PPP Borrower Loan Forgiveness: What Comes Next?
As lenders got their transmission websites up and running, the Paycheck Protection Program (PPP) went from a trickle to a flood of applications. While initial funding was fully committed, new appropriation has passed Congress to re-open the program (the second round went live on April 27, 2020).
Now that the application is filed, it’s natural for a borrower to think about what’s next. Processing times will vary, and applying some leading practices will allow for an easier implementation of the program and provide transparency during the loan forgiveness process.
Traceability of Proceeds
PPP loans are forgivable contingent on the use of the loan proceeds. For this reason, it may make sense for borrowers to establish a separate operating account to hold these funds. Making covered payments from a “PPP Account” increases transparency over their use and simplifies accounting at the close of the loan period.
As a reminder, a minimum of 75 percent of the loan amount must be used to cover payroll costs, inclusive of healthcare benefits. The remaining 25 percent or less may be used to cover interest on mortgage obligations (incurred prior to February 15, 2020), rent (on agreements in force before February 15, 2020), and utilities (where service began prior to February 15, 2020).
In order to have the loan assessed for forgiveness, borrowers must present the information below for the eight-week period following the loan origination date. (If the loan origination date is Wednesday, April 22, 2020, the eight-week period following this date would end on Tuesday, June 16, 2020).
- Copies of payroll tax forms on file with the IRS (including forms 941, 940, state income and unemployment tax filing reports) for the eight-week period following loan origination;
- Copies of payroll reports for each pay period for the eight-week period following loan origination. Gross wages, including Paid Time Off (PTO), which may include vacation time, sick leave, and other PTO, should be reflected;
- Documentation reflecting the health insurance premiums paid by the company under a group health plan (including owners of the company) for the eight-week period following loan origination (monthly invoices should be fine);
- Documentation of all retirement plan funding by the employer for the eight weeks following origination of the loan should work. Copies of work papers, schedules, and remittances to the retirement plan administrator should be available;
- Copies of all lease agreements for real estate and tangible personal property and proof of payment for the eight-week period following loan origination (if PPP funds were used to pay the lease);
- Copies of all statements of interest paid on debt obligations incurred during the eight-week period following the loan origination and proof of payment on the same obligations prior to February 15, 2020; and
- Copies of cancelled checks, statements, or other evidence of utilities paid during the eight-week period following the loan origination date.
PPP loan terms are set in such a way that the loan is either partially or wholly forgivable if certain conditions are met. Borrowers are responsible for providing documentation to their lender in support of a forgiveness amount. Lenders will need to verify the forgiveness amount and provide it to the SBA. Any portion of the loan amount that is not forgiven converts to a two-year term loan with 1 percent interest.
Here, we offer a downloadable forgiveness calculation guide to help demonstrate how to run calculations on a potential loan amount. Within the worksheet, there are separate tabs to allow for the calculation of payroll expenses, healthcare expenses, retirement benefits, as well as borrower data requirements.
Some things to remember:
- Payroll forgiveness is limited at an annualized $100,000 per employee – which is an eight-week maximum of $15,385, as well as covered healthcare and retirement expenses for employees.
- Owner compensation replacement should be calculated based on a 2019 net profit, with forgiveness limited to eight weeks of 2019 net profit, excluding sick leave equivalents.
- Once the 75 percent payroll threshold has been reached, borrowers may apply for forgiveness on mortgage interest on real or personal property, provided the obligation was incurred before February 15, 2020. Similarly, rent payments on lease agreements in force before February 15, 2020 and utility payments may also be paid from PPP loan proceeds and are eligible for forgiveness. In all of these cases, the utilities, lease payments, and mortgage interest must be eligible for deduction on Form 1040 Schedule C, under either business mortgage, business rent, or business utility payments.
- Self-employed individuals are entitled to a maximum amount of loan forgiveness of eight weeks of 2019 profit (for those filing a Schedule C).
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