PPP loan forgiveness

The stay-at-home orders required by nearly every state from March through May were necessary to gain traction against the coronavirus, but the businesses that were forced to suspend or significantly alter their operations found themselves suddenly unable to stay afloat. 

To provide support for businesses, Congress authorized the Paycheck Protection Program (PPP), which provided up to $349 billion in forgivable loans to small businesses so they could continue paying their employees during COVID-19.  The Paycheck Protection Program was later amended with the Paycheck Protection Program Flexibility Act on June 4, 2020 to address some of the issues with the original program. 

PPP is an important resource for small businesses right now. However, business owners should be strategic in using it. Getting a PPP loan forgiven is contingent on a number of factors, balancing the requirements of the loan with the current challenges of the economic landscape. 

What is the Paycheck Protection Program?

PPP is available for any business with fewer than 500 employees. This includes nonprofits, self-employed individuals, independent contractors, sole proprietorships, veterans organizations, and tribal business concerns.

The amount of PPP you can receive is based on your 2019 average monthly payroll. Applicants can get 2.5x that amount for up to eight weeks of payroll. Funds from PPP are primarily intended to support keeping employees on businesses’ payrolls. However, they can be used for other eligible expenses: mortgage interest, rent, and utilities. 

Program conditions

24 weeks of coverage 

Originally, businesses had eight weeks to use the PPP funds. However, this timeline has been extended under the Paycheck Protection Program Flexibility Act. Businesses now have 24 weeks to use the funds from PPP, although they can opt to use the original eight week period if they prefer. 

The clock on this starts on the day you receive your first loan payment. There is a cutoff date, though: December 31, 2020. If your first loan payment is disbursed on July 16 or later, you won’t be able to take full advantage of the 24 week period.

The 60/40 rules 

You have to use at least 60% of your loan to cover payroll costs, though this doesn’t include payments to independent contractors. 40% can be used to cover other eligible costs. 

Note: PPP initially was a 75/25 distribution of costs, but was updated with the second version of PPP. 

Staff and pay requirements requirements 

You have to retain the number of full-time equivalent employees (FTE) on your payroll. This number is calculated by 

  • Dividing the your average number of FTE employees during the eight weeks following your loan disbursement by the average number of employees between February 15-June 2019. 
  • Do the same for your average number of employees during the eight weeks following your loan disbursement by the average number of employees between January 1-February 29, 2020

The larger of the numbers is the number of employees you need to maintain. 

You’ve also got to maintain at least 75% of their total salary. If the employee’s pay drops to less than 75% of that amount, this will impact the amount of your loan that can be forgiven. 

Rehiring: Exemptions and grace period

PPP was intended to help you bring employees back onto your payroll. You need to make a good faith effort to rehire any staff that were laid off or furloughed. Pay should be reinstated with no more than a 25% decrease to meet PPP requirements. (Though, let’s note, these changes need to be made due to COVID-19) However, if your employee turns down your reemployment offer, you may be allowed to exclude them. 

Getting your loan forgiven FAQ

If you meet all of the conditions listed above for a PPP loan, you are eligible to have 100 percent of your loan forgiven. However, you’ll owe money when your loan is due if the funds have been used for anything other than payroll expenses and other eligible costs.

 Because it’s like that subscription will be high, it’s anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.

What actions will reduce my forgiveness amount?

The amount of your loan that can be forgiven is reduced if:

  • Your number of FTE employees is reduced
  • Employee salaries or hourly wages are reduced by more than 25% 
  • Eligible non-payroll expenses exceed 25% of the total eligible expenses

Is loan forgiveness automatic? 

No, in order to have your loan forgiven, you have to apply for forgiveness through your lender. You;ll need to provide documentation on full time equivalent employees, pay rates, mortgage or lease and utility obligations. Your lender will have up to 60 days to make a decision.  

What if I have to fire an employee or they quit? How does that impact my loan forgiveness?

It depends on a number of factors, but you may qualify for exemption if your employee is fired for cause or if they voluntarily resigned. Keep in mind that if you aren’t able to maintain 100% of your FTE workforce over the loan period, forgiveness is reduced proportionally rather than all together. Moreover, you have until December 31 to return your business to full staffing levels.  

If my lender denies my application for forgiveness, can I appeal? 

Yes, you can. If your borrower denies your application, you can ask the SBA to review the decision as long as the request is made within 30 days of the notice of denial.  

What’s the timeline on all of this?

The deadline for PPP loan applications was June 30, 2020. However, there are still important deadlines you need to keep in mind. 

  • The deadline to rehire employees under PPP has been extended six months, from June 30 to December 31, 2020. 
  • If a business’ loan isn’t forgiven, they have five years to repay the loan. 
  • Businesses must apply for loan forgiveness by December 31. However, they can choose to apply early if they choose. 

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