Paycheck Protection Program

The PPP Loan program was intended to cover expenses equivalent to 10 weeks of payroll based on a businesses pre-pandemic levels of staffing. During the covered period described below, businesses must use loan capital on a set of forgivable expenses in order to have the loan forgiven (discharged).

It is required that 60% or higher of the forgivable expenses must be payroll.

• Salaries and Wages (Capped at an annualized $100,000 per staff person - Including Owners Draw)
• Nonwage Payroll Expenses like unemployment insurance, employer contributions to health insurance and retirement accounts, and employer payroll tax submissions
• Business Utilities and Rent/Mortgage Interest

Businesses can select one of two periods:

• 8 Week covered period (Owners Draw - forgivable limited to $15,385)
• 24 Week covered period (Owners Draw - forgivable limited to $20,833)

Within the present regulations for the Paycheck Protection Program and in all proposed legislation, documentation must be retained. While some potential legislative changes may transfer the requirement for document retention from the lender to the borrower.  The requirement that documentation be available upon request remains. This documentation should the following information:

• Period of Performance
• Date of Payment
• Purpose of the Expense
• Indication of Payment

An excel spreadsheet of payments to employees is not sufficient to document payroll without more formal documentation (bank statements, checks matching the payments described).

Businesses can submit expenses to their lender at anytime during the process. The SBA has confirmed that borrowers can submit forgiveness applications before the end of the 24 week covered period and sign off on any Safe Harbor Statements based on the  status of the business at that time.

At the end of the covered period (either 8 weeks or 24 weeks after the distribution of loan capital), borrowers have until the maturity date of the loan to submit the forgiveness application. If borrowers have not submitted an application within 10 months of the last day of the covered period, they will be required to begin payments.

After the lender has received the PPP Forgiveness Application  and all requisite documentation, the lender has up 60 days to submit the file to the SBA. After this, the SBA has up to 90 days in order to respond with an approval or denial. At this point, the lender must reach out to the borrower notifying them of the current status of the loan

After the lender has received the PPP Forgiveness Application  and all requisite documentation, the lender has up 60 days to submit the file to the SBA. After this, the SBA has up to 90 days in order to respond with an approval or denial. At this point, the lender must reach out to the borrower notifying them of the current status of the loan

Andrew received his loan of May 5th. His covered period is either:

• 8 Week Period: 5/5-6/30
• 24 Week Period: 5/5-10/20

Because his loan was originated before June 5th, it is currently a 24 month loan unless extended by mutual agreement with his lender.

Andrew has until the loan maturity date (May 4th, 2022) in order to submit for loan forgiveness. If a forgiveness application is not received within 10 months of the last day of the covered period, he will need to begin making payments.

Stephanie received her loan on August 1st. It covers either the period of:

• 8 Week Period: 8/1-9/26
• 24 Week Period: 8/1-12/31

The covered period can be up to 24 weeks but must end as of December 21st.

Because her loan was originated after June 5th, it is currently a 60 month loan.

Shtephanie has until June 4th 2025 to submit for loan forgiveness. If a forgiveness application is not submitted by 10 months after the last day of the covered period. 

This initially 11 page form has been simplified by the June revision to a 5 page document. It should be used by anyone that does not qualify for either  the 3508EZ or 3508S Forms.

This document gathers additional information in order determine if employee hours or wages were cut during the covered period.

PDF FORM

This two page form removes many of the calculations used to determine if employee levels and wages remained the same with several Safe Harbor Questions. Additional information can be found in the FAQ below. This form should be used for loans above $50,000 with any of the following conditions.

PDF Form

• Independent Contractor, Self--Employed, or other Owner/Operator business where the owner is the only employee.
• Businesses that can certify the first statement and at least one of the three secondary statements
  1. The borrower did not reduce by more than 25% the salary of any employee who did not have annualized salary of more than $100,000 during any single pay period in 2019
     
     
  2. Secondary Statements
     •  The Borrower did not reduce the number of employees or average number of paid hours during the loan period (ignoring reductions in employees or paid hours that arose from the inability to rehire similarly qualified employees for unfilled positions or an employee refusing the restoration of hours).
     • Regardless of variations in headcount during the Covered Period, the Borrower was able to return to or above the wages and employment levels held before the pandemic began by the end of the Covered Period.
     • The Borrower was forced to operate - or was operating at a lower level of business activity, during the loan period due to compliance with sanitation, social distancing, or any other safety requirement or guidance issued by the Secretary of Health and Human Services, the Director of the CDC or OSHA related to COVID-19.

This simplified form is available to borrowers with loans of $50,000 or less. The form removes the requirement to complete certain safe harbor statements on employee retention.

PDF FORM

Currently the SBA allows a number of expenses to be considered Forgivable:

• Payroll and associated expenses like employer contributed payroll taxes, employer contributions for health insurance and employer contributions for retirement. Owner's Draw can also be used up to a certain amount. This can include covering tips, lost commissions, bonuses and incentive pay as long as these amounts do not increase compensation above the annualized $100,000 level. Payroll must be paid or accrued to during the covered period
• Business Rent, Business Mortgage Interest Payments, and Business Utilities can also be considered forgiven. These payments must be accrued during the covered forgiven period and documented as paid.

As of now,  lenders are required to maintain a copy of borrower documentation matching their forgiveness application. The Industry best practice is the following:

Any documented expense should include three core components

1. Purpose of the Expense 2. Period of Performance

3. Date of Payment

• Payroll Documents should be either directly produced from a payroll system (not excel or an excel product). Excel documentation should be accompanied by either checks or bank statements
• Non-Payroll Expenses like Business Utilities and Leases must should include an invoice as well as a receipt or other indication of payment

For businesses with an owner operator, there are additional rules on what can and cannot be forgiven. For a full list of these rules, please review the SBA provided document here.

• Regardless of the number of businesses that an individual may have, their owner's draw/self employment compensation is capped at $20,833 per individual across all businesses that they have a stake in.
• C-Corporations
  • Borrowers are eligible for loan forgiveness for employer payment of state and local taxes, for the amount paid by the borrower for employer contributions for their employee health insurance, and for employer retirement contributions to their employee retirement plan (capped at 2.5/12 of the 2019 employer retirement contribution).
• S-Corporations
  • Borrowers are eligible for loan forgiveness for employer payment of state and local taxes paid by the borrower, and for employer retirement contributions. Employer contributions for Heath insurance are not eligible for individuals with over a 2% stake in the business.
• Self employed (Schedule C or Schedule F):
  • Employer payments for health insurance, retirement or state and local taxes are not eligible for additional loan forgiveness.
  • Borrower must submit its 2019 IRS Form 1040 Schedule C as part of the Forgiveness process if not already held by the lender.

There are currently three reasons why a Paycheck Protection Program loan might not be fully forgiven:

A. The borrower was unable to spend loan capital on forgivable expenses.

B. The borrower reduced staff by either reducing headcount, hours, or wages between the start and end of the covered period. There are several notable exceptions for this.

• Borrowers are not responsible for employees that were terminated with cause or that left voluntarily. Similarly voluntary pay cuts are allowed.
• Borrowers are not responsible for employees that chose not to return to work and cannot rehire similarly qualified individuals
• Borrower was unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020, by the Federal Departments of Health and Human Services, the CDC, or OSHA.
  
  

C. The borrower received an Economic Injury Disaster Loan - Advance Grant. This grant program was administered directly by the SBA. Borrowers cannot receive full forgiveness on both an EIDL Advance Grant and a PPP Loan. Instead the amount of the EIDL Advance Grant will be subtracted from the maximum forgiveness available for PPP.

• If an individual received a PPP loan of $35,000 and an EIDL Advance Grant of $10,000. Only $25,000 of the PPP loan will be forgivable. 
  
  
• If an individual received a PPP loan of $5,000 and an EIDL Advance Grant of $5,000. The PPP loan will not be forgivable.

If a portion of a client's PPP loan is not forgiven, the client is responsible for beginning to pay off the loan. This will begin either after partial forgiveness occurs or if the borrower has not submitted a forgiveness application in the ten months after the covered period. The borrower will still be able to submit a forgiveness application but is responsible for making payments and interest accrued after this point.

While the ideal is that all borrowers would receive total forgiveness, this is not always possible. Thankfully the Paycheck Protection Program loan has a 1% interest rate, making it the lowest-cost source of capital that any business could hope to obtain.

Once either condition is met, the lender will reach out to the borrower in order to confirm the beginning of payments, monthly payments, and method of payment. 

This guidance is provided based on the best available knowledge as of the date of its writing. It is a starting point but does not replace the guidance of tax professionals.

The CARES Act passed by the federal government expressly states that the forgiven part of a PPP loan will be discharged and not considered taxable revenue for the business. 

At the sametime, IRS Notice 2020-32 states that no deduction is allowed for an otherwise deductible expense if the payment of the expense results in forgiveness of the PPP loan. Several pieces of legislation proposed in Congress would reverse this IRS ruling but it is uncertain if or when this will happen.

There are a number of legislative proposals that have been raised that would simplify the process of loan forgiveness for borrowers with loans under $150,000. The primary  impact of these proposals moves the requirement for document retention of  forgivable expenses from the lender to the borrower. This would allow borrowers with loans under $150,000 to complete a one page forgiveness application.