It’s no secret that the coronavirus has substantially impacted our economy. If you’re a business owner, chances are you applied for one of the business relief programs that were made available as part of the CARES Act (Coronavirus Aid, Relief, and Economic Security Act), a $2 trillion stimulus package that went into effect on March 27, 2020. One of the temporary programs of the stimulus package was the Paycheck Protection Program (PPP) loan. Though the PPP loan application deadline has been extended to August 8, 2020, the businesses that applied for the loan in April and May are now turning their attention to the Loan Forgiveness application. So, what exactly is the PPP loan and what do you need to know about the forgiveness application process?
What is the Paycheck Protection Program Loan?
At its foundation, the PPP loan was created with one simple set of rules: businesses who qualified to receive the loan have 8 weeks to spend the loan proceeds on payroll and state payroll taxes and certain non-payroll expenses, which include rent, utilities, and mortgage interest (if applicable), with a maximum spend of 25% on the non-payroll items. However, as part of the PPP Flexibility Act, the SBA added in a 24-week option and gave businesses a little more flexibility by allowing them to spend up to 40% on the specified non-payroll expenses during that time. At the end of the 8 (or 24) week period, the business may have some or all of the loan forgiven depending on how the money was spent and whether the number of full-time equivalent employees changed as compared to certain specified periods prior to the pandemic.
The PPP Loan Forgiveness Application
Once the 8- or 24-week period is over, businesses will have to apply for forgiveness by filling out an application. Depending on your specific circumstances, you will either have to fill out the easier, shorter version of the form, or the more complicated, longer-form version. Regardless of length, there are several criteria businesses will need to meet to get their loans forgiven.
This process starts by gathering documentation for payroll and non-payroll expenses, to prove how businesses spent the money. The forgiveness application also requires that the business calculate the average full-time equivalent (FTE) employee information for a specific period(s) prior to the PPP loan start date, the “comparison period,” and the PPP period itself. Businesses will also have to disclose if they have any highly compensated employees defined as those making more than $100,000 annually and how much they were paid during the PPP period.
Although there are other requirements that determine how much of your loan is forgiven, the two main questions you will need to answer are:
- How much did you spend on qualifying wages and qualifying non-wage expenses during the PPP period?
- How many average full-time equivalent employees did you have on staff in the comparison period prior to the loan, as well as during the PPP period?
The above questions are important because the object of the PPP is for businesses to maintain the same number of employees and pay them the same wages. If there are any changes to either the number of employees or how much you paid in payroll, it will likely impact the percentage of forgiveness you are awarded on the PPP loan. For example, if you had 10 people on staff for the comparison period and you only had 9 people on staff through your PPP period, the factor for retaining employees will be calculated so that you will likely only get 90% of your qualifying expenses paid by the loan forgiven.
Once your level of forgiveness is determined, you will have to pay back the remainder of the loan to the bank. You are eligible to pre-pay the loan with no pre-payment penalties, or you can choose to have the amount owed deferred for 6 months after the 8- or 24-week period and pay the amount owed over a 2-year period with a low-interest rate.
There are a couple of things to be aware of when submitting your application.
- Be aware that you may not be awarded full forgiveness on your PPP loan, even if payroll and headcount information did not change from the comparison period. The PPP loan was based on 10 weeks of qualifying expenses and the original PPP period covered only an 8-week period, so even if your payroll, headcount, and non-payroll expenses match exactly, the full loan amount may not be forgiven as you did not spend the entire amount.
- An additional caveat is that if an employee needed to take time off due to a COVID-19 related illness and was paid under the expanded FMLA (Family and Medical Leave Act) rules, wages paid would not count towards qualifying PPP payroll expenditures. Instead, COVID-19 qualifying wages paid under the FMLA rules are to be reported to the IRS on quarterly payroll tax reports, where they are eligible for a credit. Make sure to talk with your accountant, payroll, or bank specialist if you have credits or other loans related to the COVID-19 crisis to determine how they interact with PPP rules.
If you’re a small business and need help with the next steps of your PPP loan, the first thing you need to do is talk with the bank that gave you the PPP loan. It’s important to gather information from here first, as different banks might require forms in different formats.
Here’s what you will need to find out:
- When is your loan forgiveness application due?
- Who needs to fill out the form? Will it be you (the business owner) or the bank?
- If the bank is completing the forgiveness application form, will they be providing a document for you to submit to them?
- What time periods will you need information from, in addition to the prior period and the period that the PPP loan covered?
- What records will you need for payroll and non-payroll expenses?
How Can DMA Help?
If you’re already an accounting or payroll client with us here at DMA, we can help compile the information you need, including determining how much your business paid each individual in each time period and help you calculate full-time equivalents. However, it’s very important that you speak with your bank FIRST, as that’s where you will submit your loan forgiveness form.
If you have any questions, reach out to our team here.