The surest way to get your PPP loan forgiven is to pay your people first (it is the Paycheck Protection Program after all). All the nitty-gritty details aside, the whole point of a PPP loan is to keep US workers paid and employed. As long as you make that your top priority and follow the guidelines below, your loan will be forgiven.
The loan amount you receive is equal to 2.5 times your average monthly payroll costs, and the forgiveness period is eight weeks. That means, in theory, you will be able to fully cover your payroll (minus federal unemployment, Social Security, and Medicare taxes) over the next two months with money to spare.
The 75/25 Rule
Per the IRS PPP Loan guidelines, 75% of the loan must be spent on payroll costs, while the other 25% can be used for rent, utilities, and interest on mortgages and other debt obligations.
So, let’s say you receive a $240,000 loan— at least $180,000 (75%) needs to be used to pay employees’ wages, salaries, tips & commissions, health & retirement benefits, and state or local payroll taxes. The remaining $60,000 (25%) can be used to pay interest on debt & mortgages, utilities, and rent. If you follow these guidelines, your loan will be fully forgiven.
How to Calculate Loan Forgiveness
First, determine how much of your loan at maximum is eligible for forgiveness. The best way to do this is to document EVERYTHING starting from the first day you receive funding from your lender. Using that documentation, tally up everything you spent on:
- Payroll— the same factors used to determine your average monthly payroll costs when applying for the loan
- Interest paid on debt and mortgages
- Utilities and rent payments
Now take the total you spent on payroll costs and divide it by the amount of your loan— if you get 0.75 or higher, you’re looking good.
Do rent, utilities, and interest payments take up the remainder of your loan? If the answer is yes, then you are on track for 100% forgiveness.
Now, we need to look at your employee headcount and wages. Part of the loan requires that you retain the same number of full-time equivalent employees from the time you applied for the loan through the end of the eight weeks.
Did you lose employees since you applied for the loan? If so, subtract eight weeks’ worth of those salaries from your maximum loan forgiveness amount from above. The headcount you must retain is based on the headcount you submitted when applying for the loan. The amount of loan forgiveness will reduce proportionately to employees lost.
Did you implement pay cuts during the eight weeks? If so, you need to reduce your loan forgiveness amount by the difference between the employees’ current pay and 75% of their original pay when you applied for the loan. Part of the PPP requirements is that you maintain 75% of total salaries.
In other words, you will have to pay back any salaries lost between the time you applied for the loan and the end of the eight week forgiveness period.
In short, you will owe money if you:
- Have a decrease in the number of full-time equivalent employees
- Cut employees’ pay by more than 25%
- Use the money to pay for anything other than payroll costs, interest on debt & mortgages, rent, and utilities
EPSLA and EFMLA
It’s important to note that emergency paid sick leave and expanded family and medical leave under the Families First Coronavirus Response Act are NOT included in payroll costs and are not eligible for forgiveness. That is because those wages are forgiven by way of tax credits.
You will be reimbursed for paying those wages regardless of whether you have a PPP loan or not, so save your loan money for non-refundable costs.
How to Apply for Forgiveness
That’s right; you have to apply for forgiveness after the eight weeks to receive it. Your lender is responsible for processing applications for forgiveness and will provide you with instructions on how to do so. Your lender is required to give you a response within 60 days of your application.
Documents Needed for Loan Forgiveness
We recommend that you document EVERYTHING over the eight week forgiveness period. Reliable record-keeping will help ensure that you receive the loan forgiveness that you are entitled to. Your lender will tell you what documents they need, but you should expect to provide:
- Documents verifying the number of full-time equivalent employees on payroll and their pay rates, for the periods during your eight weeks (this could be a Work Site report in some payroll systems)
- Payroll reports from your payroll provider
- Payroll tax filings (Form 941)
- Income, payroll, and unemployment insurance filings from your state
- Documents verifying any retirement and health insurance contributions
- Documents verifying your eligible interest, rent, and utility payments
What Happens to Loan Amounts NOT Forgiven
Outstanding portions of your loan that don't receive forgiveness must be repaid over two years at a 1% interest rate. All payments are deferred for six months, but your balance does accrue interest over this period. There are no prepayment fees or penalties, so you can pay back your loan as quickly as you want.