay off people, and they were not able to work remotely and perform their same functions.
Of course, please note that, ultimately, the SBA makes the rules, and they are continuing to be updated frequently. You should monitor this FAQ document which the SBA keeps updating.
If you have any questions, contact your lender and –if you learn something new or interesting– send us a note so we can share with all our network!
Don’t forget to consult our main COVID-19 resource page for manufacturers.
- Updated 5/20/2020 to add information to 3.3 and 3.4
- Updated 5/6/2020 to add link to the FAQ document which the SBA keeps updating.
- Updated 5/11 to add section 1 (the basics) and complete the FAQ with most recent info.
- Updated 5/19 to add top section with most recent info: official loan forgiveness application from the SBA.
- Updated 6/15 to include the June 5 relaxed PPPFA rules, simplify the FAQs in light of the new info.