What are the basic rules for PPP Loan Forgiveness?

In April, small/mid businesses all over Florida jumped at the chance to obtain SBA loans to help stay in business and fund payroll. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) Paycheck Protection Program (PPP) authorized billions for qualifying businesses to obtain loans for payroll, benefits, rent and other costs, and the key feature is the “forgiveness” aspect of the Program. The SBA has not issued the final regulations on forgiveness, but here are the basic rules we know so far.

What is forgivable? All PPP loan proceeds (plus accrued interest on the loan itself) are forgivable so long as they are spent on the following expenses incurred and paid during the eight-week period: 1) payroll costs, 2) utilities, 3) rent and 4)mortgage interest. Any amounts spent outside of the eight-week window are not forgivable. Payroll costs must account for 75 percent of the loan forgiveness amount.  Eligible payroll costs are capped at $15,385 maximum per employee (plus benefits).  Utilities, rent and mortgage interest must be in effect as of Feb. 15, 2020.  All eligible expenses must be incurred and paid during the eight week period.

When does the eight week period run?   It begins on the date that the SBA lender makes its first disbursement of PPP loan proceeds, which should occur within 10 calendar days from the date of loan approval.

How can loan forgiveness be reduced?  Your loan forgiveness (the amount the SBA will not require your company to repay) may be reduced according to two methods:  (1) a head-count reduction formula; and (2) a salary-reduction formula.

  • Headcount Reduction: your company maintains employment levels 1) for the eight-week period from the loan origination date or 2) by June 30, 2020, for the average number of full-time equivalents employees per month to, at recipient’s election, either a) the average number of full-time equivalent employees per month from Feb. 15, 2019, and ending on June 30, 2019 or b) the average number of full-time equivalent employees per month from Jan. 1, 2020, and ending on Feb. 29, 2020; or
  • Salary Reduction: your company maintains wages/salaries on each individual employee 1) for the eight-week period from the loan origination date or 2) by June 30, 2020, with a salary that at no time during any pay period in 2019 was greater than $100,000 on an annualized period, and at least 75 percent of what that individual employee’s wage/salary was in the most recent full quarter prior to the origination date of the loan.

What if a laid-off employee rejects recall to work?  An employee who rejects an offer of rehire will be excluded from your company’s calculations for employment level and wages/salaries for forgiveness reduction as long as the company made a good faith, written offer of rehire and the employee’s rejection of such offer is documented.  In addition, an employee that rejects a recall to work also loses eligibility for unemployment benefits.

What documentation can help your company obtain maximum forgiveness?  Companies receiving PPP funds should work closely with their CPA and corporate counsel.  Here are some tips from the experts.

  • Account for all eligible expenditures made over the eight-week period.
  • Monitor spending on eligible expenses throughout the forgiveness period to determine whether it meets the 25 percent limit at the end of the forgiveness period
  • Maintain records of all forgivable payments (payroll costs include all federal and state taxes paid)
  • Other expenses, should include invoice and payment receipt
  • Due to the “incurred and paid” requirement, you may need to run payroll on the last day of your eight week period to capture all eligible payroll expenditures.
  • Send recall letters to all laid-off employees and maintain proof of delivery, and obtain written responses from employees refusing your offer of rehire.
  • Keep checking with your SBA lender for updates to forgiveness regulations and a sample forgiveness packet.


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