Business Law Breakdown: Payroll Protection Act Loan Forgiveness

Hi, I’m Jim Howicz, partner with Richards Rodriguez & Skeith. It’s July 2020, and if you’re a regular follower of our series I’m going to try to do something different. Because of the coronavirus, we’ve been away from the office for a few months. I’m recording this video at home and addressing a topic specific to the situation we’re all in.

Today, I’m going to talk about the Payroll Protection Act and how your business can achieve full loan forgiveness. There have been a number of changes to this program since it was introduced. The changes were intended to make it easier for businesses to use the funds for payroll and expenses, and have those funds be completely forgiven.

Before we talk about loan forgiveness, let’s recap the basics of the PPP:

The Payroll Protection Program (PPP)

Your PPP loan amount was based on 2.5 times your average monthly payroll cost for 2019. The purpose of the loan was to help your business cover eight weeks of payroll and expenses, specifically mortgage expenses, rent, and utilities, as long as these expenses were set up before February 15, 2020.

Now that you have your loan proceeds, how do you have to spend that money to make sure that the conditions for loan forgiveness are met? Remember, these requirements are spelled out in the loan forgiveness application you can get online from the SBA, or from your lender.

Determining Eligible Expenses

First, you have to spend the funds on eligible expenses incurred over 24 weeks, starting from the day you received the funds from your lender or December 31^st, 2020, whichever comes sooner. What that means, is that loans dispersed after July 16^th can’t take advantage of that 24-week spending period. At least 60% of your loan must be used for payroll costs. If you do not use 60% for payroll, your forgivable amount will scale in proportion to the amount that you spent on payroll.

Now, last month there was a ruling that said that if you didn’t spend 60% or more on payroll, nothing could be forgiven. Thankfully, that rule has been changed to allow for partial forgiveness. Remember that payroll includes more than just salary. You can include some benefits and insurance expenses. Payments to independent contractors cannot be included in payroll costs, however. You must maintain the number of employees on your payroll at or above pre-PPP loan levels in order to have full forgiveness.

Calculating Payroll

To do this, a little bit of math will be required. You need to compare the ratio of the average number of FTE for the eight-week period following your initial loan disbursement, against the average number of FTE during two time periods before you were eligible for the PPP loan. If you did not maintain your headcount, your forgivable expenses will be reduced proportionally.

There are a few twists on this, however. You can rehire laid-off employees. In some instances, laid-off employees that are offered reemployment and don’t come back are excluded from this calculation, as are employees that are fired for cause or resign or reduce their hours voluntarily. You may be able to exclude jobs for which you were unable to hire qualified employees or unfilled positions, or jobs for employees that were not able to come back due to safety requirements. If you are a seasonal employer, the rules are a little different.

There are also salary requirements. Your forgiveness requires that you maintain at least 75% of your total salary under $100,000 for each employee. If you do not maintain that level, forgiveness will be reduced by the difference between that employee’s current pay and 75% of their original pay. In certain instances, this reduced pay can be reinstated. Similar forgiveness provisions are in place for self-employed individuals and partnerships.

Record-Keeping and Documentation Requirements

The last thing I want to cover is the record-keeping and the document requirements that you’ll need to submit with your forgiveness application. Your lender may have additional requirements. Make sure you have documents verifying the number of full-time equivalent employees on the payroll and their pay rates for the time period we discussed.

You will need to hang onto the following:

• Payroll reports from your payroll provider
• Payroll tax filings
• Income, payroll, and unemployment insurance filings from your state
• Documents that verify any retirement and health insurance contributions
• Documents that verify your eligible interest, rent, and utility payments as they were in February 2020
• Documents that verify eligible interest, rent, and utility payments during the forgiveness period, such as canceled checks, payment receipts, and accounts statements.

I can’t stress enough that good record-keeping and bookkeeping will be critical to getting your loan forgiven.

In addition to all that, your business will need to have complete financial statements at the end of your fiscal year. This is because your lender and the SBA have the right to request and audit your business’s financial documents and records under the terms of the loan that you signed.

There you have it. In order to get PPP loan forgiveness, you’re going to need to complete a forgiveness application form and submit it to your lender. Please know that we are tracking this topic and will try to keep you apprised of any future updates and changes on this evolving topic as it happens.

For more information on this topic, contact our office today.