How To Ensure Your PPP Loan is Forgiven
Many small businesses are now receiving their Paycheck Protection Program (PPP) loan funds, so probably a good time to discuss how businesses achieve the best part of these loans, the forgiveness part. Forgiveness of the loan proceeds is possible only if you use the funds according to the SBA rules.
Free money is seldom without conditions, so let’s explore what you need to do to make these funds are forgiven.
Forgiveness Summary
Proceeds from this loan, must be spent at least 75% on payroll and qualifying related expenses, and no more than 25% on qualified rent/mortgage and utilities within an 8-week period following the funding of your PPP loan. If not, any unforgiven funds will convert to a 2 year loan at 1%.
Take special note, if your loan is forgiven, these expenses covered by the loan are NOT tax-deductible, the IRS recently stated in Notice 2020-32. Be sure to have your CPA assist you with the changes to your taxable revenue during this period.
Forgiveness Condition 1: Payroll Expenses
To make sure that the entire amount of your loan is forgiven first, make sure you create a plan to spend 75% on payroll expenses. Those expenses include:
- Salaries, wages, commissions, or tips ($100,000 max per employee—gross earnings)
- Employee benefits (vacation, sick leave, health care, retirement benefits)
- State and local taxes (CA SUTA/ETT)
Depending on your payroll schedule, you want to be sure you map your payroll out and if necessary, adjust the timing of your payroll date to accommodate as many payroll cycles as possible.
Forgiveness Condition 2: Full Time Equivalent (FTE) Headcount
Secondly, your full-time employee head count cannot drop below your average monthly levels during the look-back period (which can be February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020).
If you have several part-time employees and are not sure how many FTE’s, use the following calculation:
To calculate your FTE count, divide total working hours during the 8 week period (320 for a typical 40 hour business), by the total hours worked by your employees:
Example: Total work hours over 8 weeks: 320
Total hours worked by employees: 2000
FTE Calculation 2000 / 320 = 6.25 FTE’s
Be sure to calculate what your FTE number was during one of the look-back periods described above. This will be your baseline for the forgiveness period. Or if you’re a client of Infinium HR, contact us and we can provide an FTE report for the look back periods.
Finally, for loans to become fully forgivable, employers cannot reduce salaries or wages below 75% of what those employee’s wages were in the most recent quarter prior to the shutdown.
The remaining 25%, or whatever is left after payroll expenses can be used to cover, rent, lease or mortgage payments, and utilities.
Some Special Considerations
Employers who have laid off workers during the shutdown have until June 30 to rehire those employees or replace them with new employees to get back to that FTE count.
If you use any part of your PPP loan for expenses not included in the list described above, that amount will not be forgiven.
Requesting Loan Forgiveness
It is highly recommended that you at the very least, keep very detailed records of all expenses paid with your PPP funds. Here are a few suggestions to make sure you can track your forgivable expenses:
- Track your expenses on a spreadsheet and compare to your target payroll and expense baseline. (see template attached)
- Keeping the loan funds in a separate bank account and only withdraw to cover eligible expenditures
You can request loan forgiveness by submitting a request to your lender not more than 90 days after the eight-week loan period. It should include documents showing:
- The number of FTE employees with detailed pay and pay rates
- Total eligible payroll paid during the 8 week period
- Gross payroll
- SUTA/ETT taxes
- Employee benefits
- Eligible mortgage, lease, and utility payments
You’ll be able to get an answer from your lender on your forgiveness eligibility within 60 days.
If you have any questions at all, contact us here at Infinium HR. We have included a PPP Forgiveness Worksheet for you to utilize. Click on the link below and contact us if you need assistance.