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.
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.
These are just a few of the items noted in the new Application. We are working on putting together a more comprehensive summary and on updating the rest of the article below.
In this article you’ll find:
- The Basics: current 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 8-week period (8 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 25% 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 75% 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 yourself an owner draw or 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 8-week period should cover current expenses.
Even though there is no clear guidance as to whether you can pay last 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 8-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 June 30, 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.
As visually explained on this page of the US Chamber website:
- Reduction based on reduction of number of employees
- Reduction based on reduction in salaries
NOTE 1: Calculating FTEs
The Department of Labor doesn’t have a definition for FTE and simply states that “this is a matter generally to be determined by the employer”. For the PPP, the SBA has chosen not specify the number of hours to be used, as of 5/8/2020. That said, here are our recommendations:
- For hourly employees, determine a reasonable number of hours per week (e.g. 40). 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.
NOTE 3: Choose a period
For the purpose of calculating your baseline of average number of FTEs per month BEFORE the crisis, you can see above that you have different options (named option 1, option 2 and “For Seasonal Employers”). The choice of period is up to you and separate from any choice you’ve made in the initial application process when you sized your loan amount. For very seasonal businesses, it seems like you will alternatively be able to choose an even narrower 8-week period between Feb 15, 2019 and June 15, 2019 most reflective of where your business should be this year, as a base for calculating your average number of FTEs per month before the crisis. You will likely have to self-certify to your lender that you chose the most adapted category, but we recommend that you document your reasoning in case you need to justify it later.
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 8 weeks following your loan closing.
- Payroll costs must make up at least 75% of how you spend the funds in order to be forgiven.
- Limit mortgage interest payments, rent payments and utilities to no more than 25% of your loan amount.
- Document how all loan proceeds were spent:
- List of all employees on payroll the 8 weeks following loan with the dollar amount of payroll costs (defined below).
- Evidence of mortgage interest payments, rent payments and utilities paid during the 8 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 June 30, 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 8 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. Any unforgiven balance will begin a monthly payment starting the 7th month after your note date and will be amortized over the remaining 18 months.
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 I have to lay off people again after June 30th?
Q. I will use PPP funds as they were intended and hope for full forgiveness. What if I cannot keep all this staff in July, if business hasn’t picked up enough?
A. There is currently no retention guideline beyond June 30, 2020. If you can get back to full employment by then by using PPP funds but cannot retain everyone past that date, there is no requirement or guidance to keep that headcount after that date.
You should also note that the current pandemic unemployment subsidy that gives $600 weekly on top of the State UI benefits expires at the end of July 2020.
3.3 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.
3.4 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.
3.5 Why would I rehire employees and start using PPP funds if we are currently sheltering in place and not able to go back to work?
This is a very difficult question to answer! There is lots of pressure being put at the Federal level to allow for some flexibility on the start of the 8-week clock (say, to add the option to let the 8-week period start when your business is allowed to operate again if a shelter-in-place order currently prevents you from operating), but as of May 7th, there have not yet been any revisions to this position. A conservative approach would be to consider that there won’t be any revision, and use PPP funds as best you can to cover remote or essential work, keeping in mind that any non-forgiven portion of your loan is not ideal but still lets you benefit from a 1% loan that you can choose to repay as early as you want.
3.6 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).
3.7 How do we prorate expenses?
Q. We ran payroll 3 before we received PPP loan proceeds. How can we make sure this payroll counts for forgiveness, minus 3 days?
A. This is another grey area of interpretation that we will hopefully get more granularity around from the SBA. The basic idea is that PPP funds should (conservatively) not be used to cover expenses incurred before you received the loan proceeds, and should be prorated to reflect the expenses incurred during the 8-week period.
As of May 7th and given the current lack of clarity, here is what we recommend:
- Payroll is typically in arrears, so the payroll you ran 3 days before receiving PPP money should cover a past period worked and not anything current, so we recommend only counting payroll ran during the 8-week period as a forgivable expense. A follow-up and very unclear question is whether you can prorate some of the payroll ran after the 8-week period to include the last few days of work done during the 8-week period. In theory, the answer would be yes, but we are waiting for more guidance from the SBA.
- Rent and other expenses should be treated differently. Let’s consider a rent paid on May 1st and PPP funds received on May 4th: we recommend you use PPP funds to reimburse yourself for a prorated amount of the rent you paid on May 1st, of course keeping track of all the hard proof and of your reasoning, should you need them later.
- Again, this is our best guess at understanding the current set of rules and at keeping a conservative approach, and doesn’t constitute an official guidance by any means.
3.8 How will we transmit and report all this forgiveness documentation?
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.
3.9 Can you recommend best practices to track use of funds in real time?
Q. We hope to maximize forgiveness and would need to track use of funds in real time to make sure we maximize payroll and include the right amount of rent and other expenses. Any tips?
A. If you are using outsourced accounting firms, they may be able to provide you with a tailored solution. Otherwise, for most companies, a separate bank account is best practice and simplifies tracking. Some of the calculations may require more complex tracking, for example to take into account prorated amounts or compensations above an annualized salary of $100,000 — and in our experience, nothing beats a good spreadsheet that you will put together to account for your specific situation.
3.10 What’s the timeline for submitting documentation for the loan forgiveness?
There is no “due date” for forgiveness; however, we recommend filing promptly after the end of the 8-week period. Your lender will have 60 days to approve your forgiveness request, which, added to the 8-week forgiveness period, utilizes 4 of the 6 month deferral period. Thus, the process only has 2 months of leeway before the expiration of the deferral period. Keep in mind that the SBA has issued over 2 million loans, all of which have forgiveness periods ending within a few weeks of one another. The process is likely to be lengthy and complicated, so we recommend to start as early as possible.
3.11 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 18 months to repay the loan with a 1% interest (2-year term).
3.12 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.
3.13 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.
3.14 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.
For more information on the rules around forgiveness, please review the Interim Final Rule, the Interim Final Rule – Additional Eligibility Criteria and Requirements for Certain Pledges of Loans, which covers Self-Employed borrowers and the FAQs and other documents found on the Treasury’s website.
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.