Paycheck Protection Program – Loan Forgiveness
The CARES Act includes loan forgiveness provisions for loans received under the Paycheck Protection Program (PPP). The exact details are continually being updated so please check here often for the latest information. This Q&A is intended to help you understand the basics.
- How long do I have to spend the money?
Eight weeks. The clock starts the day the loan is funded. These eight weeks are referred to as the “covered period”. - Can I delay receipt of the money so that the clock will start later?
No. The intent of the program is to help businesses make payroll now, not later. - How do I record the loan proceeds?
Debit cash, credit a new liability account called “PPP Loan”. - Do I need a separate bank account to track PPP proceeds and their use?
There is no requirement to have a separate bank account. As a best practice, you might consider putting the proceeds in your business savings account and transfer funds into your checking and payroll accounts as you spend the funds on covered costs. - What do I have to spend the proceeds of the PPP loan on?
Payroll costs, rent, utilities, and interest. These are referred to as “covered costs”. At least 75% of the proceeds must be spent on payroll costs to maximize loan forgiveness. - What gets included for payroll cost?
The definition is exactly the same as it was for the computation of the loan amount. Payroll cost includes gross wages, cash tips, vacation, parental, family, medical or sick leave, allowance for separation or dismissal, group health insurance, retirement, and state and local taxes assessed on wages. Payroll cost does NOT include the employer’s portion of payroll taxes or workers’ compensation premiums. - What if I have already laid off my employees?
The intent of the program is for you to be able to keep paying all employees their regular pay, whether they are working or not. Consult with your employment law attorney as you consider the terms for rehiring any employees to restore your FTE count. - How is the $100,000 wage limit applied in the 8-week period?
Since you don’t yet know who will make over $100K, the limit is pro-rated to your pay period. - What is rent, and does related party rent count?
The CARES Act does not specify rent for real or personal property, however, you can only include rent paid under a leasing agreement in force (signed) before February 15, 2020. - What utilities are included?
Payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020. A “transportation utility” has been interpreted to mean fuel costs for business vehicles. - What interest expense is included?
Interest on loans secured by real or personal property that were in effect before February 15, 2020. If your line of credit is secured by real or personal property, then the interest paid on the line would be included. - How much of the PPP loan can be forgiven?
Up to 100%. - How will my forgiveness be reduced?
There are three answers to this question, and we have addressed each separately.- If all the proceeds are not spent. If you do not have enough payroll, rent, utility, and interest costs during the 8-week period to spend all the proceeds.
- If your FTE count drops. FTE (full-time equivalent) is not defined, but we assume it has the same meaning it has always had. A person who works 40 hours per week is counted as 1.0, while a person who works 24 hours per week is counted as 0.6. FTEs are measured and averaged using each pay period during the 8-week period. The average number of FTEs is then compared to a base period. The employer gets to choose the base period that is most beneficial (a) February 15, 2019 – June 30, 2019, or (b) January 1, 2020 – February 29, 2020.
- If employee salaries/wages are cut more than 25%. This step is very math-intensive because you must look at every employee (who made less than $100,000 in 2019) individually, especially if compensation is reduced across the board. The CARES Act includes an “apples to oranges” comparison by utilizing a base period of 12-weeks and comparing those wages to our 8-week period.
- Can I avoid forgiveness reduction?
Yes, if you eliminate the reduction in FTEs and eliminate the reduction in wages by June 30, 2020. The exact details of what this means need to be clarified by the SBA. - What documentation will I have to provide to support my forgiveness calculation?
Calculations for FTEs, payroll tax filings (Form 941 and payroll registers), verification of payment (canceled checks, bank statements), account statements, bills, etc. We recommend keeping a spreadsheet of all eligible expenses as they are incurred and filing copies of the supporting documentation in a special folder. A copy of the bank statement with eligible expenditures highlighted would also be helpful to support any EFT payments.The SBA is clear on this point: no documentation = no forgiveness. - What if I pay my utilities with my business credit card?
Keep track of what you have charged to the credit card that is an eligible covered cost and make sure you apply a cash payment from the proceeds to the credit card bill before the end of the 8-week period. - Do I account for my covered costs during the 8-week period on a cash or accrual basis?
There is no guidance yet on whether the covered costs are to be included on a cash or accrual basis. - What if my payroll costs during the 8-week period use up 100% of my loan proceeds? Is this ok or do I have to spend some of the money on rent, utilities, and interest?
It is acceptable to spend 100% of the proceeds on payroll costs. The only SBA restriction is that at least 75% of the proceeds have to be spent on payroll costs. - What if I do not spend 100% of the loan proceeds on covered costs?
There is no clear guidance on what you are required to do with the excess. - What happens if I don’t follow the rules for use of proceeds?
The SBA can charge you with fraud in addition to making you repay the misused amounts. - Is the forgiven amount considered taxable income?
No. - How do I apply for forgiveness?
Your bank will contact you regarding the process of forgiveness. - When will I know if my forgiveness application has been approved?
The lender has 60 days to review and either approve or deny the application. - What are the terms of the loan (the portion that is not forgiven)?
1% and the term is two years. No collateral, no personal guarantee required, and no prepayment penalties. - How does the remaining loan get repaid?
No payments are due for six months; however, interest accrues during this deferral period. The actual loan amortization (how principal will be repaid) is not yet defined.
**Please see the link below to the Treasury Department Information Sheet for any additional guidance**
PPP Information Sheet
**Please see the link below to the Treasury Department FAQ **
PPP Frequently Asked Questions
PPP Update (April 15, 2020): New Guidance for Individuals and Partners with Self-Employment Income
The third interim final rule provides guidance for individuals with self-employment income who file a Form 1040, Schedule C and provides an update specific to the calculation of payroll costs for partners in a partnership.
Here's what’s new:
Are individuals with self-employment income who file Form 1040, Schedule C eligible for a PPP loan?
Yes. The interim final rule confirms individuals with self-employment income who file a Form 1040, Schedule C are eligible for the PPP loan if they meet these 4 requirements:
- The business was in operation on 2/15/2020;
- The business owner is an individual with self-employment income;
- The business owner’s principal place of residence is the United States; and
- The business owner filed, or will file, a Form 1040, Schedule C for 2019.
What if I haven’t prepared my 2019 Schedule C yet or I wasn’t in operation during 2019?
The interim final rule is clear you MUST present a 2019 Schedule C to apply for a PPP loan since the amounts on this form are used to determine the maximum loan amount and to estimate eventual forgiveness. If you were not in operation during 2019, but in operation on 2/15/2020, the SBA indicates it will issue future guidance to address your situation.
Furthermore, if you haven't filed your 2019 tax returns or Schedule C yet, the guidance indicates you can prepare your 2019 Schedule C and include it with your PPP loan application, even if you don't file it until later. The guidance does not address what would happen if the Schedule C you ultimately file is different than the draft used for the PPP loan application, so we recommend you file for the loan with your final version.
What can loan proceeds be used for?
Individuals with self-employment income filing Schedule C may use the loan proceeds for the same items as other businesses with two important nuances:
- The loan proceeds can be used to replace owner compensation. Owner compensation is calculated based on the 2019 net profit reported on Schedule C for businesses without employees.
- The loan proceeds can also be used for the same items as other businesses within the 8-week period post-loan disbursement, BUT the Schedule C business must have claimed a similar deduction on the 2019 Schedule C. The SBA explains the goal of this requirement is to be consistent with the borrower certification “to support the ongoing operations”.
Additional helpful links:
https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program
https://home.treasury.gov/system/files/136/PPP--Fact-Sheet.pdf