PPP Loan Forgiveness — A Step-by-Step Guide

On 6/22/20 the SBA issue a new set of Interim Finals Rules (one of many) that helped to clarify some issues but not all. Here is what you need to know:

As of now, you have 8 weeks (56 days) from date money hits your bank account to spend the funds (Covered Period). But you can elect to start the 8 weeks for the payroll costs from the first payroll period date after you receive the funds (Alternative Payroll Covered Period (APCP)) instead. For those that receive funds after 6/5, you automatically have 24 weeks to spend the funds. Those that received the funds pre 6/5 can elect to use the 24 weeks also.

  • The APCP only applies to paying payroll costs. For non-payroll costs, you must use the Covered period dates.
  • Must spend money on Payroll costs, interest on mortgage (pre 2/15/20) on real or personal business property, rent (for real and personal property (equipment, car), Utilities (electric, gas, water, transportation, telephone, internet, but not cable). It seems that paying these to a related party is ok as long as the agreement existed pre 2/15/20.
  • Money is supposed to be spent on “Costs incurred and payments made.” The new guidance says Costs incurred or payments made. This allows you to pay back bills (how far back not clear) and prepay future bills if paid in the next billing cycle after the 8-week period ends.
  • Minimum of 60% of the funds (can be higher) must be spent on Payroll costs and a max of 40% can be spent on Rent, etc.

What are considered payroll costs under PPP loans?

  • Salaries, Wages, commissions, and Tips. This includes bonuses paid to employees.
  • For partnerships-the partners share of guaranteed payment and net profit. This is reduced by any section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties multiplied by 0.9235. You still have 24 weeks to spend the money. The amount allowed to be spent is based on 8 weeks of net profit up to $15,385, or 2.5 months of 2019 net profit up to $20,383 for a 24week covered period
  • For self-employed individuals, independent contractors, and all Schedule C filers, it includes the net profit (line 31 of the Schedule C) for 2019. The maximum amounts are the same as for partnerships
  • The new interim final rule from the SBA released 6/16 says companies can spend up to $15,385 for the 8 weeks or $46,154 over the extended 24-week period for all non-owner employees
  • For owner-employees (S Corporations) compensation cannot exceed the lesser of $15,385 or $20,383 as per partnerships above. This is in total across ALL
  • For owner-employees (C Corporations) compensation is capped and 2019 compensation, health insurance, and retirement contributions.
  • It does NOT include the Employer portion of Social security and Medicare taxes.
  • It does NOT include people paid as 1099 contractors.
  • State and local employer taxes (unemployment) are assessed on compensation.
  • Health Insurance of all employees. It does not apply to partners, S corporation shareholders, and Schedule C filers.
  • Employer pension (profit sharing/SEP/Defined benefit) payments for benefits of all employees. Does NOT include employee 401K payments. ALSO, does not apply to partners and Schedule C filers. For S corporation Owner-employees cannot exceed the 2019 prorated amount.

Recordkeeping of PPP funds used

  • ASSUME YOU WILL BE AUDITED! Keep detailed records. The banks have the last word in what they will ask for in determining forgiveness and no one is exactly clear on what they will ask for.
  • Set up a separate bank account and only use the funds for the stated purpose. Keep copies of all bills you pay and payments (utility bills, rent bills, etc.). You may need to show proof leases that existed pre 2/15/20.
  • Keep copies of the bank statement as well as any other statements that may be used to pay a bill (e.g. A credit card statement that may have your phone bill on it).
  • Keep payroll records, payroll tax filing, and employee payment records
  • Use a ledger to keep track of the details of total expenditures. Or if using Quickbooks use classes to keep track of all PPP payments.
  • Alternatively use a separate excel sheet to keep track of the funds used.

Download our free sample schedule of PPP payments as an Excel spreadsheet.

Calculation of PPP forgiveness amount

On 6/17 the SBA released two new applications for forgiveness that Banks are to give to borrowers to complete. Form 3508 and Form 3508EZ.

If a borrower can check one of 3 boxes it can use the Form 3508EZ which basically a simple two-page form:

  1. The borrower Is self-employed (Schedule C ), had no employee at the time of the PPP loan app, and did not include any employee salaries in the computation of the average monthly payroll in the borrower application.
  2. if you had employees but you did not reduce salary/wages by more than 25% during the specified Covered period or APCP and did not reduce the number of employees or average paid hours during the period compared to the period between 1/1/20-3/31/20
  3. did not reduce salary/wages by more than 25% during the same periods as number 2 above and was unable to operate during the covered period or APCP due to Compliance with requirements with the Govt. edicts.

If you do not meet one of the three conditions above then you will have to file a regular Form 3508. While it has been reduced from 11 pages to 5 it is still very complicated and confusing to fill out.

There is still a requirement that there be no reduction in FTE employees during the applicable time frame for Form 3508. For both the 3508EZ and the 3508 they ask the number of employees at the time you filed the loan application and at the time you file the forgiveness application. However, the act did extend the date to replace fulltime equivalent (FTE) employees from June 30, 2020, to December 31, 2020.

While the revised law allows you to extend to 24 weeks the use of funds in some cases it means that the borrower may have to wait until after 12/31/20 to file the application for forgiveness because some certifications may not be known until 12/31/20.

But if you use the funds in 12 weeks you do not have to wait until 12/31/20 if you have everything you need

Also, while the period for filing has been extended to after 12/31/20, both applications have an expiration date of 10/31/20.

This makes no sense.


Other related items

The amount of the loan the is forgiven will not be taxable to you. But also, the expenses that are paid with the PPP funds are not deductible.

You must keep all records relating to the loan and expenditures for 6 years.

To the extent that you received any money from the SBA from the EIDL grant that amount will be deducted from the amount to be forgiven.

The amount not forgiven will be a loan at 1% interest paid back over 5 years from the date the loan forgiveness application is approved. For those who received their funds pre 6/5 you can extend the repayment to 5 years if you and the bank agree. You have a deferral period of one year before you have to begin to pay the loan back.

The new bill also says that if you really cannot resurrect your business because of the pandemic or the economy they are not going to withhold forgiveness.

Specifically, for a firm not to lose forgiveness due to a drop in headcount it needs

“to be able to document an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020; and an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020…”

Or, alternatively, the firm needs to be able

“to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.”

The Bill also includes a provision to let the companies that get forgiveness defer payment of the employer portion of the payroll taxes.


Who decides the forgiveness amount?

Your request for forgiveness will be submitted to the bank that lent you the funds. It appears at this moment that they have a lot of latitude to decide what and how much to forgive. The bank has 60 days after receipt of your application and supporting documentation to decide how much will be forgiven.


Overview of the application

BE AWARE – As stated the law is still confusing in many ways and there are numerous calls from Congress and others to change the law to make it user friendly and more favorable.

The SBA continues to come out with guidance. We expect a lot more guidance to come out. Also, Congress is discussing additional provisions to make forgiveness easier.

And though Form 3508EZ has been greatly simplified the process for many people there are still many questions. And more so with the regular form 3508.

We are here to help you if needed. Contact us for a free 30-minute consultation.

Stay Tuned.