How to Get Loan Forgiveness Under PPP
The second round of funding under the Payroll Protection Program (PPP) is underway. On April 24 President Trump signed the bill that added $319 billion to the PPP program. One of the key features of the program that makes it so attractive to small businesses is the loan forgiveness aspect. While the loan proceeds can be used for any purpose, if a borrower wants forgiveness of all or part of the loan, the loan must be used for certain expenses.
What Expenses Qualify for Forgiveness? PPP is designed to protect workers from the business downturn associated with Covid-19. To help small business owners keep their employees receiving paychecks, PPP allows forgiveness for wages paid from the proceeds of the PPP loan. Because employers can't keep workers if the employers can't keep their doors open, PPP also allows payments for rent or mortgage on business premises and utility payments associated with the business. "Wages" includes all cash compensation paid to employees, including commissions, housing stipends and allowances. It also includes costs of separation and payments for employment-related benefits such as vacation, parental, family, medical or sick leave; payments for the provision of group health care benefits, including insurance premiums; payments for retirement benefits; and state or local payroll taxes. "Wages" do not include payment of the employer's portion of federal withholding taxes.
When Must the Payments be Made? PPP sets a time limit on when disbursements of the loan proceeds must begin. The first payments must be made within ten days after the lender funds the loan.
Is There a Time Limit for Disbursement? Yes. The loan is based on wages paid to employees and is limited to 2.5 times the monthly wages paid by an employer. Therefore, the loan proceeds must be disbursed during the "covered period," which is eight weeks from the date the lender makes the first disbursement to the business.
Are There Limits on Non-Wage Disbursements? Yes. Even though expenses like rent and utilities can be forgiven, these expenses cannot exceed 25% of the loan proceeds. To the extent they do, those payments will not be eligible for forgiveness. Additionally, proceeds up to $10,000 from an advance on an Economic Injury Disaster Loan (EIDL) will be deducted from the amount forgiven.
What Documentation is Needed for Loan Forgiveness? In the SBA PPP loan application package there is an application for loan forgiveness. This lists the documentation that must be submitted with the application for forgiveness and includes verification of the number of FTE employees on the payroll and pay rates for the covered period and the prior periods included in the formulas for determining any reduction in loan forgiveness; documentation verifying payments on mortgage obligations, rent payments and utility payments (this could include canceled checks); and a certification from a representative of the business authorized to make such certifications that the documentation submitted is true and correct, and that the amount of the loan for which forgiveness is requested was used to pay the covered expenses.
Good record keeping will be critical to obtaining loan forgiveness. While not required, it's suggested that the loan proceeds be deposited into a separate account and that all disbursements for covered expenses be made directly from this account. To the extent the loan proceeds are not used for wages, obtain receipts from the suppliers to whom payments were made.
What Terms Apply to Any Portion Not Forgiven? Any portion not forgiven will be repaid under the terms of the original loan, which is one percent (1%) interest rate, no payments during the first six months, two-year term for repayment, and no prepayment penalty.
For answers to other common questions and more details on the forgiveness program, see this article from the National Law Review. The SBA has also published a list of Frequently Asked Questions which you can access here.