One post tagged with "PPP Loan"

If your business received a Paycheck Protection Program loan, understanding the forgiveness process is crucial to ensuring you don't have to repay those funds. This comprehensive guide walks you through everything you need to know about qualifying for full loan forgiveness, from eligible expenses to documentation requirements.

Understanding PPP Loan Forgiveness Basics​

The Paycheck Protection Program was designed to help small businesses maintain their workforce during economic challenges. The best part? These loans can be completely forgiven if you meet specific criteria. However, failing to follow the rules means you'll need to repay the loan with 1% interest.

Key principle: Your loan can be forgiven if you spent the funds on eligible business expenses during your covered period and maintained your employee headcount and compensation levels.

The 60/40 Rule: Your Foundation for Forgiveness​

To qualify for full forgiveness, you must follow this critical rule:

• At least 60% of loan proceeds must be spent on payroll costs
• Up to 40% can be spent on other eligible non-payroll expenses

If you spend less than 60% on payroll, your forgiveness amount will be reduced proportionally. For example, if you only spend 50% on payroll costs, you can only receive forgiveness for a portion of your loan.

Eligible Payroll Expenses​

Payroll costs are the cornerstone of PPP forgiveness. Here's what qualifies:

For Employees​

• Gross wages, salaries, tips, and commissions
• Employer contributions to employee health insurance
• Employer contributions to retirement plans
• State and local taxes on employee compensation (like unemployment insurance)
• Paid sick leave and family leave

For Business Owners​

• Self-employed individuals and sole proprietors: Up to $20,833 (equivalent to$100,000 annually over 2.5 months)
• General partners: Based on 2019 or 2020 net earnings from self-employment, capped at $20,833
• Owner-employees: Limited to the lesser of $20,833 or 2.5 months of their 2019 compensation

What's NOT Included in Payroll Costs​

• Payments to independent contractors (they receive their own PPP loans)
• Employee compensation above $100,000 on an annualized basis
• Employer Social Security, Medicare, or Federal Unemployment taxes
• Qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act

Eligible Non-Payroll Expenses​

You can use up to 40% of your loan on these qualifying expenses (must have originated before February 15, 2020, unless noted otherwise):

Business Mortgage Interest​

• Interest payments on mortgages secured by real or personal property
• Must have originated before February 15, 2020
• Does NOT include principal payments or prepayments

Rent and Lease Payments​

• Rent on real property (office space, retail locations)
• Lease payments on personal property (equipment, vehicles)
• Agreements must have been in force before February 15, 2020
• If you share space with another business, prorate based on your tax filings

Utilities​

• Electricity and gas
• Water and sewer services
• Telephone services (landline and mobile)
• Internet access
• Transportation utilities (fuel, maintenance for business vehicles)

Service agreements must have begun before February 15, 2020, but can be renewed or refinanced.

Expanded Eligible Expenses (Added in 2021)​

Operating Expenses

• Software and cloud computing services for business operations
• Accounting, HR, and similar business software

Property Damage Costs

• Repairs for property damage from public disturbances in 2020 (vandalism, looting)
• Only the uninsured portion qualifies

Supplier Costs

• Payments to suppliers for goods essential to operations
• Must be pursuant to a contract or purchase order in effect before receiving your loan
• Perishable goods ordered during the covered period may qualify

Worker Protection Expenditures

• Personal protective equipment (PPE)
• Physical barriers (plexiglass shields, partitions)
• Ventilation and air filtration improvements
• Costs to expand outdoor dining or service areas
• Health screenings and testing
• Cleaning supplies and sanitization services

These expenses are eligible from March 1, 2020, onward.

Choosing Your Covered Period​

You can select a covered period between 8 and 24 weeks starting from when you received your loan disbursement (not the application date). Here's how to choose:

• 8 weeks: Best if you have higher payroll costs relative to your loan amount
• 24 weeks: Gives you more flexibility to meet the 60% payroll requirement
• You don't need to adjust your payroll schedule; expenses are counted when incurred, not necessarily when paid

Most businesses benefit from the 24-week period as it provides more time to deploy funds appropriately.

Documentation Requirements​

Proper documentation is essential for loan forgiveness. Gather these materials:

Payroll Documentation​

• Payroll reports from your payroll provider
• Federal payroll tax filings (Form 941)
• State quarterly wage reports
• Unemployment insurance filings
• Payment receipts or cancelled checks
• Documentation of retirement and health insurance contributions

Employee Verification​

• Employee lists showing full-time equivalents (FTEs)
• Pay rates for all employees
• Records proving employees were on payroll during the covered period
• Documentation of any employee separations or reductions

Non-Payroll Expense Documentation​

• Proof that obligations existed before February 15, 2020 (lease agreements, mortgage documents, utility bills)
• Cancelled checks or bank statements showing payments
• Receipts and invoices for utilities, rent, and mortgage interest
• Receipts for eligible operating expenses, supplier costs, and worker protection expenditures

Pro tip: Organize documents by category and chronologically. This makes the application process smoother and helps if your loan undergoes SBA review.

Maintaining Employee Headcount and Compensation​

To receive full forgiveness, you must maintain your workforce during the covered period:

Headcount Requirements​

Calculate your full-time equivalent (FTE) employees:

1. Determine average FTE during your covered period
2. Compare to a reference period (choose the better option):
   • January 1, 2020, to February 29, 2020
   • February 15, 2019, to June 30, 2019

If your ratio is 1.0 or higher, you've maintained headcount. If it's below 1.0, your forgiveness will be reduced proportionally.

Exemptions apply if:

• You offered to rehire employees at the same hours and pay, but they declined
• You couldn't find similarly qualified employees
• You couldn't operate at pre-COVID levels due to federal COVID-19 requirements or guidance
• Employees were fired for cause, voluntarily resigned, or voluntarily requested reduced hours

Salary Requirements​

You cannot reduce the annual salary or hourly wage of any employee by more than 25% compared to the most recent full quarter before your covered period. This applies to employees who made less than $100,000 annually in 2019.

Safe harbor: If you reduced headcount or wages but restored them by December 31, 2020, you can still receive full forgiveness.

The Application Process​

Step 1: Determine Your Forgiveness Amount​

Calculate total eligible expenses during your covered period, ensuring at least 60% went to payroll costs.

Step 2: Choose the Right Form​

Three forgiveness application forms are available:

• Form 3508S: For loans of $150,000 or less (simplified with fewer calculations)
• Form 3508EZ: For certain borrowers with straightforward situations
• Form 3508: Standard form for all other borrowers

Most borrowers with loans under $150,000 should use the simplified 3508S form.

Step 3: Complete the Application​

• Fill out the appropriate form
• Attach all required documentation
• Have an authorized representative sign the application

Step 4: Submit to Your Lender​

Submit your application and documentation through your lender's portal or submission process. Each lender has slightly different procedures, so check with yours for specific instructions.

Step 5: Wait for Decision​

• Lender review: Your lender has 60 days to review and submit your application to the SBA
• SBA review: The SBA has 90 days to make a forgiveness determination
• You'll be notified of the decision through your lender

Application Timeline​

When to apply: You can apply any time after using all loan proceeds, up until the loan maturity date. However, if you don't apply within 10 months of the end of your covered period, you must begin making loan payments.

Payment deferral: If you apply within 10 months, payments are deferred until the SBA makes a forgiveness decision.

Common Mistakes to Avoid​

Mistake #1: Not Tracking Covered Period Correctly​

Use the date you received funds (disbursement date), not your application date or approval date.

Mistake #2: Mixing Personal and Business Expenses​

For home-based businesses, only include the portion of utilities and rent that's deductible on your business tax return.

Mistake #3: Including Owner Health Insurance Incorrectly​

For self-employed individuals, you cannot include health insurance or retirement contributions funded by the PPP loan in your forgiveness calculation.

Mistake #4: Paying Independent Contractors​

Payments to independent contractors don't count as eligible payroll expenses. They should apply for their own PPP loans.

Mistake #5: Poor Record Keeping​

Maintain detailed records and receipts for everything. The SBA can audit your loan even after forgiveness is granted.

Mistake #6: Not Adjusting for Part-Time Employees​

When calculating FTEs, part-time employees (those working less than 40 hours per week) must be calculated proportionally.

Mistake #7: Forgetting About the Safe Harbor Period​

If you reduced staff or wages but restored them by December 31, 2020, document this carefully to avoid reductions.

Loans $50,000 or Less: Special Provisions​

If your loan was $50,000 or less, you're exempt from reductions in forgiveness due to decreased headcount or wages, making the process significantly easier.

What Happens If Not Fully Forgiven?​

If only a portion of your loan is forgiven:

• You must repay the unforgiven amount
• 1% interest rate applies
• 5-year repayment term (2-year for loans originated before June 5, 2020)
• You can appeal the SBA's decision if you disagree

Forgiveness and Taxes​

Good news: PPP loan forgiveness is not taxable income at the federal level. Additionally, expenses paid with PPP funds are fully deductible for federal tax purposes.

State taxes: Some states have different rules. Check with your tax advisor about your state's treatment of PPP forgiveness and related expenses.

Final Checklist Before Applying​

Before submitting your application, confirm you have:

• Calculated your covered period correctly
• Verified at least 60% of funds were used for payroll
• Gathered all payroll documentation
• Collected proof of non-payroll expenses
• Verified headcount and salary levels
• Organized documents by category
• Completed the appropriate forgiveness form
• Had an authorized representative review and sign
• Saved copies of everything for your records

Getting Help​

The PPP forgiveness process can be complex. Consider working with:

• Your accountant or CPA for tax and calculation assistance
• Your payroll provider for payroll reports and documentation
• Your attorney for legal questions about eligibility or compliance
• Your lender for specific submission requirements

The SBA and Treasury Department websites (sba.gov and treasury.gov) also provide official guidance and answers to frequently asked questions.

Conclusion​

PPP loan forgiveness requires careful documentation and adherence to specific rules, but with proper planning and organization, most businesses can successfully receive full forgiveness. The key is understanding eligible expenses, maintaining required employment levels, and keeping thorough records throughout your covered period.

Start gathering your documentation early, use the full covered period if needed, and don't hesitate to consult with professionals when questions arise. With the right preparation, you can transform your PPP loan into the grant it was intended to be—keeping your business running and your employees paid during challenging times.

---

This article provides general information and should not be considered legal, accounting, or tax advice. Consult with qualified professionals regarding your specific situation and refer to official SBA guidance for the most current requirements.