* As of May 31, 2021, the Paycheck Protection Program (PPP) no longer accepts applications.
Under the Paycheck Protection Program (PPP) created by the CARES Act, loans can be canceled if borrowers use the proceeds to maintain their payroll and pay other specified expenses.
Congress recently changed the rules on loan forgiveness. The Treasury Department and the Small Business Administration are responsible for updating the application form and instructions for canceling the loan. You can find the most recent information here.
PPP borrowers should request a loan discount from the lender who processed the loan.
This guide is designed to help borrowers understand the process by which their loan forgiveness amount will be calculated and the overall approach to the loan forgiveness process.
* As of May 31, 2021, the Paycheck Protection Program (PPP) no longer accepts applications.
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HOW MUCH will be forgiven?
The process of calculating the loan forgiveness amount requires three steps:
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Determine the maximum loan cancellation amount possible based on the borrower’s expenses during the 24 weeks following the granting of the loan;
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Determine the amount, if any, by which the maximum loan exemption will be reduced due to a reduction in employment or wages and salaries; and
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Apply the 60% rule which requires that at least 60% of eligible loan forgiveness expenses be allocated to salary costs.
1. Determine the maximum amount of loan forgiveness possible
1A. Expenses eligible for loan forgiveness:
The following expenses incurred or paid by the borrower within 24 weeks of loan origination (see below to determine the 24 week period) are eligible for a rebate:
Salary expenditure, defined as:
- Compensation (not exceeding $ 46,154 per employee) in the form of:
- gross salary, gross salaries, gross commissions and tips,
- vacation, parental, family, medical or sick leave (other than leave for which the employer has been reimbursed under the Family First Coronavirus Response Act), and
- severance or dismissal indemnity;
- Employer contribution for collective health coverage for employees;
- Employer contribution for employee pension plans; and
- Payment of national and local taxes assessed on employee compensation.
To note: For an independent contractor or sole proprietor, labor costs include only salaries, commissions, income or net gains from self-employment or similar compensation.
Non-salary expenses, defined as:
- Mortgage interest payments for the business on real or personal property (debt contracted before February 15, 2020);
- The tenant’s rents for the business on movable or immovable property (lease in force before February 15, 2020); and
- Utility payments for the business for electricity, gas, water, transportation, telephone, or internet access (service started before February 15, 2020).
To note: For an independent contractor or sole proprietor, you must have claimed or be entitled to claim a deduction for these expenses on your Form 1040 Schedule C 2019 in order to claim them as expenses eligible for the PPP loan forgiveness in 2020.
1B. Identifying your 24 week period:
The 24 week period during which the expenses must be incurred or paid:
- The 24 weeks (168 days) starting from the day the PPP loan was disbursed or
- For borrowers with a bi-monthly (or more frequent) pay schedule, the 24 weeks (168 days) starting on the first day of the first pay period after the PPP loan is disbursed.
Advice: If you are using an online date calculator, remember to count the date of loan disbursement as part of the 168 days. For example, if the loan was disbursed on April 20, the last day of the 56 days would be October 4).
2. Determine the amount, if any, by which the maximum loan forgiveness will be reduced.
2A. Determine the reduction in loan forgiveness based on a reduction in wages or salaries of more than 25%:
For employees who earned $ 100,000 or less in 2019 (or were not employed by the borrower in 2019), the borrower’s loan forgiveness will be reduced for each employee whose average salary (salary or hourly wage) during the 24-week period is less than 75% of their average salary for the full quarter preceding the 24-week period (for most borrowers: January 1 to March 31, 2020). The amount of the reduction in the loan forgiveness is based on the amount of the reduction in salary.
Safe Harbor: Borrowers can avoid having their loan forgiveness reduced if they reinstate an employee’s salary. Specifically, if by December 31, 2020, the employee’s annual salary or hourly salary is equal to or greater than his annual salary or hourly salary as of February 15, 2020, the borrower’s loan forgiveness n is not reduced.
2B. Determine the reduction in loan forgiveness based on a reduction in the average number of employees.
The borrower’s loan forgiveness will be reduced if the average number of full-time equivalent (FTE) weekly employees during the 24-week period is less than the average number of FTEs during the reference period chosen by the borrower. Borrowers can choose between the following reference periods:
- February 15 to June 30, 2019,
- From January 1 to February 29, 2020, or
- In the case of a seasonal employer, a period of 12 consecutive weeks between May 1 and September 15, 2019
Exceptions: Borrowers will not be penalized for FTE reductions if any of the following occur:
- The borrower is unable to rehire people who were employees on February 15, 2020 and cannot hire employees of similar qualification for positions not deposited before December 31, 2020
- Borrower is able to document inability to return to February 15, 2020 activity level due to compliance with social distancing or other customer safety requirements
Safe Harbor: There is no reduction in the forgivable loan amount for borrowers who have reduced their FTEs during the period beginning February 15 and ending April 26, 2020, but who on or before April 31, 2020. December 2020, have restored the FTEs to the level existed on February 15.
3. Apply the 60% rule
A borrower’s maximum loan amount could also be reduced if the borrower’s eligible non-salary expenses exceed 40% of the total eligible expenses. The maximum allowable loan exemption corresponds to the salary costs divided by 0.60.
Example: If your salary expense for the 24-week period equals $ 60,000, your loan forgiveness cannot exceed $ 100,000. Any amount over $ 100,000 would mean your non-salary expense is more than 40% of the total rebate amount.
LOAN REMISSION AMOUNT
The borrower’s loan forgiveness will be equal to the lesser of the following amounts:
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The amount of your PPP loan
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The maximum loan forgiveness amount from Stage 1 minus any reduction from Stage 2
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The maximum loan forgiveness amount when eligible salary expenses are equal to or greater than 60% of the total forgiveness (i.e. your eligible salary expenses 0.6 0.60)
What happens to the UNFORGIVED loan amounts?
For any undelivered loan amount, the original loan terms – maximum loan of two years at an interest rate of 1% with deferred payments until the date the forgiveness amount is remitted to the lender – s’ will apply. (For loans made after June 4, 2020, the loan term is five years.)
There are no penalties or prepayment charges.
What are the REQUIREMENTS for record keeping?
Borrowers will be required to submit certain documents with their loan forgiveness request:
Payroll documents:
- Bank statement or reports from third-party payroll service providers documenting cash compensation paid to employees,
- Tax forms or equivalent reports from third-party payroll service providers for periods straddling the 24 week period for: (1) income tax returns (usually Form 941), and (2) quarterly payroll returns and tax returns unemployment insurance income, and
- Payment receipts, canceled checks or account statements documenting payment of employer contributions to health insurance and employee pension plan.
Full-time employees (FTEs):
- Documentation showing the number of FTEs for the reference period from step 2. Documents may include income tax returns (usually Form 941) and quarterly payroll returns and unemployment insurance tax returns .
Non-salary expenses:
- Commercial mortgage interest payments: amortization schedule and canceled checks or lender account statements from February 2020 and covering the 24 week period.
- Commercial rent and lease payments: copy of the current lease and canceled receipts or checks or account statements from the lessor from February 2020 and covering the 24 week period.
- Commercial utility payments: copy of invoices for February 2020 and the 24 week period and receipts, canceled checks or account statements
8 WEEK OPTION OPTION
Borrowers who received a loan before June 5, 2020 can choose to use the original week after origination to determine the discount.
ABILITY TO DEPOSIT IMPTS ON EMPLOYERS ‘WAGES
PPP borrowers can now also delay payment of the employer’s share of social charges until the end of the year.
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