PPP Loan Forgiveness: A Ready Reckoner!
PPP Loan
Forgiveness: A Ready Reckoner!
In
our run up to the articles under our US PPL Loan series, we hereby provide a
ready reckoner on a full PPP Loan forgiveness. This article factors in the changes
introduced by the PPP Flexibility Act introduced since June 4, 2020.
As
you are already aware, the highlight of the PPL Loan program is its eligibility
for full forgiveness if you meet the stipulated conditions as provided
therein. So to attain forgiveness, one
has to apply for the same after the completion of the forgiveness period in
which the loan proceeds have to be expended as prescribed.
Let us briefly revisit
the conditions of the PPP to start with:
- PPP Loan is
sanctioned based on a business’s average monthly payroll cost for 2019
multiplied by 2.5, to secure payroll costs for up to Eight weeks.
- PPP Loan proceeds
can be used for:
a. Payroll – Salaries,
Wages, Vacation, Parental, Family, and Medical leaves plus health benefits.
b. Mortgage Interest –
If mortgage was executed prior to February 15, 2020.
c. Rents – If lease or
rental agreement was executed prior to February 15, 2020.
d. Utilities – If the
same were in subscription or service prior to February 15, 2020. These include: electricity, water charges,
gas, sewage, telephones, internet, and transportation eligible as per tax
guidelines.
Hence,
all expenses that fall under the aforementioned categories are eligible for
forgiveness of the PPP loan.
Ensuing are the
additional conditions one has to meet in order to apply for forgiveness:
1.
Coverage of Expenses
incurred in 24 weeks:
Expenses incurred
over 24 weeks from the day starting when the first PPP proceeds were disbursed
by your lender. It will not necessarily
mean the date of signing the loan agreement.
So one doesn’t need to alter their payroll schedule, all payroll costs accrued
within the 24 weeks period are eligible.
31st December 2020 is the deadline of such coverage period,
hence borrowers receiving loans after July 16, 2020 shall not have the full 24
weeks coverage period. However, if you
received your PPP loan before June 5, 2020 you can still use an 8-week coverage
period instead of 24 weeks, since you have the option.
Reach us at GJM & Co.
if you need to understand what coverage period should be opted - 8-weeks or 24-weeks.
2.
60:40 principle
The PPP Flexibility
Act prescribes that at least 60% of the PPL loan proceeds should be used for
payroll expenses. Payments to
independent contractors shall not be eligible as payroll. The forgiveness amount shall be scaled
proportionate to the amount spent towards payroll.
3.
Employee rules
& requirements
A Business must
maintain the number of employees on its payroll. Here is the computation you can use to
determine if you’ve met this requirement:
Firstly, determine
the average number of full-time equivalent employees you had for:
The 8-week period following your initial
loan disbursement, Say that’s - X
February 15, 2019 to June 30, 2019, Say
that’s Y1
and January 1, 2020 to February 29, 2020,
Say that’s Y2
Take X and divide
that by Y1. Do the same with Y2. Take the largest number you obtain. If you’re
a seasonal employer, you must divide by Y1.
If you get a number
equal to or larger than 1, you successfully maintained your headcount and meet
this requirement.
If you get a number
smaller than 1, you did not maintain your headcount and your forgivable
expenses will be reduced proportionately.
At this point, it is important to also understand the
PPP Rules on Rehiring:
Exemptions on rehiring employees
Employees who were
employed as of February 15, 2020, and were laid off or put on furlough may not
wish to be rehired onto payroll. If the employee rejects your re-employment
offer, you may be allowed to exclude this employee when calculating
forgiveness.
To qualify for this
exemption:
a. You must have made
an written offer to rehire in good faith
b. You must have
offered to rehire for the same salary/wage and number of hours as before they
were laid off
c. You must have
documentation of the employee’s rejection of the offer
If any of these
conditions apply to an employee, you can also qualify for an exemption:
a. They were were
fired for cause
b. They voluntarily
resigned
c. They voluntarily
requested and received a reduction of their hours
You may also be
required to demonstrate you were unable to hire similarly qualified employees
for unfilled positions, or document that due to safety requirements, you were
unable to return to normal operating levels. Note that employees who reject
offers for re-employment may no longer be eligible for continued unemployment
benefits.
4. Employee Pay rules
You must maintain
at least 75% of total salary. This
requirement will be individually assessed for every employee that did not
receive more than $100,000 in annualized pay in 2019.
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.
5.
Grace period to
rehire
You can rehire any
staff that were laid off or put on furlough and reinstate any pay that was
decreased by more than 25% to meet the requirements for forgiveness, if those
changes were made due to COVID-19 between February 15 and April 26. You have
until December 31st to do so.
Let’s take a look
at some examples for reductions in your forgiveness amount:
Expenditures
from your PPP funds on the eligible things is straightforward. But things get
more complex when your headcount isn’t consistent and employee pay levels remain
similar.
Reduction in
Headcount
Assume
you have 3 full-time employees and they each made $3,000 per month, which means
your PPP loan amount was $22,500 (3000 x 3 x 2.5). You had to lay them off in
February due to COVID-19. If you only
hire back two out of the three employees, your workforce is 67% (two thirds) of
your original headcount. Over the 24
weeks of the PPP period, you spend $36,000 on your employees, more than your
PPP loan amount. You claim the full $22,500 of your loan for forgiveness. If we
assume you do not qualify for any rehiring exemptions, when it comes to
calculating your forgivable amount, because your workforce is smaller, your forgivable
amount will be multiplied by 0.67. You would be able to have $15,075 forgiven.
Reduction in
Payroll
Assume
you have three employees and they each made $3,000 per month, meaning your PPP
loan amount was $22,500 (3000 x 3 x 2.5). You had to lay them off in February
due to COVID-19. You hire back all three of your employees, but you only pay
them $2,000 a month. Over the 24 weeks
of the PPP period, you spend $36,000 on your employees, more than your PPP loan
amount. You claim the full $22,500 of your loan for forgiveness. When it comes to calculating your forgivable
amount, we look at each employee’s individual compensation. The 75% minimum
salary is $2,250, so you’re paying each person $250 less than that each month.
The difference is scaled up to a 24-week period, ($250 * 6), so $1,500 would be
deducted from the forgivable amount. Repeating that for each employee would
result in a total of $18,000 forgiven.
Forgiveness for
self-employed individuals
You
are entitled to use the PPP loan to replace lost compensation due to the
impacts of COVID-19. You are eligible to claim 2.5 months’ worth of your 2019
net profit to replace pay. If you didn’t have any other payroll expenses
factoring into your PPP loan amount, this means that your entire PPP loan could
be forgiven for the 24-week period. If
you are using an 8-week forgiveness period, you can claim 8 weeks’ worth of
your 2019 net profit as owner compensation replacement. The remaining PPP funds
will need to be spent on utilities, rent, and mortgage interest expenses in
order to be forgiven. If you have
mortgage interest, rent, or utilities expenses, you must have claimed or be
entitled to claim a deduction for those expenses on your 2019 Form 1040
Schedule C in order to claim them for forgiveness. For instance, if you worked in an office
space in 2019 and did not have a home office, you could not have claimed a
deduction on your home mortgage interest. Even if you are currently working at
home now, you are not eligible to claim home mortgage interest payments for
forgiveness.
Forgiveness for
partnerships
As
a general partner in a partnership, you are eligible to claim the same amount
you claimed as partner compensation expenses when you applied for the PPP. The maximum partner compensation is capped at
the 2019 Schedule K-1 net earnings from self-employment (reduced by claimed
section 179 expense deduction, unreimbursed partnership expenses, and depletion
from oil and gas properties), all multiplied by 0.9235.
Applying for loan
forgiveness after the coverage period
Applications
for loan forgiveness will be processed by your lender. You will need to fill
out a PPP Forgiveness Application form and submit that to your lender.
If
you had a PPP loan prior to the Paycheck Protection Program Flexibility Act
being signed, you can choose to use the original 8-week period instead of the
24-week period.
After
you submit your application for forgiveness, your lender is required by law to
provide you with a response within 60 days.
Documents required
for Forgiveness
These
are the required documents you will need to collect to provide with your PPP
forgiveness application. Your lender may have additional requirements depending
on their policies
Documents
verifying the number of full-time equivalent employees on payroll and their pay
rates, for the periods used to verify you met the staffing and pay requirements:
- Payroll reports
from your payroll provider
- Payroll tax filings
(Form 941)
- Income, payroll,
and unemployment insurance filings from your state
- Documents verifying
any retirement and health insurance contributions
- Documents verifying
that your eligible interest, rent, and utility payments were active in February
2020
Documents
verifying your eligible interest, rent, and utility payments (cancelled checks,
payment receipts, and account statements)
Good
documentation and bookkeeping will be critical for
getting your loan forgiven—you’ll need to keep track of eligible expenses and
their accompanying documentation over the 24 weeks. Your lender will likely
require these documents in digital format, so take the time to scan any paper
documents and keep backups of your digital records.
Furthermore,
your business will need to have complete financial statements at the end of
your fiscal year. Your lender and the SBA have the right to request and audit
your business’s financial documents and records.
If
you need a reliable bookkeeping solution in place, GJM & Co. can do
your bookkeeping for you, all online. Schedule
a Call today.
What if your
business is not approved for forgiveness?
Your
lender may allow you to provide additional documentation so they can revaluate
your request. Otherwise, your
outstanding balance will continue to accrue interest at 1%, for the remainder
of the 5-year period. There is no
prepayment penalty. You can pay off the outstanding balance at any time with no
additional fees.
If
you need help with your PPP Loan forgiveness, reach us today at info@gjmco.in
or Schedule
a Call.
Thanks & Best
regards,
Knowledge Base team
GJM
& Co.
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Accountants
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