This article was originally published on April 22, 2020, as “How to Spend Your Paycheck Protection Program Loan” and has since been updated to reflect the loan forgiveness rules published by the Small Business Administration and U.S. Treasury Department on May 15, 2020.
To date, Congress has appropriated $659 billion to the PPP. If you have already applied for a PPP loan, check with your lender to ensure you are still in line. If you have been having difficulty with your PPP application at a traditional national bank, you can also apply through small community banks/credit unions and companies like PayPal and Square.
On May 15, the Small Business Administration (SBA) and Treasury Department released the Paycheck Protection Program (PPP) loan forgiveness application, including instructions on how to complete the application. Keep in mind that the government may issue further clarifications. PPP loan forgiveness is not counted as taxable income (and as of May 20, business expenses paid for with forgiven PPP funds are not tax deductible — though proposed legislation could change this). This article will be updated as new information becomes available.
For specific questions about PPP loan forgiveness, reach out to your lender, accountant, and/or local SBA office or SBA-resource partners (SCORE, Small Business Development Center, Women's Business Center). They are being trained to walk small businesses through this process and may be able to give you more direction. You can find those local resources here.
You can also reach ABA’s Advocacy Team at email@example.com.
This article touches on the following frequently asked questions:
- What are the conditions for loan forgiveness?
- What if I have an EIDL grant and a PPP loan?
- How do I apply for loan forgiveness?
- What will I need to apply for loan forgiveness?
- What if my PPP loan is not forgiven?
Best practices: To make the loan forgiveness process easier, keep detailed records on how you are spending your PPP funds. Experts recommend opening a separate checking account for your PPP funds. You can use this loan forgiveness calculator from Intuit to estimate how much of your PPP loan will be forgivable. (This calculator may not be updated to reflect the recent forgiveness application.)
1) Proceeds are used over the eight-week period after the loan is made.
The amount of PPP loan forgiveness depends on your expenses over an eight-week period (56 days). The PPP loan forgiveness application allows you minimal flexibility to choose when this period begins for payroll purposes only. You have two options for the payroll period: the general covered period or the alternative payroll covered period.
- The covered period begins on the date the lender makes the first disbursement of your PPP loan. For example, if you received your PPP funds on Monday, April 20, the first day of the covered period is April 20; the last day of the covered period is then Sunday, June 14.
- The alternative payroll covered period begins on the first day of your first pay period following the PPP loan disbursement. This option is available if your payroll schedule is biweekly or more frequent. For example, if you received your PPP funds on Monday, April 20, and the first day of your first pay period following your PPP loan disbursement is Sunday, April 26, the first day of the alternative payroll covered period is April 26; the last day of the alternative payroll covered period is Saturday, June 20.
The alternative payroll covered period is only an option for payroll expenses, not non-payroll expenses. Non-payroll expenses (interest on a mortgage, rent or lease payments, and utility payments) will be determined over the covered period only (beginning on the date of loan disbursement).
2) At least 75 percent of the loan is used for payroll costs.
Payroll costs INCLUDE:
- Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis [or $15,385 over an eight-week period] for each employee. Owners [owner-employees, self-employed individuals, and general partners] are capped at the lesser of $15,385 over an eight-week period or the eight-week equivalent of their applicable compensation in 2019);
- Employee benefits including costs for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit; and
- State and local taxes assessed on compensation.
Payroll costs DO NOT INCLUDE:
- Compensation of an individual employee in excess of $100,000 annually (or $15,385 over an eight-week period), as prorated in the covered period or alternative payroll covered period;
- Federal employment taxes imposed or withheld between February 15, 2020, and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and
- Qualified sick and family leave wages under the Families First Coronavirus Response Act (already getting a tax credit)
Payroll costs paid vs. incurred
Payroll costs are considered paid on the day that paychecks are distributed or the day you originate an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the last pay period of the covered period or alternative payroll covered period are eligible for forgiveness if paid on or before the next regular payroll date. You should count payroll costs that were both paid and incurred only once.
3) No more than 25 percent of the loan is used for non-payroll costs.
Non-payroll costs are:
- Interest on mortgage obligations, incurred before February 15, 2020;
- Rent, under lease agreements in force before February 15, 2020; and
- Utilities, for which service began before February 15, 2020
Non-payroll costs paid vs. incurred
Non-payroll costs must be paid during the covered period or incurred during the covered period. Non-payroll costs incurred but not paid during the covered period are eligible for forgiveness if paid on or before the next regular billing date. You should count non-payroll costs that were both paid and incurred only once.
4) You maintain your staff and payroll.
Loan forgiveness will be reduced if:
- You decrease your full-time equivalent (FTE) employees; and
- You decrease salaries and wages by more than 25 percent for any employee that made less than $100,000 annualized in 2019
You can rehire your employees and restore salary levels for changes made between February 15, 2020, and April 26, 2020. You may also hire a new employee to replace an employee who left the business.
Your average weekly FTE employees during the covered period or the alternative payroll covered period will be compared to either (at your election):
- your average weekly FTE from February 15, 2019, to June 30, 2019;
- your average weekly FTE from January 1, 2020, to February 29, 2020; or
- (in the case of seasonal employers), either of the preceding periods or a consecutive twelve-week period between May 1, 2019, and September 15, 2019.
You will need to calculate the average full-time equivalency (FTE) during either the covered period or the alternative payroll covered period. To do this, determine the average number of hours paid per week for each employee. Then, divide the average number of hours per week by 40 and round the total to the nearest tenth. The maximum for each employee is 1.0. You can choose to use a simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.
FTE reduction safe harbor
The FTE reduction safe harbor exempts certain borrowers from the loan forgiveness reduction based on FTE employee levels. You will be exempt from the reduction in loan forgiveness if both of the following conditions are met:
- You reduced your FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and
- You then restored your FTE employee levels no later than June 30, 2020, to your FTE employee levels on February 15, 2020.
FTE reduction exception
A borrower’s PPP loan forgiveness will not be reduced under an additional two circumstances:
An employee rejected a rehire offer. To exclude this employee in loan forgiveness calculations, you must provide documentation verifying:
- You made a good faith, written offer to hire the same employee;
- Your offer was at the same salary/wage and same number of hours as the employee was previously hired; and
- The employee declined the offer.
- An employee was fired for cause, voluntarily resigned, or voluntarily requested and received a reduction of hours in the covered period or alternative payroll covered period.
Employees who left the business under these circumstances are only exempt from a reduction in loan forgiveness if you did not hire a new employee to fill the position.
**Be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation. For more information, see question 40 of the Treasury Department’s FAQ.**
Your PPP loan forgiveness will be affected if you also receive an Economic Injury Disaster Loan (EIDL) grant. Any proceeds from an EIDL grant of up to $10,000 will be subtracted from the loan forgiveness amount on the PPP loan.
In other words, if your business spends 100 percent of the PPP funds (say, $10,000) on forgivable expenses, but you also receive an EIDL grant (say, $3,000), all $10,000 of the PPP funds will technically be forgiven, but you’ll be required to pay back the $3,000 from the EIDL grant under the PPP loan terms of 1 percent fixed interest over two years.
Following the eight-week period, you can submit a request to your lender for loan forgiveness. You can do this by completing the loan forgiveness application posted by the SBA and Treasury Department or by completing an application made available electronically through your lender.
To apply for loan forgiveness, you will need to submit two main components: (A) the PPP loan forgiveness application and (B) supporting documentation. The lender must make a decision on loan forgiveness within 60 days.
A) PPP loan forgiveness application
The PPP loan forgiveness application provided by the SBA and Treasury Department includes four components: (1) PPP Loan Forgiveness Calculation Form (to be submitted to the lender); (2) PPP Schedule A (to be submitted to the lender); (3) PPP Schedule A Worksheet; and (4) PPP Borrower Demographic Information Form (optional to submit to the lender).
1) PPP Loan Forgiveness Calculation Form (to be submitted to the lender)
This form is on pages 3 and 4 of the application and does need to be submitted to the lender. To complete the form, you’ll need the following information:
- Basic information about your business including business address and phone number;
- SBA PPP loan number (the loan number assigned by SBA when the loan was approved. Your lender will have this information);
- Lender PPP loan number (the loan number assigned to the PPP loan by the lender);
- PPP loan amount;
- Employees at the time of loan application and at the time of forgiveness application;
- PPP loan disbursement date;
- EIDL advance amount and EIDL application number;
- Payroll schedule;
- Covered period and (at your election) alternative payroll covered period dates; and
- Payroll and non-payroll expenses.
See the instruction sheet for this form on page 1 of the application for more detailed explanations of the required information.
2) PPP Schedule A (to be submitted to the lender)
PPP Schedule A is on page 6 of the application and does need to be submitted to the lender. You will use the PPP Schedule A Worksheet (see below) to help you prepare this document.
To complete Schedule A, you will need the following information:
- From the PPP Schedule A Worksheet: table 1 totals, table 2 totals, and the FTE reduction calculation;
- Non-cash compensation payroll costs; and
- Compensation to owners.
See the instruction sheet for Schedule A on page 5 of the application for more detailed explanations of the required information.
3) PPP Schedule A Worksheet
This worksheet is on pages 7 through 9 of the application and does not need to be submitted to the lender. The worksheet is meant to help you complete the PPP Schedule A which does need to be submitted to the lender.
To complete the worksheet, you will need the following information:
- Employee names and last four digits of their Social Security numbers;
- Cash compensation;
- Average FTE; and
- Salary/hourly wage reduction, FTE reduction exceptions, FTE reduction safe harbor.
See the instruction sheet for this worksheet on page 7 of the application for more detailed explanations of the required information.
4) PPP Borrower Demographic Information Form (optional to submit to the lender)
This form is on page 11 of the application and is optional to submit to the lender. Choosing to not submit this form will not have any bearing on your loan forgiveness. The demographic information form is included in the application form for reporting purposes only (for example, to determine the percentage of PPP loans that went to minority or women-owned businesses).
The form asks for the following information:
- Veteran status;
- Race; and
B) Supporting documentation
Documents you must submit with your PPP loan forgiveness application:
Payroll documentation verifying cash and non-cash compensation:
- Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees;
- Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the covered period or the alternative payroll covered period;
- Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941);
- State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state; and
- Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that you included in the forgiveness amount (PPP Schedule A, lines 6 and 7).
FTE documentation showing the average number of FTE employees on payroll per month between (at your election):
- February 15, 2019, and June 30, 2019;
- January 1, 2020, and February 29, 2020; or
- (in the case of seasonal employers) either of the preceding periods or a consecutive twelve-week period between May 1, 2019, and September 15, 2019.
Non-payroll documentation verifying (1) eligible non-payroll costs were in existence before February 15, 2020, and (2) eligible payments were made in the covered period:
Mortgage interest payments:
- Copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments from the covered period; or
- Lender account statements from February 2020 and the months of the covered period through one month after the end of the covered period verifying interest amounts and eligible payments.
Rent or lease payments:
- Copy of current lease agreement and receipts or cancelled checks verifying eligible payments from the covered period; or
- Lessor account statements from February 2020 and from the covered period through one month after the end of the covered period verifying eligible payments.
- Copy of invoices from February 2020 and those paid during the covered period and receipts, cancelled checks, or account statements verifying those eligible payments.
- Mortgage interest payments:
Documents you must maintain, but not submit:
PPP Schedule A Worksheet or its equivalent and the following:
- Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 1, including the “Salary/Hourly Wage Reduction” calculation;
- Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 2; specifically, that each listed employee received during any single pay period in 2019 compensation at an annualized rate of more than $100,000 (or $15,385 over an eight-week period);
- Documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule; and
- Documentation supporting the PPP Schedule A Worksheet “FTE Reduction Safe Harbor.”
You must retain all documentation for six years after the date the loan is forgiven or repaid in full.
If you spend part or all of your PPP funds on non-forgivable expenses and/or do not maintain staff and payroll, you will have to repay the non-forgiven amount at a 1 percent fixed interest rate over two years. All payments are deferred for six months; however, interest will accrue over this period. There are no prepayment penalties or fees for paying your loan back in less than two years.