After a bumpy start in round one, the second round of PPP funding appears to be reaching the people who need it. According to a joint statement by Administrator Jovita Carranza and Secretary Steven Mnuchin, 2.2 million PPP loans have been made to small businesses in round two, with a total value over $175 Billion. . That’s already more loans than in round one, with some funds still remaining to be to be distributed. Additionally, the average loan is $79,000, which is $127,000 less than the $206,000 average loan amount for round one. That means more smaller businesses with less revenue obtaining much needed financing.
But getting a loan is just the first hurdle. Once business owners get financing, they must then figure out how to use the funds in a way that maximizes loan forgiveness. As has been the case with this program from the beginning, we have some initial rules, additional guidance and a lot of unknowns. As always, we’ll do our best with the information that we have to give some guidance on how this forgiveness will work.
The current forgiveness rules
Under the Interim Final Rule on Additional Eligibility Criteria and Requirements for Certain Pledges of Loans (Interim Rule 4.14.20), the amount eligible for forgiveness depends in part on what you spend the money on for the eight weeks following your lender disbursing your funds. Forgiveness can be up to the full principal amount of the loan plus accrued interest if the loan funds are spent on the following:
- payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual),
- covered benefits for employees (but not owners), including health care expenses, retirement contributions and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums),
- owner compensation replacement, calculated based on 2019 limited to eight weeks’ worth (8/52) of 2019 net profit,
- payments of interest on mortgage obligations on real or personal property incurred before February 15, 2020,
- rent payments on lease agreements in force before February 15, 2020 and
- Utility payments under the service agreements dated before February 15, 2020
At first glance, these rules seem straight-forward. Six basic types of expenses count toward forgiving the loans. However, a few actions may reduce your benefit, including:
- You spend less than 75% of the loan on payroll costs
- You reduce full-time employees compared to 4.1.19 – 6.30.20
- If you reduce your employee’s salary or wages to less than 75% of the base salary or wages of such employee during the prior quarter
The rules have huge gaps, and not all of these ambiguities have been clarified yet. My intention is to help you focus on what you can control and navigate the rules the best you can with the information you have.
What does this actually look like
Because lenders are the final arbitrators for forgiveness, the process and therefore the results may differ based on your lender. But according to Interim Rule 4.14.20 the documentation you’ll need for loan forgiveness includes:
- If you have employees, you should submit Form 941 and state quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records that best correspond to the covered period (with evidence of any retirement and health insurance contributions).
- The 2019 Form 1040 Schedule C that was provided at the time of the PPP loan application must be used to determine the amount of net profit allocated to the owner for the eight-week covered period.
- Whether or not you have employees, you must submit evidence of business rent, business mortgage interest payments on real or personal property, or business utility payments during the covered period if you used loan proceeds for those purposes.
Let’s break down what this looks like for each business
Sole-Proprietors with no employees
This is the easiest case because you’ve already provided the documentation you need when you applied: your Schedule C. You divided line 31 by 52 and multiply that by 8. Let’s say hit the maximum $100,000 threshold. That would result in a forgivable loan amount of $15,385. That amount is presumably automatically forgiven (assuming you apply for forgiveness), since the SBA has not asked for any additional information. So, there’s no need to try to figure out how to pay yourself over the eight week period in order to obtain forgiveness. Keep in mind these rules have been known to change mid-stream so you may consider transferring the forgivable portion from your business account to your personal account.
In addition to the owner compensation, the Interim Rule says you must submit evidence of business rent, business mortgage interest payments on real or personal property or business utility payments during the covered period if you used with.
Lastly, sole proprietors must have claimed or have been able to claim these expenses on their 2019 return. Make sure to check the expenses that you’re trying to claim with what you already submitted.
Business owners with employees
Things get a bit more complicated for business owners with employees. To be eligible for forgiveness you have to submit form 941s or similar payroll documentation to document what you paid employees during that period. And as with the sole proprietor, you have to submit evidence of business rent, business mortgage interest payments on real or personal property, and business utility payments during that covered period.
You also have the additional step of verifying you have the same average # of full-time employees (FTE) for the following eight weeks as you did from February 15, 2019 – June 30, 2019 or from January 1, 2020 until February 29, 2020. If you don’t meet this requirement, your forgiveness amount is reduced by the following equation.
Payroll Costs X FTE 8 weeks from loan origination / FTE from 2.15.19-6.30.19 or 1.1.20-2.29.20
Even if you did reduce your employees during either of your time frames, you can get full forgiveness if you eliminate that reduction by June 30, 2019. You can find an additional support sheet here.
So, if your total payroll costs are $50,000, but you had four employees from both 2.15.19 – 6.30.19 and 1.1.20 – 2.29.20, the amount of forgivable payroll costs gets reduced by 75%. You can obtain full forgiveness again if you bring back the employee by June 30th. According to the most recent FAQs, you can also get full forgiveness if you offered to rehire the same employee, but the employee declined the offer (See FAQ 40).
This formula works well if you can easily assess your average full-time employees and your workforce was steady for the periods in questions. The formula is more difficult if there is a lot of fluctuation between full-time employees.
For the reduction based on salaries, you have to calculate payroll costs minus the amount of any reduction in wages that is greater than 25% compared to the most recent full quarter, for any employee who did not earn during any period in 2019 wages at an annualized rate more than $100,000.
This formula seems much more complicated to determine, but from the language it will be good for you to determine:
- The total base salary for or wages for each employee for the last full quarter before the date you received your loan
- Note any employees whose salaries have been reduced and did not earn an annualized rate more than $100,000 for any period in 2019
- Track the amount, if any of reductions in salaries for any of those employees
As with the restoration of employees, you can obtain full forgiveness if you restore wages.
What you can do now
These rules are far from definitive, and we can all hope for additional guidance soon. In the meantime, here are some things you can do right now to help prove and maximize your loan forgiveness process:
- Calculate your payroll costs for the next eight weeks.You can find help calculating payroll costs here. Exclude any amounts of annualized salaries over $100,000. Check those payroll costs against the 75% threshold for loan forgiveness.
- Get on the same page with your payroll processor to ensure the amounts you expect are being paid with PPP funds
- Figure out your average FTEs for 2.15.19 through 6.30.19, as well as 1.1.20 through 2.29.20
- Estimate your business rent, mortgage interest and utility amounts that may be used for forgiveness and make sure those won’t be more than 25% of your loan.
- Track how you spend your PPP funds and be able to link them back to qualified spending. I’ve seen some people even set up a separate account for these funds.
- Keep in touch with your lender and ask for any information they have on forgiveness (they will likely say we are waiting on additional guidance).
- If and when additional guidance does come, you can find it here.
I know this is a lot of wrangling. I have a couple of final notes.
Remember, you must apply for forgiveness within 90 days of the end of the eight-week period. Lenders have 60 days from the date you apply to decide whether you qualify. It’s also important to note that you are not allowed to deduct any expenses you paid the forgivable funds with. Whatever is not forgiven is paid back at a 1% interest rate.