Borrowers of the PPP Program now have guidance on how to apply for loan forgiveness, thanks to the new instructions released on May 15, 2020, by the Small Business Administration (SBA) and the Department of the Treasury.
If you borrowed from this program, here are some tips you need to know in order to submit for forgiveness. The published PPP Loan Forgiveness application is 11 pages and does have instructions to help you fill out the calculations on the worksheets, checklist of documents to submit, and a glossary of terms you will need to know.
The SBA outlines these instructions to apply for forgiveness:
- To receive loan forgiveness, a borrower must complete and submit the Loan Forgiveness Application (SBA Form 3508 or lender equivalent) to its lender (or the lender servicing its loan).
- As a general matter, the lender will review the application and make a decision regarding loan forgiveness. The lender has 60 days from receipt of a complete application to issue a decision to SBA.
- You will need to submit the following two forms to your Lender (in addition to any forms your lender may ask you to submit):
- PPP Loan Forgiveness Calculation Form (Application, page 3)
- PPP Schedule A (page 6)
- The forgiveness application has two additional forms:
- PPP Schedule A Worksheet (used to calculate your forgivable amounts)
- PPP Borrower Demographic Information Form (optional)
- You will need to calculate your forgiveness amount by following the instructions and completing the PPP Schedule A first, then transfer the information over to the actual forgiveness application and submit as a packet to your lender.
- The PPP Schedule A is made up of two forms: 1) with a calculation worksheet that walks you through each line and 2) the actual form where you will put your totals. The amounts on your worksheets are transferred to the actual loan forgiveness application. To save yourself a lot of headaches, you can also get these amounts from your payroll system or payroll processor.
Information You Will Be Asked on the Application
- You will be asked if you paid your employees weekly, biweekly, twice a month or monthly.
- You will need to have your EIN or SSN.
- Your business information needs to be the same as your borrower application, unless there was a change of address or contact information.
- SBA PPP/EIDL loan number, disbursement date and amount.
- Number of employees at time of loan application and time of loan forgiveness for PPP or EIDL.
- There are some reductions you will need to calculate in case you had fluctuations in your employee levels during the covered periods. There are formulas on the Instructions for PPP Schedule A Worksheet page to follow, which are relatively straightforward.
- It will be important to calculate your amounts in one of two ways: average annual salary or average hourly pay. Stick to one form of calculation when you fill out the application.
- There are exceptions for companies who had reductions in employee levels if the borrower made good effort to bring them back. Check out the terms you need to know below for FTE Reduction Safe Harbor.
- Once you have made the final calculations on the PPP Schedule A Worksheet and have filled out the PPP Loan Forgiveness Calculation Form (Application), you will have to select between three amounts the worksheets had you calculate to identify your actual loan forgiveness amount:
- 1) Modified Total, 2) PPP Loan Amount, and 3) Payroll Cost 75% Requirement.
- Each amount will be different, and you will have to select the smallest amount of the three options and subtract the EIDL loan amount you borrowed (if applicable) to see how much your loan will be forgiven. You will owe the difference or balance from your original PPP loan and will need to pay it back within two years.
- When you sign, you are making representations and certification on behalf of the borrower that everything is true and meets the forgiveness requirements.
- There are consequences if your supporting documents and forms are false or misrepresented.
- Tax information will be shared by the lender with the SBA and SBA Office of Inspector General to ensure compliance with PPP requirements and all SBA reviews.
- The SBA may require additional information for the purposes of evaluating eligibility for the PPP loan and loan forgiveness.
- Failure to provide documentation will result in ineligibility and denial of loan forgiveness.
Terms You Need to Know
- Cover Periods:
- The cover period is an eight-week (or 56 days) period that starts on the same day as your loan disbursement date. This cover period is the time you have to use your PPP funds and make payments as described by the program rules.
- However, the PPP loan forgiveness application talks about two types of cover periods: 1) Cover Period, which starts on the date you received your loan, or 2) Alternative Payroll Covered Period, which starts on the date you sent out your first payroll payment(s) to your employees after you received your funds.
- Alternative Cover Period is used to help businesses that pay biweekly or have a more frequent payroll schedule. You will need to check the right box on the loan forgiveness application to use the Alternative Cover Period in your calculations.
- Cover Periods: Important Dates
You will be eligible to be forgiven for expenses covered by the PPP loan, so long as they are:
- Payroll costs, incurred and paid during cover period (75% of total forgiveness)
- Business mortgage interest payments, obligation incurred before February 15, 2020
- Business rent or lease payments, agreements in force before February 15, 2020
- Business utility payments, in service before February 15, 2020
- You are not required to report payments that you do not want to include in the forgiveness amount.
- Eligible Payroll Costs:
- Payroll costs need to have been made during a covered period, and costs are incurred the moment a payroll check is disbursed or withdrawn as an ACH credit transaction.
- Payroll costs are considered incurred on the day that the employee’s pay is earned.
- Payroll costs incurred but not paid during the last pay period of the covered period are eligible if paid on the next pay period. Otherwise, payroll costs must be paid during the covered period.
- For each employee, the total amount of cash compensation eligible for forgiveness may not exceed $100,000 annually as prorated for the covered period. The forgivable amount is capped at $15,385 per individual employee.
- You may count payroll costs you incurred only once.
- Eligible Non Payroll Costs:
- Covered mortgage obligations
- Business mortgage payments: Payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation, incurred before February 15, 2020
- Covered rent obligations
- Business rent or lease payments: Payments pursuant to a lease agreement for real or personal property in force before February 15, 2020.
- Covered utility payments
- Business utility payments: Payments for service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020
- Eligible nonpayroll costs must be paid during the covered period and paid when the bills were due, if they were late, then must be paid on the next due date.
- Eligible nonpayroll costs cannot exceed 25% forgiveness amount.
- You may count nonpayroll costs incurred only once.
- Covered mortgage obligations
- Total Average Weekly Full Time Equivalency (FTE):
- Do not include any independent contractors, owner-employees, self-employed individuals or partners on your calculations; these are treated separately. Ask your lender for the worksheet to calculate these expenditures.
- Enter the sum gross amounts from wages, tips, commissions, paid leave (vacation, family, medical or sick leave, not including leave covered by the Families First Coronavirus Response Act), allowances for dismissal or separation pay incurred during covered pay.
- The amount per employee cannot be more than $15,385.
Terms on the PPP Schedule A Worksheet (Calculation Tables)
- Average FTE:
- For each employee, enter the average number of hours paid by week, divide by 40, and round the total to the nearest tenth. (40 hours)/40 = 1, (30 hours)/40=.75 or .8, (20 hours)/40=.5 (employee identifier, table 1)
- This is used to see how many employees you have and if the amount needs to be reduced due to a statutory requirement concerning reductions in full-time equivalent employees.
- Calculate this for each worker and total the amounts on Table 1 in PPP Schedule A Worksheet.
- The amount forgiven may be less than borrowed, depending on whether the average weekly number FTE’s employees during the covered periods was less during the chosen reference period (see below).
- Employee Identifier:
- This is the last four of the employee’s Social Security Number (SSN).
- Reference Period Selections:
- You will need to determine what your employee levels were during these periods:
- February 15, 2019 – June 30, 2019 OR
- January 1, 2020 – February 29, 2020
- For seasonal employers, the preceding period or a consecutive 12-week period between May 1, 2019, and September 15, 2019
- This reference period is what is used to determine how many employees you had before the pandemic and then you will compare to what your employee levels are at the time of the loan forgiveness.
- You will need to determine what your employee levels were during these periods:
- Forgiveness Reductions:
- The loan forgiveness amount may be subject to reductions; the PPP Loan Forgiveness application has some explanations on PPP Schedule A.
- For businesses that borrowed from EIDL and PPP, the EIDL will be subtracted from the PPP forgiveness amount.
- The loan forgiveness amount received may be reduced if the average weekly FTE employees during the covered period was less than during the chosen reference period.
- An exemption is made if FTE Reduction Safe Harbor applies.
- The FTE Reduction Safe Harbor applies if: (1) the borrower reduced its FTE employee levels from February 15, 2020, to April 26, 2020, as described above; and (2) the borrower then restored its FTE employee levels to its FTE employee levels in the borrower’s pay period that included February 15, 2020, by June 30, 2020.
- If you let them go and brought them back before June 30, 2020.
- Salary/Hourly Wage Reduction:
- There will be a calculation formula on page 7 of the PPP Loan Forgiveness Application. Use it to figure out what amounts will go in the Salary/Hourly Wage Reduction box on Table 1 of certain employees during the covered periods where their pay was less now than during the period from January 1, 2020, to March 31, 2020.
- If the employee levels dropped and are restored to the level you had before March 31, 2020, this reduction is eliminated.
- Fill it out the Salary/Wage Reduction section only if you reduced the pay of your staff by more than 25 percent during the covered period as compared to the January 1, 2020–March 31, 2020 period.
- For example, if you had 10 employees in the Jan. 1 – March 31 period, and dropped their pay during those period more than 25 percent, but then gave them their 25 percent back with the PPP loan, then you eliminate this reduction from the forgivable loan amount.
- FTE Reduction Exception (Lost employees not recovered):
- To maximize your forgivable amount, you need to show that you made good faith to retain your employee levels. A good faith effort to retain your employee includes making offers to rehire during the covered period, documented rejections of employment by the employee, and efforts to reduce employee hours.
- In all these cases, include FTEs on the line only if the position was not filled by a new employee. Any FTE reductions in these cases do not reduce the loan forgiveness amount to the borrower.
Hopefully, these tips will help you stay organized and understand the PPP Loan Forgiveness process. Make sure to work with your accountant, lender and business advisor to help you maximize the amount of your PPP loan forgiveness amount.
EDGAR RAFAEL OLIVO is a bilingual business educator, economic advisor and contributor for several media outlets. He’s a non-profit executive who is passionate about education. He is certified in finance and data analytics and holds a business degree from Arizona State University.
