CAN MY PPP LOAN BE FORGIVEN IN WHOLE OR IN PART?
Yes. The amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest. That is, the borrower will not be responsible for any loan payment if the borrower uses all of the loan proceeds for forgivable purposes described below and employee and compensation levels are maintained. The actual amount of loan forgiveness will depend, in part, on the total amount of payroll costs, payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020, over the eight-week period following the date of the loan. However, not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs. While the Act provides that borrowers are eligible for forgiveness in an amount equal to the sum of payroll costs and any payments of mortgage interest, rent, and utilities, the Administrator has determined that the non-payroll portion of the forgivable loan amount should be limited to effectuate the core purpose of the statute and ensure program resources are devoted primarily to payroll. With a focus on keeping workers paid and employed. The Act, which provides a loan amount 75 percent of which is equivalent to eight weeks of payroll (8 weeks/2.5 months = 56 days/76 days = 74 percent rounded up to 75 percent). Limiting non-payroll costs to 25 percent of the forgiveness amount
will align these elements of the program and will also help to ensure that the finite appropriations available for PPP loan forgiveness are directed toward payroll protection.
HOW CAN PPP LOANS BE USED?
The proceeds of a PPP loan are to be used for:
1. payroll costs
2. costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums
3. mortgage interest payments (but not mortgage prepayments or principal payments)
4. rent payments
5. utility payments
6. interest payments on any other debt obligations that were incurred before February 15,2020; and/or
7. refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020. If you received an SBA EIDL loan from January 31, 2020 through April 3, 2020, you could apply for a PPP loan. If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP loan. If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan. Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.
WHAT QUALIFIES AS “PAYROLL COSTS?”
Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation.
IS THERE ANYTHING THAT IS EXPRESSLY EXCLUDED FROM THE DEFINITION OF PAYROLL COSTS?
Yes. The Act expressly excludes the following:
1. Any compensation of an employee whose principal place of residence is outside of the United States
2. The compensation of an individual employee with more than an annual salary of $100,000, prorated as necessary
3. Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance
Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and
4. Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Pub. L. 116-127).
DO INDEPENDENT CONTRACTORS COUNT AS EMPLOYEES FOR PURPOSES OF PPP LOAN CALCULATIONS?
No, independent contractors have the ability to apply for a PPP loan on their own, so they do not count for purposes of a borrower’s PPP loan calculation.
WHAT IS THE INTEREST RATE ON A PPP LOAN?
The interest rate will be 100 basis points or one percent. PPP Loan provides low cost funds to borrowers to meet eligible payroll costs and other eligible expenses during this temporary period of economic dislocation caused by the coronavirus.
WHAT WILL BE THE MATURITY DATE ON A PPP LOAN?
The maturity is two years. While the Act provides that a loan will have a maximum maturity of up to ten years from the date the borrower applies for loan forgiveness.
CAN I APPLY FOR MORE THAN ONE PPP LOAN?
No. One loan per borrower limitation is necessary to help ensure that as many eligible borrowers as possible may obtain a PPP loan. This limitation will also help advance Congress’ goal of keeping workers paid and employed across the United States.
WHEN WILL I HAVE TO BEGIN PAYING PRINCIPAL AND INTEREST ON MY PPP LOAN?
You will not have to make any payments for six months following the date of disbursement of the loan. However, interest will continue to accrue on PPP loans during this six-month deferment. The Act authorizes the Administrator to defer loan payments for up to one year.
WHAT HAPPENS IF PPP LOAN FUNDS ARE MISUSED?
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 will 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.
PPP Loan Forgiveness Guidelines
Forgiveness of allowable expenses is permitted during the 8-week period following the date of the PPP loan disbursement. Forgivable Expenses must be used to first pay payroll (Minimum of 75% of loan) this includes Wages, Salaries, Commission, Cash Tips, Other Similar Compensation.
- Employees must reside in United States
- Cannot exceed $100,000 (Max of $15,385) per employee Vacation, Parental, Family, Medical, Sick Leave Allowance for Dismissal or Separation
- Health Benefits
- Retirement Benefits
- State & Local Taxes on Employee Compensation
Other Forgivable Expenses (not to exceed 25% of PPP funds) include:
- Covered mortgage obligation must be liability of borrower and incurred prior to 2/15/2020
- Real and/or personal property only interest portion allowed
- Rent obligation lease in force prior to 2/15/2020
- Utilities in service prior to 2/15/2020 Electricity, Gas, Water, Transportation, Telephone, Internet access
Documentation for Forgiveness
It is the borrower’s responsibility to maintain detailed and accurate records. Failure to do so will impact the ability for a portion or all of the loan from being forgiven.
Payroll Documentation/Payroll Reports:
- 8 weeks from disbursement
- 2/15/2020 – 6/30/2020
1st & 2nd quarter 2020 IRS Form 941’s
IRS Form 1040, Schedule C, E, or F IRS Form 1065 or 1120-S / K1’s
Earnings by employee for most recent full quarter
Overhead Expense Documentation:
Real estate – Mortgage statements
Personal property – Loan statements
Rent – Lease & monthly payment
Utilities – Bill & monthly payment
Movement of funds: Cancelled check / wire transfer / electronic funds transfer, etc.
Special Situations for Forgiveness Terms Sole Proprietors and Independent Contractors
Schedule C, Line 31, Net Income
Amount forgiven is 8/52 of line 31
Benefits not allowed for owners (IFR # 3) Based on 2019 expenditures
Expansion not allowed
Other allowable expenses need utility bills, bank statements, electronic funds transfer, etc.
How Does PPP Forgiveness Work if you have an SBA EIDL Disaster Loan?
If included in loan, lender to pay SBA directly for refinance of EIDL loan
EIDL Advance not refinanced
EIDL Advance deducted from forgiveness amount
Borrower can have both PPP & EIDL but cannot be used for the same purpose
Recommendations on How to Prepare for Your PPP Loan Forgiveness
- Assemble your records showing how funds were spent, as they are being spent.
- You will have to provide your Lender with evidence such as payroll reports and cancelled checks that the PPP funds were used for eligible purposes.
- Determine NOW what your base FTE base number is
- Determine NOW your average salary and wages per employee for 1Q20.
- Complete your application for forgiveness and submit to your lender. Along with certification form. (PPP Loan Forgiveness Application will be sent soon)
- If the full loan amount is not forgiven, decide whether to pay off the balance immediately or pay the loan off over the two-year maturity at a fixed rate of 1.00%. Additionally, all payments are deferred for 6 months; however, interest will continue to accrue over this period.
What documentation must be submitted with an application for loan forgiveness?
To receive loan forgiveness, the CARES Act requires that the borrower submit an application to the lender. The application must include the following:
- Documentation verifying 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, including payroll tax filings reported to the Internal Revenue Service and state income, payroll and unemployment insurance filings
- Documentation, including cancelled checks, payment receipts, transcripts of accounts or other documents verifying payments on mortgage obligations, rent payments and utility payments
- A certification from a representative of the business authorized to make such certifications that:
- The documentation presented is true and correct
- The amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation or make utility payments
- Any other documentation SBA determines necessary
It will be important for businesses to keep detailed records regarding the use of the PPP loan during the covered period. Businesses should start keeping detailed records beginning on day one of the covered period, insist on receipts and keep an organized system for document storage. While not required under the CARES Act or SBA guidance, PPP loan proceeds may be
deposited into a separate bank account, with only costs eligible for loan forgiveness paid out of that account. Good recordkeeping will be critical in maximizing the amount of loan forgiveness.
Can lenders rely on borrower documentation for loan forgiveness?
Yes. A lender does not need to conduct any verification if the borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified payments for eligible costs.
PLEASE NOTE ISSUES THAT STILL NEED FURTHER CLARIFICATION:
The covered period for loan forgiveness has already begun for a number of businesses and many questions remain unanswered, including:
- Many small businesses will be closed at the time their loan is funded due to stay at home orders that have not been lifted or for other reasons. Will the covered period be modified or extended?
- It is unclear what the phrase “costs incurred and payments made” means. Does a cost have to be incurred and paid during the covered period, or are costs that were incurred prior to and paid during the covered period or incurred during and paid after the covered period eligible for forgiveness?
- The CARES Act and current guidance do not define rent. Are items such as common area maintenance (CAM) charges, insurance and taxes that are often defined as “additional rent” in a lease agreement included? Are lease agreements limited to leases of real property? Are rent payments to related parties eligible (although the CARES Act and current guidance do not specifically distinguish between third parties and related parties)?
- How is “full-time equivalent employees” defined? Additionally, how will furloughed employees, employees on paid leave, employees on reduced schedules, or employees who have voluntarily terminated or refused to come back to work be treated?
- How will SBA make a determination that a business is a “seasonal business?”
- It may be necessary for businesses to lay off employees after April 26, 2020. Further, it may not be possible for businesses to rehire employees or increase wages by June 30, 2020. Will the time periods that determine whether a business has eliminated a reduction in employees or wages be adjusted?
- The CARES Act requires that the lender make a decision on loan forgiveness not later than 60 days after the date the lender receives the application. Will there be further guidance on the application and approval process for loan forgiveness?