Payroll Protection Program Loan Forgiveness

*UPDATE: The SBA released its PPP loan forgiveness application on May 15th. Download it here. Please contact us for assistance completing your application.

*UPDATE: This post was updated on April 29 to reflect additional clarifications around head count and salary requirements for payroll protection program loan forgiveness.

Perhaps the most attractive feature of the Payroll Protection Program (PPP) loan is the promise of loan forgiveness. The original guidelines from the Small Business Administration (SBA) stated the loans used for payroll costs and other designated expenses would be forgivable if the loan proceeds are used to cover payroll costs, as well as most mortgage interest, rent, and utility costs over the 8-week period after the loan is made. Employee and compensation levels must be maintained. In the rush to distribute desperately needed aid to businesses, banks and lenders have been all over the map with applications, processes, and approvals. Major corporations with fewer than 500 employees per location made headlines as they received significant percentages of these loans intended for small businesses. In response to questions from reporters on this issue, Secretary of the Treasury Steve Mnuchin said the following in an April 21 press conference:

“I just want to clarify, because certain people on the PPP may have not been clear in understanding the certification. If you pay back the loan right away, you won’t have liability to the SBA and to Treasury. But there are severe consequences for people who don’t attest properly to a certification.”

Analysts have interpreted Mnuchin’s comments to imply that PPP recipients are going to be subject to scrutiny when it comes to loan forgiveness. If you’ve received PPP funds, you can smooth your way through the forgiveness process by keeping detailed, well-organized records of the ways you spend the money. Here are some planning and bookkeeping tips:

1. Understand what’s forgivable and what isn’t.

We said it above, but it’s worth repeating. In order to receive loan forgiveness, you must maintain your full-time employee headcount during the eight-week period following receipt of funds. It’s ok to bring back furloughed employees (or hire additional staff if laid-off workers refuse to return) in order to hit your full-time equivalent. Additionally, if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 in 2019, you’ll see reductions in the amount of your loan that is forgivable.

There’s a formula you can use to determine if you’ve met the headcount requirement. First, determine the average number of full-time equivalent employees you had for:

  • The 8-week period following your initial loan disbursement (A)
  • February 15, 2019 to June 30, 2019 (B1)
  • January 1, 2020 to February 29, 2020 (B2)

Take A and divide that by B1. Do the same with B2. Take the largest number you obtain. If you’re a seasonal employer, you must divide by B1.

If you get a number equal to or larger than 1, you successfully maintained your headcount and met this requirement. If you get a number smaller than 1, you did not maintain your headcount, and your forgivable expenses will be reduced proportionately.

If you have 1099 contractors on your payroll, those costs are not considered forgivable (even if they were used in the loan amount calculation). The SBA issued a specific clarification regarding 1099 contractors, stating that they aren’t included in loan forgiveness for the business because contractors and self-employed individuals have the ability to apply for PPP loans themselves.

In addition to payroll costs, PPP funds can also be used to cover mortgage interest, rent, and utilities, provided those assets/services were in place as of February 15, 2020. If your business leased a new location on March 1, its rent costs are not eligible for forgiveness.

2. Make a plan for spending the forgivable amount in eight weeks.

The clock starts ticking on your eight-week time period as soon as the funds hit your bank account. Many businesses have experienced the loan money landing in their accounts unannounced as banks scramble to approve applications and distribute funds. Although it may sound obvious, you need a plan in place to make sure your spending aligns with that window of time. You may need to work with your payroll provider to run a special payroll in the event that your typical payroll periods straddle the loan-forgiveness period.

3. Include repayment of non-forgivable portions of your loan in your budget for the year.

It’s entirely possible that your total loan amount is greater than what will be forgivable in the end. Once you’ve calculated what’s forgivable and what isn’t, look at your budget past the eight weeks to see how you’ll fit in loan payments.

4. Set up a new account in your bookkeeping software to account for the loan money.

By creating a new account, you can more easily track every dollar of loan money, as opposed to mixing it in with your general funds. When it comes time to apply for PPP loan forgiveness, you’ll have the records you need of exactly how you spent the money. Alternatively, you can open a new checking account with your bank for the loan and transfer funds each time you need to use them. If you decide to go that route, create a separate spreadsheet that accounts for each transfer so you aren’t trying to pull those expenses from your general ledger.

5. Organize related documents.

Save yourself the headache of going back through paperwork to find supporting documentation for loan forgiveness. We recommend approaching this like an audit: the more organized you keep paperwork as events unfold, the easier time you’ll have gathering everything you need to submit to the SBA. If you’re still using paper in your business, this can simply be a system of folders. For businesses that are paperless, we recommend Hubdoc as our preferred document management system.

Our friends at CPAllianceTM have created an easy-to-use spreadsheet to help you track your PPP funds. You can download it here.

What do I do if my PPP loan isn’t forgiven?

If you stay organized, maintain the size of your payroll, and use your loan funds for authorized purposes, you should be able to take advantage of PPP forgiveness. However, even if that doesn’t work out, keep in mind that you’re still receiving advantageous loan terms: a 24-month term at 1% interest. Use that loan to help power your business through the downturn, or even invest in growth.

Coronavirus Relief Information

About the Author

Kaneka Jackson is a Senior Cloud Accounting Advisor with GCT Technology & Accounting. She has worked in both corporate accounting and for CPA firms, and she’s passionate about helping businesses improve their accounting processes. As a Veteran of the U.S. Navy, Kaneka is all too familiar with the ever-changing landscape of government regulations. She has successfully guided many clients through the PPP application process and is looking forward to supporting loan recipients as they apply for forgiveness.