As of April 16, 2020, the funds allocated to the Paycheck Protection Program (PPP) had been exhausted, with an estimated 1.6 million loans extended. The businesses that applied for and obtained the loans now have to turn their attention towards ensuring they are meeting all the conditions of their loan if they hope to have the amount they borrowed forgiven.
Conditions for full loan forgiveness
One of the most attractive aspects of the PPP is the promise of up to 100% of loan forgiveness, with that forgiveness being tax free. To qualify, the following criteria from the Small Business Administration (SBA) must be met for the 8 weeks from the date the borrower receives its SBA loan funding:
- maintain full-time equivalent employee headcount and payroll costs as of February 15, 2020 (75% of the loan amount);
- meet obligations for mortgage interest payments, rent and utilities (the remaining 25% of the loan amount);
- take action by June 30, 2020 to restore the full-time equivalent employee headcount to the February 15, 2020 level if employment numbers were reduced before obtaining the loan (employee headcount will be the average number of employees per month from either February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020, at the borrower’s discretion);
- take action by June 30, 2020 to pay additional wages and salaries if compensation was reduced between February 15, 2020 and April 26, 2020, in order to avoid a dollar for dollar reduction of loan forgiveness.
As outlined above, 75% of the PPP loan must go towards payroll costs for the loan to be fully forgiven. These costs include:
- salary, wage, commission, cash tips or the equivalent, capped at an annualized amount of $100,000 per employee;
- partnership payments and any share of the partnership income, capped at an annualized amount of $100,000 per partner;
- vacation, medical, parental or family leave costs (excluding paid sick or family leave for COVID-19 related reasons, which is covered by the Families First Coronavirus Response Act);
- group healthcare benefits, including insurance premiums;
- retirement benefits; and
- state or local tax payments for employee wages
Many companies may own the real estate their business occupies, often in a separate affiliated entity. It has not yet been established whether the qualifying expense discussed above will be the rent paid to the affiliate or the interest on the mortgage the affiliate pays, which is likely a smaller amount. We anticipate that the SBA will provide clearer instructions when they issue their final guidance, expected in the next week.
Reduction in loan forgiveness
The PPP was written to ensure that businesses maintain their full workforce even if the business does not function during the pandemic, so that employees are ready to return to work once operations resume. If employers do not meet all the conditions of the loan, the amount of the loan that is forgiven will be reduced. The factors that are taken into consideration:
- Was there a decrease in the number of employees?
- Was there a reduction in employee compensation?
- Was more than 25% of the loan amount used for non-payroll reasons?
If the business does not meet all conditions and a portion of the loan is not forgiven, payment will have to be made on the remaining amount of the loan within 2 years, accruing interest at 1% per annum. Interest and principal payments will be deferred for 6 months from the date of the loan. However, interest will accrue during that 6-month deferment period.
Applying for loan forgiveness
Businesses are encouraged to deposit their PPP loans in a separate account to make it easier to track the use of the money and fulfil the requirements needed to qualify for loan forgiveness. A business is likely required to submit the following in order to obtain loan forgiveness, although these requirements may vary depending upon the lender:
- A formal application (which the SBA has not yet provided);
- Documentation proving that the number of full-time equivalent employees and their salaries were not reduced during the 8-week loan period;
- Proof that 75% of the loan was used to pay employee payroll costs
- Documentation supporting other covered expenses (mortgage interest, rent, utilities), including canceled checks, payment receipts, account statements and invoices;
- Certification from a company representative that the documentation presented is true;
- Any other documentation the SBA ultimately determines necessary
It is recommended that businesses examine their loan documentation closely for any required timeline under which they must file for loan forgiveness with their PPP lender. In some cases, this may be as soon as 30 days after the 8-week period terminates.
The SBA has until April 27, 2020 to issue final guidelines on loan forgiveness, so as clarifications and/or changes to these requirements are issued, we will keep you updated.
Please contact Smith & Howard by filling out the form below if you have any questions related to tracking expenses and other items in order to qualify for loan forgiveness.