Paycheck Protection Program: Forgiveness
The Borrower's Guide to PPP Loan Forgiveness
Updated 7/18/20 – The website has been updated to reflect the interim final rule which made changes to H.R. 7010, the Paycheck Protection Program Flexibility Act, or more commonly known as the PPP. You can also visit the Small Business Administration site here for additional information. At this point, banks have not been provided guidance on processing forgiveness applications under these new rules. This program remains fluid and further changes will likely be announced by the SBA.
SouthEast Bank does not provide legal or accounting advice. You should consult with your attorney and/or accountant for any specific questions. The following information is provided by the SBA.
Recent Interim final rule changes:
- Lowered the percentage of funding that must be attributed to payroll costs from 75% to 60% and clarified that employers who use less than 60% of their PPP loan funds for payroll may still be eligible for partial forgiveness.
- Extended the end date for PPP loan coverage from June 30, 2020 to Dec. 31, 2020.
- Extended the maturity period of loans made on or after June 5, 2020 to 5 years.
- Offered borrowers with loans made prior to June 5, 2020 the choice of either an eight- or 24-week forgiveness period and extended the forgiveness period of loans made on or after that date to 24 weeks.
- Explained borrowers who submit forgiveness applications within 10 months of the “covered period” end date will not have to make loan payments until the SBA remits the loan forgiveness amount to the lender or notifies the lender that no loan forgiveness is allowed.
- Reiterated that the SBA will not grant additional PPP loans after June 30, 2020.
Here's What We Know
Please keep in mind, the information below is subject to further developments as we receive more information from the SBA. SouthEast Bank does not provide legal or accounting advice. You should consult with your attorney and/or accountant for any specific questions.
The funds from the PPP must be used for the following purposes if seeking forgiveness:
- Payroll: salary, wage, vacation, parental, family, medical, or sick leave, health benefits
- Mortgage interest: as long as the mortgage was signed before February 15, 2020
- Rent: as long as the lease agreement was in effect before February 15, 2020
- Utilities: as long as service began before February 15, 2020
Rehiring Grace Period:
- Borrower has until June 30, 2020, to restore full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.
- Borrowers that cannot resume standard business practices or cannot return to the level of business activity they maintained before February 15, 2020, may still be eligible for full loan forgiveness.
- Borrower does not have to rehire the same employees.
- Rehired workers do not have to perform customary work duties.
- Borrower’s PPP forgiveness will not be reduced if borrower offers to rehire a laid-off employee and the individual rejects the job. The borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower.
Employee Pay Requirements:
- Borrower must maintain at least 75% of total salary
- This requirement will be individually assessed for every employee that did not receive more than $100,000 in annualized pay in 2019
- If the employee’s pay during the loan period is less than 75% of the pay they received during the most recent quarter in which they were employed, the eligible amount for forgiveness will be reduced by the difference between their current pay and 75% of the original pay.
- The CARES Act notes that employers who restore wages by December 31, 2020, may still be eligible for full loan forgiveness.
Setting a PPP Loan Period
The SBA offers Borrowers the choice of which loan period they use, and offers Borrowers two options:
- From the disbursement date of loan funds.
- From the First day of your pay period following first payment.
For example, if Company X received the PPP Loan amount deposited into their account on April 29 and paid their employees on May 1 for the bi-weekly payroll period that ran from April 13 (Monday) through April 26 (Sunday).*
- Option 1: Company X’s Loan Period runs from April 29 through June 24, 2020. The loan applies to expenses incurred or paid within that time frame.
- Option 2: Company X’s Loan Period runs from May 11 through July 6, 2020. The loan covers payroll experiences incurred and paid within that time frame, while other expenses remain in the normal loan period.
The SBA also clarified its original language to explain payroll costs incurred but not paid during the last covered pay period may still be forgiven, providing they are paid on or before the next payroll date.
*Assuming Company X opted for an eight-week coverage term
For the Self-Employed Borrower:
- Self-employed Borrower is entitled to use the PPP loan to replace lost compensation due to the impacts of COVID-19.
- However, a self-employed Borrower is not entitled to use the full amount to replace pay.
- The Administrator, in consultation with the Treasury Secretary, has determined that it is appropriate to limit the forgiveness of owner compensation replacement for individuals with self-employment income who file a Schedule C to eight or 24 weeks' worth (8/52 or 24/52, based on coverage term) of 2019 net profit.
- If self-employed Borrower has mortgage interest, rent, or utilities expenses, he or she must have claimed or be entitled to claim a deduction for those expenses on 2019 Form 1040 Schedule C in order to claim them for forgiveness.
U.S and Foreign Affiliates:
- For purposes of the PPP’s 500 or fewer employee size standard, an applicant must count all of its employees and the employees of its U.S and foreign affiliates, absent a waiver of or an exception to the affiliation rules. 13 C.F.R. 121.301(f)(6). Business concerns seeking to qualify as a “small business concern” under section 3 of the Small Business Act (15 U.S.C. 632) on the basis of the employee-based size standard must do the same
- With respect to any loan or loan forgiveness under the PPP, the nondiscrimination provisions in the applicable SBA regulations incorporate the limitations and exemptions provided in corresponding Federal statutory or regulatory nondiscrimination provisions for sex-specific admissions practices at preschools, non-vocational elementary or secondary schools, and private undergraduate higher education institutions under Title IX of the Education Amendments of 1972, for sex-specific emergency shelters and coreligionist housing under the Fair Housing Act of 1968, and for adoption or foster care practices giving child placement preferences to Indian tribes under the Indian Child Welfare Act of 1978
- SBA regulations do not bar a religious nonprofit entity from making decisions with respect to the membership or the employment of individuals of a particular religion to perform work connected with the carrying on by such nonprofit of its activities
- Student workers generally count as employees, unless (a) the applicant is an institution of higher education, as defined in the Department of Education’s Federal Work-Study regulations, 34 C.F.R. § 675.2, and (b) the student worker’s services are performed as part of a Federal Work-Study Program (as defined in those regulations) or a substantially similar program of a State or political subdivision thereof
- Institutions of higher education must exclude work study students when determining the number of employees for PPP loan eligibility, and must also exclude payroll costs for work study students from the calculation of payroll costs used to determine their PPP loan amount
- The Administrator, in consultation with the Secretary of the Treasury, has determined that a limited exception for work study is appropriate here
- In particular, the Administrator recognizes that requiring institutions of higher education to count work study students towards employee headcount would result in an anomalous outcome in two respects. First, it would prevent some small educational institutions from receiving PPP loans due solely to their provision of financial aid to students in the form of work study
- Second, it would result in the exclusion of small educational institutions whose part-time work study headcount dwarfs their full-time faculty and staff headcounts
- Educational institutions that filed loan applications prior to the issuance of the regulation are not bound by this interpretation but may rely on it. Lenders may continue to rely on borrower certifications as part of their good faith review process
Special Circumstances to Remember:
- PPP loans in excess of $2 million will be audited for program compliance prior to any forgiveness consideration for the PPP loan.
- Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.
- Expenses related to forgivable loan through the PPP will not be tax-deductible.
Conditions for Loan Forgiveness:
- Forgiveness Period: For loans issued before June 5, eligible expenses may be incurred over either eight or 24 weeks, starting from the day the PPP funds were disbursed to Borrower. For loans issued on or after June 5, 2020, the forgiveness period has been extended to 24 weeks.
- The 60/40 rule: At least 60% of the loan must be used for payroll costs. Payments to independent contractors cannot be included in payroll costs. Borrowers that use less than 60% of their PPP loan funds for payroll may still be eligible for partial forgiveness.
- Documentation: It is strongly recommended that Borrowers fully document the use of PPP funding to the best of their abilities.
- Staffing Requirements: Borrower must maintain the average number of full-time equivalent employees per month compared with the monthly averages of either:
- February 15, 2019, to June 30, 2019 (A)
- January 1, 2020, to February 29, 2020 (B)
- If Borrower is a seasonal employer, calculate B.
- Loan forgiveness is reduced when a business’s average monthly number of full-time employees falls below the average monthly number from periods A or B. To calculate the initial forgiveness:
- Loan Amount x (Post-PPP Full-time Employees / Pre-PPP Full-time Employees)
What we know about Loan Forgiveness:
- After the end of the loan term, Borrower should be able to submit a request to the lender for loan forgiveness.
What we DON’T know about Loan Forgiveness:
- The request may need to include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations
- Payroll reports from payroll provider
- Payroll tax filings (Form 941)
- Income, payroll, and unemployment insurance filings from state records
- Documents verifying any retirement and health insurance contributions
- Documents verifying eligible interest, rent, and utility payments (canceled checks, payment receipts, account statements).
- Borrower may be required to have an authorized representative certify that (1) the documentation, if any, presented is true and correct and (2) the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments.
- Once you request is submitted, the lender or SBA is required to decide to deny or accept forgiveness within 60 days. If Borrower is initially denied, lender or SBA may allow Borrower to provide additional documentation to reevaluate request.
- If loan forgiveness is denied, outstanding balance will continue to accrue interest at 1% for the remainder of the 2-year or 5-year period, based on coverage term.
These terms are subject to change based on SBA guidance. The information in this section is tentative and based on current SBA guidance. There is no final guidance on loan forgiveness and the procedures and forms required by SBA to obtain formal forgiveness of a PPP loan. SouthEast Bank does not provide legal or accounting advice. You should consult with your attorney and/or accountant for any specific questions.