Paycheck Protection Program Loan Forgiveness Process
The Paycheck Protection Program (PPP) was enacted as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act in March 2020 to assist small employers with the cost of maintaining their employees during the COVID-19 crisis through a loan from the Small Business Association.
This article will cover how forgiveness of the loan is able to be achieved and the process of applying for forgiveness.
Loan Forgiveness Form:
Originally, the Small Business Administration (SBA) required Form 3508 to be filled out and sent to the lender to document and obtain loan forgiveness. The form was “one size fits all” and was to be filled out in the same manner whether a borrower had a loan for $10,000 or $10,000,000. To simplify the loan forgiveness process for both the borrower and lender, Form 3508EZ was introduced. A company must meet certain criteria to fill out Form 3508EZ. The company must meet one of the three requirements listed below.
- If the borrower is self-employed or an independent contractor with no employees, they can fill out this form automatically. If they have employees and/or are not self-employed, criteria 2 or 3 must be evaluated.
- If the borrower did not reduce annual salary or hourly wages for each employee by more than 25% during the covered period as compared to the first quarter of 2020 (1/1/2020 – 3/31/2020) and the borrower did not reduce the number of employees employed between January 1, 2020 and the end of the covered period, the 3508EZ form can be filled out.
- If the borrower did not reduce annual salary or hourly wages for each employee by more than 25% during the covered period as compared to the first quarter of 2020 (1/1/2020 – 3/31/2020) and the business was unable to operate at the same level of activity during the covered period as compared to the period prior to February 15th due to laws and regulations implemented for COVID 19, the 3508EZ form can be filled out.
For a PPP loan to be fully forgiven, the entire loan must be used for eligible expenses. At a minimum, at least 60% must be used for payroll costs which generally includes salaries, wages, commissions, tips, bonuses or hazard pay, employee benefits (vacation, parental, family, medical, or sick leave, separation pay, group health care coverage, and retirement benefits), and state and local taxes assessed on compensation. The remaining 40% may be used to pay interest on mortgages (mortgages incurred before February 15, 2020), rent expense (leases dated before February 15, 2020) and utilities (service agreements dated before February 15, 2020).
Along with the PPP application form, the SBA is requiring documentation showing the following:
- Documentation verifying the eligible cash compensation and non-cash benefit payments for the covered period which may consist of the following:
- Bank account statements or payroll reports showing the amount of cash compensation paid to employees, payroll tax forms for the periods that overlap with the covered period including form 941 and state quarterly business and individual employee wage reporting and unemployment insurance tax filings and payment receipts, cancelled checks, or account statements showing the amount of any employer contributions to employee health insurance and retirement plans which were included in the forgiveness amount
- Documentation supporting the FTE used in the reference period chosen. These may include payroll tax filings, state quarterly business and individual employee wage reporting and unemployment insurance tax filings.
- Documentation for business mortgage interest payments including a copy of lender amortization schedule and receipts or cancelled checks showing eligible payments made in the covered period.
- Documentation for business rent or lease payments including a copy of the current lease agreement and receipts or cancelled checks showing eligible payments made in the covered period.
- Documentation for business utility payments including a copy of invoices after February 2020 and those paid during the covered period along with receipts or cancelled check.
Lenders may have additional requirements for documentation.
The covered period is the amount of time a business has to spend their PPP loan funds. Borrowers who received loans prior to June 5, 2020 are able to elect an 8-week covered period or a 24-week covered period. Borrowers who received the loan after June 5, 2020 must use a 24-week covered period. The most important factor to consider when choosing to elect an 8-week or 24-week covered period, if eligible, is to consider whether or not the borrower will be able to restore full-time equivalents and salaries to levels as compared to a reference period (either 1/1/2020 to 2/28/2020 or 2/15/2019 to 6/30/2019).
Full-Time Equivalent Employees (FTE):
During the covered period, the employer must monitor and calculate FTE per pay period and compare this figure to a reference period. A full-time equivalent employee is determined by evaluating how many employees work full time (40 hours a week or more) or part-time (less than 40 hours a week). The rationale is that because the employer received the PPP loan, they can bring back and/or pay employees for the 8 or 24 weeks at the same level that they were able to operate during the reference period.
Example: 1/1/2020 to 2/28/2020 – there were 12 FTE 2/15/2019 to 6/30/2019 – there were 11 FTE. Covered period – there were 11 FTE. For this scenario, the employer would select the 2019 reference period instead of the 2020 reference period to maximize loan forgiveness. While the 24-week covered period provides more time to spend the funds on eligible expenses, there is a longer period that FTE must be maintained to maximize loan forgiveness.
During the covered period, the employer must also pay employees at least 75% of the rate they were paid on average between 1/1/2020 and 3/31/2020. Any decrease in hourly pay or salary that exceeds 25% will limit the amount of loan forgiveness. This only applies to employees who were paid less than $100,000 in 2019.
Example: 1/1/2020 – 3/31/2020 – John worked 40 hours a week at a rate of $15/hour. During the covered period John worked 40 hours a week at a rate of $13/hour. In this example, wages were decreased by $2.00 per hour or 13%. There was not enough of a salary reduction to limit loan forgiveness. The hourly wage would have to be reduced to $11.25/hour or under to decrease loan forgiveness.
When to Apply:
Some lenders have begun accepting loan forgiveness applications. A borrower should begin to consider applying at the end of the 8 week covered period or when all funds have been used for the 24-week covered period. It is not necessary to wait for the completion of the 24-week covered period to submit the loan forgiveness application. Please remember that FTE and salary levels must be maintained to the end of the covered period selected. Applications are due no later than 10 months after the covered period has ended.
A bill called the Paycheck Protection Small Business Forgiveness Act has been introduced into the Senate that would forgive all PPP borrowers who have received loans for $150,000 or less as long as they sign and submit to the lender an attestation complying a good faith effort under the requirements.
Do you need help?
At Melanson, we are committed to ensuring you the highest level of professional accounting services including assistance with the loan forgiveness application as well as the personal touch of a trusted advisor. Contact us today to find out how we can partner with you!
Authors: Samantha Binning, CPA and Jonathan Cohen-Gorczyca, CPA
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