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How to help ensure Paycheck Protection Program loan forgiveness

6 min read
Deborah Sweeney

This article originally published on GoDaddy’s website.

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The Small Business Administration (SBA) — which administers the Paycheck Protection Program (PPP) — published the PPP Loan Forgiveness Application on Friday, May 15, 2020.

Clocking in at 11 pages, this document provides instructions for PPP loan borrowers on how to apply for forgiveness on their PPP loans. The application details four key components necessary to complete before submitting to their lenders.

  1. The PPP Loan Forgiveness Calculation Form. The template for this form may be found on page 3 of the PPP Loan Forgiveness Application. It is required for submission to your lender.
  2. PPP Schedule A. Further instructions for PPP Schedule A are outlined on page 5 of the document. This is also required for submission to your lender.
  3. The PPP Schedule A Worksheet. If you are unable to complete this section, you must obtain an equivalent report from the borrower’s payroll system or payroll processor.
  4. The PPP Borrower Demographic Information Form. This form is on page 11 of the PPP Loan Forgiveness Application. It collects demographic information, such as gender and ethnicity data, for program reporting purposes only. It is the only form that is optional for submission.

The PPP Loan Forgiveness Application does address outstanding issues for small business owners that received PPP loans. These include how to calculate the average FTE (full-time equivalent) of employees during the Covered Period or Alternative Payroll Covered Period.

Additionally, borrowers may include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving the PPP loan.

However, small business owners that received PPP loans may still have questions about outstanding criteria necessary to get their loans forgiven:

  • How much can be forgiven?
  • What is the 75% rule as it pertains to payroll?
  • And how quickly, exactly, will your PPP loan be forgiven?

Now that we’ve gone over the application materials, let’s focus on the action steps business owners must take for PPP loan forgiveness.

1. Revisit the eight-week spending time frame

The clock officially starts ticking on the date the small business owner receives their PPP loan. There is now an eight-week time frame in which the money may be spent on allowable expenses, according to John Estill, Consulting CFO at Optima Office.

These expenses fall into two categories: payroll and non-payroll.

Estill says that payroll expenses include regular wages, paid time off (PTO), commissions, and tips that are paid over the eight-week period. This payroll amount is capped at an annual wage of $100,000.

Additional expenses may include employee healthcare, retirement plans, and state and local payroll taxes.

The amount of payroll forgiveness must be at least 75% of the forgiven amount.

What about non-payroll expenses? Payments for items such as rent and utilities cannot be more than 25% of the forgiveness amount.

“The timing of when the expenses are incurred and when the expenses are actually paid play a big part in the determination of them being forgiven,” Estill says.

The deadline for when employee FTE levels and compensation must be maintained or restored is June 30, 2020.

2. Track expenses

Clint Coons, ESQ. and founder of Anderson Business Advisors, has some advice on how small business owners may ensure their PPP funding does not co-mingle with existing business funds.

“I recommend keeping the PPP funds in a separate bank account and using the funds for the covered expenses,” Coons says. He also recommends tracking all expenses covered by the PPP in the event that verification is requested by the lender.

3. Maintain employee headcount

Brianna McGurran is the Loans Analyst for Forbes Advisor. In order to qualify for loan forgiveness, McGurran says it is not enough to spend 75% of the loan proceeds on payroll for eight weeks from the time you receive the PPP loan. During this time, you also must not reduce wages or employee headcount.

“If you laid off or furloughed employees, you can use PPP funds to pay them,” McGurran says. She adds that furloughed or laid off employees must also be rehired at their previous salary levels.

“There can be a reduction in payroll forgiveness if an employee was not paid at least 75% of their average pay during the first quarter of 2020 during the eight-week time frame,” Estill says. “Employee terminations and layoffs impact this calculation.”

4. Rehire staff — or make a good faith effort

What happens if you try to rehire employees that were laid off or furloughed, but do not want to return to your company? Do you lose your chance for PPP loan forgiveness?

“Your shot at loan forgiveness shouldn’t be affected,” McGurran assures business owners. “A newer addition to the PPP loan guidelines is that as long as a company makes a good faith effort to reinstate employees on the payroll, the amount of forgiveness on the PPP loan they received won’t be reduced by those employees’ rate of pay.”

5. Pay back the PPP loan if conditions aren’t met

Upon completion of the PPP Loan Forgiveness Application to your lender, you are showing the lender that you’ve met the funding requirements.

Mark McKee, President and COO of payroll software company OnPay, notes that if the conditions haven’t been met, the amount of the PPP loan that can be forgiven may be reduced. Employers will then have up to two years to repay portions of the loan that aren’t forgiven. The interest rate is 1%.

The good news is the SBA is not finished sharing documentation that concerns PPP loans consistent with the CARES Act. In a press release with the U.S. Department of the Treasury, the SBA announced more regulations and guidance would be issued “soon” to assist borrowers working on their applications.

Further, it was announced on May 20, 2020, that Congress might extend the time frame for the PPP loan forgiveness period. (Author’s note: this extension is a developing story.)

Check out OpenWeStand's Resources page for more articles, advice, and strategies small businesses can use to get through these tough times.