If you’ve applied for and received a Paycheck Protection Program (PPP) Loan, you likely did so with the intent of applying for loan forgiveness. While the SBA officially released its PPP Loan Forgiveness application a few weeks ago, the parameters for forgiveness have been relaxed further with the passing of the Paycheck Protection Program Flexibility Act.
With these new clarifications, you may find yourself scratching your head as to exactly what you need to have prepared to apply for forgiveness. To help you sort through the application process, and updated forgiveness requirements, here’s a rundown of what costs are now determined eligible for forgiveness, how to calculate your forgiveness, and what’s needed to apply.
What is eligible for PPP loan forgiveness?
In order to receive 100% loan forgiveness, you need to utilize at least 60% of loan funds on eligible costs while maintaining your workforce and wages over 24-weeks. The broad definitions for forgivable expenses are now outlined in the following categories:
- Payroll costs
- Business rent or lease payments
- Interest payments on mortgages
- Utility payments
However, the SBA has made some additional clarifications around specific costs within the above categories that are also deemed eligible.
Leases of personal and real property qualify as rent
The updated forgiveness guidelines included within the application now specifies that lease payments for personal property qualify for forgiveness. This means that office equipment, automobiles, server space, and other items leased by businesses are classified as rental costs.
This also means that interest paid on these types of items qualifies under the mortgage interest payment classification as well. The only caveat is that the payments had to be made after February 15, 2020, within the designated 8-week period you utilized the PPP loan.
Internet, transportation and telephone payments qualify as utilities
Utilities also received an expanded listing to include “electricity, gas, water, transportation, telephone or internet access, for which service began before February 15, 2020.” While these may seem like typical utility costs, the addition of internet, telephone, and transportation costs is a welcome addition.
Now, transportation is still a fairly broad category and most likely includes the cost of gas, maintenance, and other typical auto expenses.
Non-cash compensation payroll costs are ineligible
One unfortunate clarification is that non-cash compensation isn’t eligible for forgiveness. This means that the following costs don’t qualify:
- Employer contributions for employee health insurance
- Employer contributions to employee retirement plans
- Employer state and local taxes assessed on employee compensation
Forgiveness reduction exceptions
As part of the application, the SBA also included several exceptions to the forgiveness-limitation rules. Basically this means that a borrower is not penalized for not maintaining their entire workforce with reduced loan forgiveness under the following circumstances:
- The borrower made a good-faith, written offer to rehire an employee that was then rejected.
- Is able to demonstrate an inability to hire similarly qualified employees on or before December 31, 2020; or
- Is able to demonstrate an inability to return to the same level of business activity that the business was operating prior to February 15, 2020.
- Any employees were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction of their hours.
Additionally, the SBA also recognizes a safe harbor that exempts some borrowers from losing loan forgiveness if both of the following conditions are met:
- Employee levels were reduced between February 15, 2020, and April 26, 2020.
- The number of employees is reinstated to the same level that existed before February 15, 2020, by no later than December 31, 2020.
Repayment terms extended
One major change with the passing of the flexibility act is the length of repayment terms on the PPP loans. Prior to it’s passing, small businesses had 2-years at 1% interest to repay the loan with a 6-month deferment once the SBA has verified forgiveness.
This falls on top of the 30-days it may take for your lender to verify forgiveness and an additional 60-days for the SBA to run their verification process. In short, you may have up to 7 1/2 months after applying for forgiveness, before you have to make your first payment.
The updated terms maintain the 1% interest rate but extend the repayment period to 5-years. Additionally, the act allows deferment of the employer’s payroll taxes for Social Security, which was previously unavailable under the original PPP legislature.
How to calculate PPP loan forgiveness
The Loan Forgiveness application includes a three-step calculation to find your eligible amount of forgiveness. Here’s what you’ll be working through:
- Your total eligible payroll and non-payroll costs spent over the 24-week period after receiving PPP funds.
- Reduction in total forgiveness if you failed to keep the same amount of full-time equivalent (FTE) employees or reduced wages by more than 25%.
- Testing if at least 60% of loan funds were used for payroll costs. If not, you’ll need to reduce the non-payroll costs you plan on submitting for forgiveness until you hit the 60/40% split.
You’ll be able to work through this process step-by-step within the application, but if you were able to maintain payroll and hit the 60/40% split, this shouldn’t be a difficult process. The only thing you may have to revisit is your FTE values before and after receiving funds from the PPP.
Determining your FTE
If you ended up letting employees go or aren’t quite sure what your FTE was before applying for the PPP, you’ll need to find these values for Step 2. The SBA allows for two different calculations for determining your FTE, a simple method, and an average method.
The simple method allocates a 1.0 value for those that work 40 hours per week and a .5 value for those that work anything less than 40 hours. Short and simple, it does mean that if you had employees working variable amounts of time instead of just full and half time, you will be missing out on hours worked that can hurt your forgiveness eligibility.
More than likely, you’ll want to go with the average method of calculation for a more accurate representation of your FTE. With this method, you take the average number of hours worked by each employee each week, divide by 40 and round to the nearest tenth. 40 hours is still represented as 1.0 FTE in this scenario and will accurately reflect your payroll hours before and after receiving the loan.
Documents necessary to apply for PPP loan forgiveness
Lastly, as part of the forgiveness process, you’ll need to supply supporting documentation to submit alongside your application. Depending on your situation, your level of forgiveness, and if you request an alternative coverage period, you may find that you’ll need to include more or fewer documents than what is mentioned here. But here’s what you’ll likely need to include:
- PPP Schedule: A worksheet that outlines payroll costs over the 24-week period and identifies each employee that was compensated over that time.
- Payroll Documentation: Bank accounts or third-party payroll service reports that back up the reported compensation from the PPP Schedule.
- Tax Forms: Payroll tax forms and state quarterly wage and unemployment filings that overlap with the 24-week covered period or alternative covered period.
- Contribution Statements: Payment receipts, canceled checks, or account statements that display the employer’s contribution toward employee health insurance and investment plans.
- Proof of Non-Payroll Costs: Evidence of payments made on non-payroll costs during the covered period and proof that an agreement or obligation existed before February 15, 2020.
- Proof of Mortgage Obligation: For mortgage interest payments, you must produce an amortized payment schedule and receipts for each payment during the coverage period.
If you’re still waiting on your PPP application to be approved or the funds have finally arrived, the best thing you can do right now is document everything and prepare to actively manage, forecast and track the use of your loan. It ensures that you are using the funds effectively and always have records of how it was used to make applying for forgiveness that much easier.
If the idea of manually maintaining your loan alongside keeping your business running sounds like a frustrating exercise, you may want to consider using a tool like LivePlan. Not only does LivePlan help keep all of your business planning documents in order, but it can also be used to help you manage your loan and calculate how much may be forgiven.
Easily develop multiple forecast scenarios around your loan, actively track its use, and produce the necessary financial documents for reimbursement. You can even sync it to your accounting solution, such as QuickBooks or Xero, to easily track the forecast versus actual results there.
Additional Planning Resources
If a tool like LivePlan is currently out of the question for your business, we have plenty of free resources to help you out.
Income Statement (P&L) Download: Another free Excel template that will help you create an expense budget and measure your profitability.
Cash Flow Template Download: Forecasting your cash flow is important when your business situation changes. You can use this to plan for the use of your PPP loan as well as what the rest of 2020 looks like for your business.