Now That You Have Received Your PPP Funds, Steps to Take Toward Loan Forgiveness
You will need to apply to your lender in writing for loan forgiveness after the eight-week period. Your lender should provide information and requested documents, but below are preliminary guidelines. As the SBA releases more information and clarifications, we will update you.
Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.
A minimum of 75% of the funds must be used for payroll and no more than 25% for other qualifying costs.
If a portion of the loan is not forgiven, payments are deferred for six months (interest will accrue), the interest rate is 1%, and the loan has a maturity of two years.
Payroll and Qualifying Costs as Defined by the SBA:
Payroll – salary, wage, vacation, parental, family, medical, or sick leave (up to $100,000 per employee), health coverage including insurance premiums and retirement, and state and local tax payments
Mortgage interest – as long as the mortgage was signed before February 15, 2020 – and interest on any other debt incurred before February 15, 2020, that was secured using business personal property
Rent – as long as the lease agreement was in effect before February 15, 2020
Utilities, including phone, cell phone, internet, gas, water, electricity – as long as service began before February 15, 2020
The eight-week period begins on the first day the payment was made by your lender. You may want to adjust your payroll schedule to include as much payroll as possible.
Headcount During Eight-Week Period and Base Period Calculation:
You must maintain the same number of employees on your payroll that you had previously (see exemption in next section). Below is a calculation using specified base periods to determine if you’ve met this requirement:
First, determine the average number of full-time equivalent employees you had for:
The 8-week period following your initial loan disbursement
February 15, 2019, to June 30, 2019 (base period 1)
and January 1, 2020, to February 29, 2020 (base period 2)
Second, divide the number in the 8-week period by the two base periods. Take the largest number you obtain. If you are a seasonal employer, you must divide by the first base period listed.
If you get a number equal to or larger than 1, you maintained your headcount and meet the requirement.
If you get a number smaller than 1, you did not maintain your headcount and your forgivable expenses will be reduced proportionately.
If Employees Refuse to Return to Payroll (new exemption on re-hiring employees):
Employees who were laid off or put on furlough may refuse to return to work. If that occurs, there is an exemption and you can still get your loan 100% forgiven if you have followed all the other guidelines.
To qualify for this exemption:
You must make a written offer to rehire
You must offer to rehire for the same salary/wage and number of hours as before they were laid off
You must have documentation of the employee’s rejection of the offer
Employees who reject offers for re-employment may no longer be eligible for continued unemployment benefits. You should let them know in your response to their rejection.
Rehiring Different Employees:
There is no specific guidance on this topic, but the idea of the law is to keep people employed, so it would be safer to attempt to rehire the same employees. If they refuse and you take the steps as indicated above, you can hire different employees to replace them.
Maintain at Least 75% of Total Salary:
In addition to headcount, at least 75% of wages must be paid. If any wages were reduced before you received your PPP funds, they need to be brought back up to no more than a 25% reduction. This requirement will be individually assessed for every employee.
If the employee’s pay over the 8 weeks is less than 75% of the pay they received during the most recent quarter in which they were employed, the eligible amount for forgiveness will be reduced by the difference between their current pay and 75% of the original pay.
Since your PPP amount was based on your annual income, the portion that will be forgiven for “payroll” will be eight weeks of your net profit.
To calculate: You would take your 2019 Schedule C net profit that was used to calculate your loan amount and multiply it by 8/52.
Example: Your Schedule C income amount was $25,000. You qualified for a loan of $5,208.32 ($25,000/12 = $2,083.33 x 2.5 = $5,208.32).
To calculate your forgivable payroll portion, you multiply your Schedule C income of $25,000 by 8/52 = $3,846.15. Your payroll portion is $3,846.15. The balance of the $5,208.32 loan can be spent on the other qualified expenses – rent, interest, and utilities.
Note: We will have more information on rent/mortgage interest and utilities for home offices as it becomes available. However, we are anticipating they will allow a self-employed individual with a home office deduction to use eight weeks of the home office deduction. (Multiply your home office deduction on your Schedule C by 8/52.)
Documents Needed for Loan Forgiveness:
You will need to provide copies of:
Payroll processing reports, tax or other reports during the 8-week period, including related payments such as vacation, sick, and other paid time off for employees
Monthly invoices for health insurance premiums paid by the company under a group healthcare plan, including owners of the company, along with proof of payment (cancelled checks or bank statements, ACHs, Wires)
Retirement plan funding statements, funding schedules, and remittances to retirement plan administrator
Mortgage statements showing interest and principal amounts along with proof of payment.
Invoices for rental payments along with proof of payments. Signed lease agreements should be available, also.
Utilities bills along with proof of payment
If you received an EIDL Advance, you must deduct that amount from the forgiven portion of your PPP loan.
Zigo & Associates