PPP FAQs - Loan Forgiveness
If you've received a Paycheck Program Protection (PPP) Loan, you need to ensure you're using the funds for eligible expenses and meeting other requirements in order to maximize your loan forgiveness amount. The SBA has provided some guidance and clarification, but additional rules and updates are still trickling out.
UPDATE: PPP Forgiveness Amendment Pending Passage in Senate (NOT law yet!)
- Extends covered period to 24 weeks
- Allows exemptions for FTE level forgiveness requirement based inability to rehire employees or restore business activity to pre-pandemic levels
- Reduces payroll cost percentage requirement to 60%
- Extends loan maturity from to 5 years
The Senate is expected to vote on the bill the week of June 1. They had drafted their own amendment, but were unable to pass it when they adjourned for the Memorial Day holiday.
PPP Loan Forgiveness FAQs
Watch our short video for an overview of the PPP Loan Forgiveness Application and guidance updates released on May 15:
NOTE : We are in the process of updating this information based on new rules introduced in the PPP Loan Forgiveness Application released on May 15 and additional guidance provided on May 22.
- When does the 8-week PPP Loan period begin?
- Can we delay the first disbursement?
- How is the PPP Loan forgiveness amount calculated?
- Which payroll taxes are included in payroll costs?
- Are there any wages excluded from payroll costs?
- Do independent contractors count as employees for purposes of PPP Loan forgiveness?
- How can I use my PPP Loan?
- What happens if PPP Loan funds are misused?
- How do I get my PPP Loan forgiven?
- What are the terms of the PPP Loan amount that is not forgiven?
- Does PPP Loan forgiveness count as taxable income?
- How is employee headcount or FTE calculated for PPP Loan forgiveness?
- How does "Level of Payroll" factor into forgiveness?
- What happens if after 8-week period and prior to June 30, 2020, we still cannot go back to work and thus must terminate all employees?
- What requirement updates were included in the PPP Loan Forgiveness Application released on May 15?
- PPP Loan Guidance Documents
When does the 8-week PPP Loan covered period begin?
The 8-week PPP covered period begins on the first day you receive funds from the lender (aka "PPP Loan Disbursement Date).
If you have a biweekly (or more frequent) payroll schedule, you may calculate eligible payroll costs using an "Alternative Payroll Covered Period" that begins on the first day of your first pay period following the day you received your PPP loan funds.
Source: PPP Loan Forgivness Application
Can we delay the first disbursement?
It may be possible to delay disbursement up to ten days after loan approval, but we recommend discussing with your lender immediately if you want to delay funding. Treasury specifically says, "The lender must make the first disbursement of the loan no later than ten calendar days from the date of loan approval."
How is the PPP Loan forgiveness amount calculated?
The loan forgiveness amount is proportionate to the number of employees and wage amounts during the covered 8-week period. You may also owe money if you use loan funds for anything other than payroll costs, mortgage interest, rent, and utilities payments during the 8-week loan period. And if the loan amount is more than allowable expenses, that portion will not be forgiven.
The following information is from the PPP Borrower Information Sheet published by Treasury on March 31, 2020. We are waiting for clarification and additional guidance on how the following requirements are determined:
- Number of Staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount.
- Level of Payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee who made less than $100,000 annualized in 2019.
- Rehiring: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
Which payroll taxes are included in payroll costs?
Using a "nontraditional" definition of payroll costs per the CARES Act, PPP loan and forgiveness amounts are calculated on a gross basis and exclude FICA (Social Security and Medicare), FUTA, and federal income tax withholding. Specifically, the definition of payroll costs under the CARES Act excludes "taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986 during the covered period" (defined as February 15 - June 30, 2020). Source: Treasury PPP Loan FAQs, Question 16, accessed April 17, 2020
At this time, we think payroll cost calculations for forgiveness will match similar logic as that for loan basis determination; meaning gross wages + State UI + any employer local taxes such as Denver OPT. This statute defines payroll costs in an unprecedented manner, which excludes employer-matching OASDI/Social Security and Medicare taxes, and federal UI (FUTA). Thus, it isn't the total employer tax expense as traditionally defined. We are developing custom reports to help track this unique definition for our clients.
Are there any wages excluded from payroll costs?
Yes. PPP Loan payroll costs exclude payments made to anyone residing outside the U.S., payments made to individuals taking leave under the FFCRA provisions, and payments to individuals in excess of $100K on an annualized basis, which is interpreted as in excess of $15,385 per individual during the 8-week period.
Do independent contractors count as employees for purposes of PPP Loan forgiveness?
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 forgiveness. Source: Page 4 of Federal Register Vol. 85, No. 73
How can I use my PPP Loan?
Employers seeking full forgiveness should strive to have at least 75% of the funds used for payroll costs. Payroll costs are defined in the Interim Final Rule, 2.f: gross wages, employer health premium costs, employer retirement match amounts, and state/local employer taxes. A PPP loan may also be used for rent, utility, or interest payments on other debt obligations that were incurred before February 15, 2020. Specifically Treasury states, "The proceeds of a PPP loan are to be used for: i. payroll costs (as defined in the Act and in 2.f.); ii. costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; iii. mortgage interest payments (but not mortgage prepayments or principal payments); iv. rent payments; v. utility payments; vi. interest payments on any other debt obligations that were incurred before February 15, 2020; and/or vii. 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 can 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."
To help track expenses for forgiveness, set up a separate bank account specifically for the loan funds.
What happens if PPP Loan funds are misused?
Per Federal Registry, "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."
How do I get my PPP Loan forgiven?
You will have to request loan forgiveness from your lender and provide documentation to verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must make a decision on the forgiveness within 60 days.
You need to include the following documentation to qualify expenses during the 8-week Covered Period and/or Alternative Payroll Covered Period:
- Payroll documentation verifying the eligible cash compensation and non-cash benefit payments:
- Bank account statements or payroll service provider reports documenting the amount of cash compensation paid to employees
- Tax forms for the periods that overlap with the and/or Alternative Payroll Covered Period
- Payroll tax filings reported, or that will be reported, to the IRS (i.e., 941)
- State quarterly business and individual wage reporting and unemployment insurance tax filings reported or will be reported
- Payment receipts, cancelled checks, or account statements documenting employer contributions to employee health insurance and retirement plans that are included in the forgiveness amount
- FTE documentation showing the average number of FTE employees on payroll per month between Feb. 15 - June 30, 2019 or Jan. 1 - Feb. 29, 2020. Seasonal employers may opt to use any consecutive 12-week period between May 1 - Sept. 15, 2019.
- Documents may include payroll tax filings reported or will reported to the IRS, and state quarterly business and individual wage reporting and unemployment insurance tax filings reported or will be reported
- Nonpayroll cost documentation verifying existence of obligations/services prior to Feb. 15, 2020 and proof of eligible payments from the 8-week Covered Period
- Business mortgage interest payments: Copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments; or lender account statements from Feb. 2020 and the months of the Covered Period through one month after it ends that verifies interest amounts and eligible payments
- Business rent or lease payments: Copies of all lease agreements for real estate and tangible personal property and receipts or cancelled checks verifying eligible payments; or lessor account statements from February 2020 and the months of the Covered Period through one month after it ends that verifies interest amounts and eligible payments
- Business utility payments: Copy of invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks, or account statements verifying those eligible payments.
What are the terms of the PPP Loan amount that is not forgiven?
The PPP Loan has a fixed interest rate of 1% and is due in 2 years. All payments are deferred for 6 months, however, interest will accrue over that period. There are no prepayment penalties or fees.
Does PPP Loan forgiveness count as taxable income?
No. Per Section 1106 of the CARES Act, amounts forgiven on a PPP Loan "shall be excluded from gross income." However, expenses paid with PPP Loan funds may not be tax-deductible per IRS Notice 2020-32 release on April 30, 2020, which says that providing loan forgiveness and a tax deduction is considered a double tax benefit. On May 5, the Senate Finance Committee introduced the Small Business Expense Protection Act to reverse the IRS notice, which they say is contrary to congressional intent of the CARES Act.
How is employee headcount or FTE calculated for PPP Loan forgiveness?
FTE means full-time equivalency employee, which is defined as 40 hours / week. For PPP forgiveness, FTE is calculated for each employee by averaging the number of hours worked per week over the Covered Period or the Alternative Payroll Covered Period, dividing it by 40, and rounding to the nearest tenth. Or, you may use a simplified method to calculate FTE: 1.0 FTE = 40 hours more / week; 0.5 FTE = fewer than 40 hours / week.
While the CARES Act defines employees as "individuals employed on a full-time, part-time, or other basis"* for the purposes of PPP Loan eligibility, it uses "the standard of full-time equivalent employees" to determine loan forgiveness amount. Therefore, the "straight" employee headcount you used to determine your loan eligibility may be different than the one used for forgiveness, which is based on full-time equivalency.
*Note: Revised guidance clarifies that independent contractors ("1099 workers") cannot be counted as employees for the purposes of PPP Loan eligibility and forgiveness.
How does "Level of Payroll" factor into forgiveness?
This requires additional guidance, but in the original PPP Borrower Information Sheet published by Treasury on March 31, 2020, there is a reference to loan forgiveness being reduced if you decreased salaries and wages by more than 25% for any employee who made less than $100,000 annualized in 2019. Many are still unclear if this determination of wage level is based on an hourly rate basis or a total compensation basis for those paid hourly or otherwise. It is also still a grey area if they plan to compare the wage data on an employee-by-employee basis or company-wide basis, and/or against which periods of time. If it is on an employee basis, this seems fraught as many are likely to have different employees working for them now than they did in any prior period, be it a February - June 2019 rate or prior 12-month period of time.
What happens if after 8-week period and prior to June 30, 2020, we still cannot go back to work and thus must terminate all employees?
There is reference to a rehiring grace period in the PPP Borrower Information Sheet published by Treasury stating employers have until June 30, 2020 to restore full-time employment and salary levels for changes made between February 15, 2020 and April 26, 2020. Some employers are wondering if there would be any negative impacts to their loans if they are forced to layoff staff again after the 8-week loan period or are unable to rehire by June 30 due to due to state/local restrictions. There is nothing in any of the guidance that addresses this scenario. However, nothing in the guidance yet speaks to requiring you maintain staffing levels after the 8-week period. This may be a case for reading too much into the guidance, but since this hasn't been addressed specifically by Treasury, we suggest monitoring the daily guidance updates published by Treasury or speaking with your lender to see how they interpret that section of the guidance.
What forgiveness requirement updates were included in the PPP Loan Forgiveness Application released on May 15?
On May 15, the SBA and the US Treasury released the PPP Loan Forgiveness Application, which clarifies some of the ambiguous rules. CPA Tony Nitti offers a thorough review of the PPP Loan Forgiveness Application and items that still need to be clarified.
PPP Forgiveness Application Guidance Update Summary:
- Full-Time Equivalency (FTE) is based on 40 hours/week for the purpose of maintaining staff levels for forgiveness. You may count part-time workers as 0.5 FTE or use an equivalency calculation.
- You may use an Alternative Payroll Covered Period to start the 8-week loan period on the first day of the pay period following your funding date. This also provides the ability to include payroll costs incurred at the end of the alternative covered period if paid by the next regular payroll date.
- “Costs incurred and payments made” allows eligible non-payroll expenses if they were incurred during the Covered Period but paid afterwards on regular billing cycle; this does not allow prepayment of non-payroll expenses incurred after the Covered Period.
- “Safe Harbor” provisions are in place to exempt reduction in loan forgiveness amount if FTE and/or salary/wage levels are restored by June 30, 2020. In addition, there are FTE level exceptions for workers who decline a written offer to return to work, are terminated with cause, or voluntarily resign or request a reduction in hours.
PPP Loan Guidance Documents
- PPP Loan FAQs (US Treasury, 5/27/2020)
- PPP Loan Forgiveness Application (5/15/2020)
- PPP Interim Final Rule on Loan Forgiveness (5/22/2020)
- PPP Interim Final Rule 1 (4/2/2020; published in Federal Register on 4/15/2020)
- PPP Interim Final Rule on Additional Criterion for Seasonal Employers (4/28/2020)
- PPP Interim Final Rule on Disbursements (4/28/2020)
ASAP WEBINAR: PPP Loan Forgiveness Best Practices
In this presentation, Mark Betts, VP of ASAP Accounting & Payroll, and Michelle Kooi, CPA with Tafoya Barrett & Associates, share tips on how to maximize PPP Loan forgiveness. This presentation was recorded on April 17, 2020 and additional guidance on the forgiveness provisions is still pending.
ASAP WEBINAR: PPP Loan Forgiveness - Part 2
Recorded on May 8, 2020, this presentation provides updates on PPP Loan forgiveness guidance based on the latest US Treasury PPP FAQs posted May 6. This video is a follow-up to a presentation on loan forgiveness tips shared by Mark Betts and Diana Murray of ASAP Accounting & Payroll, and Michelle Kooi, CPA and partner with Tafoya Barrett & Associates, on April 17. NOTE: The PPP Loan Forgiveness Application released on May 15 clarifies some of the ambiguous rules shared in this video.
Disclaimer: This information is provided as a self-help tool and does not constitute legal or financial advice. Laws, regulations and lending products are changing daily and decisions as to whether or how to use this information and/or what actions to take in response to the COVID19 Pandemic are solely those of the employer. The providers of this information disclaim any and all responsibility and liability for its accuracy, completeness or fitness for your particular business purposes.