If you received a loan from the Paycheck Protection Program (PPP), your next objective should be to maximize the forgivable portion of the loan. On June 5, 2020 President Trump signed into law the Paycheck Protection Program Flexibility Act (PPPFA) to make it easier for borrowers to qualify for forgiveness.
The PPPFA amends the Small Business Act and CARES Act to modify certain provisions under the PPP to give borrowers more freedom in how and when loan funds are spent while retaining the possibility of full forgiveness. For the loan forgiveness to be approved, you will need to work with your lender and complete a loan forgiveness application. Borrowers need to carefully monitor the expenses paid during the Covered Period and collect the needed documentation showing the funds were used as required.
In general terms, amounts spent during the Covered Period, on payroll, rent, mortgage interest, and utilities all qualify for loan forgiveness if the payroll portion makes up 60 percent of the loan and the other expenses make up the other 40 percent. Of course, nothing is that simple. So, let’s take a closer look.
What is the Covered Period? In short, it is the time frame that you must spend the PPP funds. The PPPFA extended the Covered Period from eight weeks to 24 weeks, or December 31, 2020, whichever is earlier. For most businesses, the Covered Period will begin when the funds are received (the deposit date). Others may opt to choose an alternative start date (the Alternative Payroll Covered Period) based on the first pay date after the PPP funds are deposited. This option is only available to employers who run payroll biweekly or more frequently.
What are qualifying costs? First, let’s look at payroll costs. Then, we’ll look at nonpayroll costs. The chart below identifies payroll costs that are eligible or excluded from the forgivable portion of the loan. For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the Covered Period. Count payroll costs that were both paid and incurred only once.
Eligible payroll costs:
• Salaries, wages, and commissions paid
• Cash tips and equivalent paid
• Vacation or sick leave paid
• Dismissal or separation expenses paid
• Company paid health benefits
• Company paid retirement benefits
• Company paid SUTA
Excluded payroll costs:
• Compensation paid to employees residing outside U.S.
• Qualified sick leave wages under Families First Act
• Qualified family leave wages under Families First Act
• Compensation paid in excess of $100,000 per employee as prorated for the borrower’s Covered Period, including owners.1
1 If 24-week Covered Period applies, compensation for owners is capped at 2.5 months’ worth of 2019 compensation, or $20,833 per individual. If 8-week Covered Period applies, compensation for owners is capped at 8 weeks’ worth of 2019 compensation, or $15,385 per individual.
Payroll costs are considered paid on the day that paychecks are distributed, or the Borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period).
Your lender will require documentation to support your claim for qualified expenses. You will be asked to provide payroll registers, health insurance premium invoices, calculations for retirement benefits paid, SUTA tax forms and/or general ledger detail – plus cancelled checks or debit advices showing these amounts were actually paid.
Note: Payroll registers come in many formats. Make sure the reports you include contain details for gross wages paid, vacation/sick leave paid, dismissal/separation expenses paid, identifies any employees residing outside the U.S., and sick leave or family leave wages paid under the Families First Act.
Next, let’s look at the other qualifying costs:
Eligible nonpayroll costs:
• Utilities paid – including gas, electric, water, transportation, telephone, and Internet for which service began before 2/15/2020
• Rent paid – lease must have been signed before 2/15/2020
• Mortgage interest paid on real and/or personal property – if loan closed before 2/15/2020
An eligible nonpayroll cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.
To document these expenses for your lender, you will need to attach utility bills, executed lease agreements, and copies of loan statements – plus cancelled checks or debit advices showing when payments were made.
What reduces the forgivable portion of the loan? There are four main criteria that will trigger a reduction of your forgivable portion of the loan.
1. Payroll Costs Don’t Exceed 60 percent – If your payroll costs make up less than 60 percent of the original loan balance, there will be a proportionate reduction to the forgivable portion of the loan, subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs. Prior to enactment of the PPPFA, the percentage was 75 percent.
2. Reduction in Compensation – If you have employees who experienced a wage reduction greater than 25 percent of their annualized income, there will be a proportionate reduction to the forgivable portion of the loan. If there are salary or wage reductions of greater than 25 percent between February 15 and April 26, 2020, the borrower is exempt from the loan forgiveness reduction rule if the salary or wage reductions are restored by December 31, 2020 (extended from June 30, 2020 by the PPPFA).
3. Reduction in Employees – If you experienced a reduction in the number of full-time equivalent (FTE) employees when compared to your testing period, there will be a proportionate reduction to the forgivable portion of the loan. If a borrower lowered FTE employee levels between February 15 and April 26, 2020 but restored the FTE employee level by December 31, 2020, they will not be subject to this reduction (extended from June 30, 2020 by the PPPFA). The PPPFA also added a safe harbor from reductions in loan forgiveness so that the forgivable amount must be determined without regard to a reduction in the number of employees if the recipient is (1) unable to rehire former employees and is unable to hire similarly qualified employees by December 31, 2020, or (2) unable to return to the same level of business activity due to compliance with federal requirements or guidance related to COVID-19.
4. EIDL Emergency Grant Reduction – Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.
What happens if part of my loan is not forgiven? You will be expected to repay the unforgiven portion of your loan within five years for loans assigned a loan number by SBA on or after June 5, 2020. Loans prior to this date continue to have a 2-year repayment period. The PPPFA also changed the deferral period in which loan payments (including principal, interest, and loan fees) must begin from six months after the end of the Covered Period to the date the Small Business Administration sends the borrower’s loan forgiveness amount to the lender (or, if the borrower does not apply for loan forgiveness 10 months after the end of the borrower’s loan forgiveness covered period). Interest will accrue at one percent beginning with the date the funds were deposited. There are no prepayment penalties or fees.
Are there other revisions made by PPPFA? Yes, the PPPFA eliminates a provision that makes a paycheck protection loan recipient who has such indebtedness forgiven ineligible to defer payroll tax payments.
Will additional guidance and modified forms be issued? Yes, SBA, in consultation with Treasury, will promptly issue rules and guidance, a modified borrower application form, and a modified loan forgiveness application implementing these legislative amendments to the PPP.
Contact the professionals at Gilliam Bell Moser if you have any questions.
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