By Raffi Yousefian | Published 03/26/2020; Updated 03/31/2021 12:39:31 PM

There is free money issued by the government, but you must navigate through a maze to get to it. You have a short amount of time, and the maze changes each time you think you’ve figured it out. 

We feel your pain, which is why we’ve drafted this post. Keyword, drafted. We have been updating it every evening since March 25th, a couple of days before the CARES Act was passed. 

On March 27, 2020, the CARES Act was signed into law. This piece of legislation, contained a special gift for small businesses, known as the PPP. Through this program, the federal government would issue nearly $660 billion in collateral-free loans to small business employers between February 15, 2020 and August 8, 2020. 

On December 27, 2020, the Economic Aid act was signed into law which added a second round of PPP loans, drastically modified the first round of PPP, and extended the time period to apply for the first round of PPP loans to May 31, 2021. In this article, we’ll walk you through the components of the first round of PPP as they stand today.

We’re hoping this post will summarize everything you need to know about the Paycheck Protection Program (PPP) and its loan forgiveness component. It is meant to be timeless and updated as soon as new legislation is passed or even discussed. Keep an eye out for the time stamp above to know when the post was last updated. For guidance on the second round of PPP loans, you should read this article. 

The “Loan”

Eligibility

You are eligible for a PPP loan if you’re a small business employer, were in operation on February 15, 2020, and either (1) had employees for whom you paid salaries and payroll taxes or paid independent contractors (as reported on a Form 1099-MISC) or (2) or you were an eligible self-employed individual, independent contractor, or sole proprietorship with no employees. 

A small business employer includes:

  • For-profit business with less than 500 employees
  • 501(c)(3) and 501(c)(19) nonprofit organizations that employ no more than 500 employees
  • a Tribal business concern described in section 31(b)(2)(C) of the Small Business Act that employs no more than 500 employees
  • Sole proprietors, self-employed individuals, and independent contractors that employ no more than 500 employees
  • a housing cooperative or an eligible destination marketing organization, that employs no more than 300 employees
  • an eligible section 501(c)(6) organization (excluding professional sports leagues and organizations with the purpose of promoting or participating in a political campaign or other activity) 
  • a news organization that is majority-owned or controlled by a NAICS code 511110 or 5151 business or a nonprofit public broadcasting entity with a trade or business under NAICS 511110 or 5151, that employs no more than 500 employees per physical location
  • Restaurants, caterers, hotels, or other businesses operating under NAICS code 72 that employ no more than 500 employees per physical location

You’re ineligible for a PPP loan if:

  • You’re in bankruptcy either at the time you submit the application or at any time before the loan is disbursed
  • You’re a hedge fund or private equity firm
  • You’re a lobbying organization, meaning: 
    • you receive more than 15 percent of receipts from lobbying activities
    • lobbying activities comprise more than 15 percent of the total activities of the organization
    • the cost of the lobbying activities exceed $1,000,000 during the most recent tax year of the organization that ended prior to February 15, 2020
  • You are engaged in any activity that is illegal under Federal, state, or local law
  • You are a household employer
  • An owner of 20 percent or more of the equity of the applicant is presently incarcerated or, for any felony, presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought in any jurisdiction; or has been convicted of, pleaded guilty or nolo contendere to, or commenced any form of parole or probation (including probation before judgment) for, a felony involving fraud, bribery, embezzlement, or a false statement in a loan application or an application for federal financial assistance within the last five years or any other felony within the last year;
  • You, or any business owned or controlled by you or any of your owners, has ever obtained a direct or guaranteed loan from SBA or any other Federal agency that is currently delinquent or has defaulted within the last seven years and caused a loss to the government;
  • You or your business received or will receive a grant under the Shuttered Venue Operator Grant program 
  • The President, the Vice President, the head of an Executive Department, or a Member of Congress, or the spouse of such person as determined under applicable common law, directly or indirectly holds a controlling interest in your business
  • You are a public traded company 

Businesses that are part of a single corporate group shall in no event receive more than $20,000,000 of PPP loans in the aggregate. 

Loan Amount

The loan amount will be limited to the lesser of:

  •  The sum of:
    • average monthly payroll costs for the calendar year 2019, calendar year, 2020 or the 1-year period up to the date of the loan* application times 2.5**, and;
    • any disaster loan that has been refinanced into a paycheck protection loan
  • $10 million.

It’s very important to understand the definition of payroll costs in this context. Payroll costs include:

  • For Employers:
    • Gross wages to employees
      • wages for employees in excess of $100k (annualized) must be excluded
      • wages for employees not living in the US must be excluded
      • includes officer’s compensation 
    • Self-employment income (including guaranteed payments) of partners in a partnership or LLC taxed as a partnership
    • Tips paid
    • Paid time off
    • Severance
    • Medical benefits
    • Retirement benefits
    • Other employer-provided group insurance benefits, such as life insurance
    • State and local taxes assessed on employee compensation (aka SUI)
  • For Sole Proprietors, Independent Contractors, and Self-Employed Individuals:
    • Self-employment earnings not more than $100,000 annualized, plus payroll costs from above if the individual has employees. Refer to Schedule C, line 31 of your 1040 to understand the calculation.  
    • If applying after March 3, 2021, a Schedule C filer who has yet to be approved for a PPP first- or second-draw loan in the current, can elect to calculate the owner compensation share of its payroll costs based on either net profit (as reported on line 31 of Schedule C) or gross income (as reported on line 7 of Schedule C).

*Self-employed individuals, such as sole proprietorships and independent contractors, are not allowed to use 1-year period up to the date of the loan

**a seasonal employer must determine its maximum loan amount for purposes of the PPP by using the employer’s average total monthly payments for payroll for any 12-week period selected by the seasonal employer beginning February 15, 2019, and ending February 15, 2020.

A seasonal business is a business that:

  • operates for no more than seven months in a year; or
  • earned no more than 1/3 of its receipts in any six months in the prior calendar 

**An applicant that was not in business from February 15, 2019 to June 30, 2019 may use the average monthly payroll costs for the period January 1, 2020 through February 29, 2020.

If you received an SBA EIDL loan from January 31, 2020, through April 3, 2020, and you seek to refinance the EIDL with PPP funds then you can add the outstanding amount of the EIDL to the PPP loan amount. 

If your loan calculation has increased after you already received the loan due to changes in the interim final rules, and you’re loan has not been forgiven, then you are allowed to work with lenders to increase your loan amount under the following circumstances:

  • If a partnership received a first draw PPP loan that included amounts necessary for payroll costs of the partnership’s employees and other eligible operating expenses, but did not include any amount for partner compensation
  • If a seasonal employer received a first draw PPP loan under the old seasonal employer definition and rules, and the methodology described above (passed as part of section 336 of the Economic Aid Act) results in the calculation of a higher loan amount.
  • If an eligible farmer or rancher received a first draw PPP loan, and such farmer or rancher would be eligible for a higher maximum loan amount based on the formula described in section 313 of the Economic Aid Act. 
  • If an eligible borrower received a first draw PPP loan, the lender reported to SBA before December 27, 2020 that the borrower fully repaid the loan, and SBA has not remitted a forgiveness payment to the lender on that loan. 
  • If a borrower returned (or repaid) part of a first draw PPP loan, the lender reported to SBA before December 27, 2020 that the borrower repaid the loan in part, and SBA has not remitted a forgiveness payment to the Lender on that loan.
  • If a borrower did not accept before December 27, 2020 the full amount of a first draw PPP Loan for which it was approved in SBA’s E-Tran origination site and SBA has not remitted a forgiveness payment to the lender on that loan.

For example, assume you determine that your loan amount should have been higher after you already received PPP funds because you recalculated your payroll costs as a seasonal employer or partnership (to include partner’s self-employment income), then you can request a loan increase based on these changes up until March 31, 2020. SBA is developing a process to collect the information necessary for eligible borrowers to reapply or request an increase in their PPP loan amount as described in this interim final rule

The loans will be administered through the SBA’s 7(a) loan program and will have a maturity of  5 years and an interest rate of 1%. The “credit available elsewhere” test that is normally applicable to SBA loans will be waived.

You will not have to make a payment towards the loan until 10 months after the covered period. If you submit a loan forgiveness application within 10 months after the end of your loan forgiveness covered period, you will not have to make any payments of principal or interest on your loan before the date on which SBA remits the loan forgiveness amount on your loan to your lender (discussed later). If you do not submit to your lender a loan forgiveness application within 10 months after the end of your loan forgiveness covered period, you must begin paying principal and interest after that period.

60% of the loan proceeds must be used to cover payroll costs (as defined above), the remainder can be used to cover qualified non-payroll costs as defined in the forgiveness section later. 

Application Process

The borrower will apply for the loan through an SBA certified lender (their bank) by submitting the Paycheck Protection Program Borrower Application Form (SBA Form 2483), or the lender’s equivalent form, plus the appropriate payroll documentation as discussed above. The last day to apply for and receive a PPP loan is now May 31, 2021.

To qualify, you must certify on the application that:

(1) you were in operation during February 15, 2020 and has not permanently closed;

(2) the uncertainty of current economic conditions makes necessary the loan request to support ongoing operations;

(3) acknowledge funds will be used to cover the expenses mentioned in the previous paragraph;

(4) you can provide payroll tax documentation to support your payroll calculations; and

(5) you will not receive another loan under the Paycheck Protection Program (besides PPP 2)

(6) you have not and will not receive a Shuttered Venue Operator grant from SBA

(7) you’re an eligible borrower as defined in the eligibility section above

The lender must make a one-time, full disbursement of the PPP loan within ten calendar days of loan approval; for the purposes of this rule, a loan is considered approved when the loan is assigned a loan number by SBA. You will not have to make any payments towards principal or interest following the date of the disbursement of the loan until forgiveness is determined (explained later) or 10 months after the 24 week period following the loan (whichever is later). There will be no prepayment penalties, guarantee fees, or yearly fees. 

On May 13, 2020 the SBA clarified a few ambiguities. First, if a partnership received a PPP loan that only covered employee payroll costs and eligible operating expenses, and NOT partner compensation, the lender may increase the PPP loan amount to include appropriate partner compensation even if the loan had already been disbursed, assuming form 1502 has not been submitted to the SBA. Second, they extended the safe harbor repayment date (the date you can give the loan back if you decide you shouldn’t have taken it) from 5/14 to 5/18. Third, any borrower + affiliates receiving PPP loans with $2m or less in principal will be deemed to have made the required certification of loan necessity in good faith.

The following documentation must be provided with the application:

  • quarterly Form 941s (or other tax forms containing similar information) and state quarterly wage unemployment insurance tax reporting forms from each quarter in 2019 or 2020 (whichever you used to calculate loan amount); or
  • equivalent payroll processor records, along with evidence of any retirement and health insurance contributions

A payroll statement or similar documentation from the pay period that covered February 15, 2020 must be provided to establish you were in operation on February 15, 2020. 

Now, that’s all great, 100% federally guaranteed loans at a very reasonable interest rate with an extended payment deferral period. 

But wait, it gets better!

Loan Forgiveness

The principal + interest on these loans will be forgiven, thus classifying it as a grant, to the extent that payments from the proceeds of the loan are expended on the following, during the covered period* beginning on the date of the disbursement of the loan through the end of the covered period:

  • Payroll costs (must account for 60% of the amount forgiven) 
    • Includes payroll costs as defined above
    • Refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020
  • Non-payroll costs
    • Mortgage interest on mortgage obligations incurred before 2/15/20
    • Real or personal property rent on leases dated before 2/15/20
    • Utility payments under service agreements dated before 2/15/20
    • Covered operations expenditures: Payments for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.
    • Covered property damage costs: Costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation.
    • Covered supplier cost: An expenditure made by an entity to a supplier of goods that are:
      • Essential to the operations of the entity at the time at which the expenditure is made, or
      • Is made pursuant to a contract, order, or purchase order that was either (1) in effect at any time before the covered period with respect to the loan, or {2) with respect to perishable goods, in effect before or at any time during the period.
    • Covered worker protection: These are operating or capital expenditures that are required to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the CDC, or OSHA during the period beginning on March 1, 2020, and ending on the date on which the national emergency declared by the President under the National Emergencies Act expires. Eligible costs are those related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19. The term includes:
      • The purchase, maintenance, or renovation of assets that create or expand a drive-through window facility; an indoor, outdoor, or combined air or air pressure ventilation or filtration system; a physical barrier such as a sneeze guard; an indoor, outdoor, or combined commercial real property; an onsite or offsite health screening capability; or other assets relating to the compliance with the requirements of certain protective guidance.
      • The purchase of covered materials described in section 328.103(a) of title 44, Code of Federal Regulations, or any successor regulation; particulate filtering facepiece respirators approved by the National Institute for Occupational Safety and Health, including those approved only for emergency use authorization; or 0ther kinds of personal protective equipment, as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor.
      • Does not include residential real property or intangible property.

*The covered period can be anywhere from 8 weeks to 24 weeks at the borrower’s election. The covered periods for a First Draw PPP Loan and a Second Draw PPP Loan cannot overlap; the borrower must use all proceeds of the First Draw PPP Loan for eligible expenses before disbursement of the Second Draw PPP Loan.

A borrower may receive forgiveness for the last four nonpayroll cost categories only if SBA had not yet remitted a forgiveness payment on the borrower’s loan to the borrower’s PPP lender as of December 27, 2020 (the date of the Economic Aid Act’s enactment).

The 60/40 spending ratio requirement is a proportional limit on nonpayroll costs as a share of the borrower’s loan forgiveness amount, rather than as a threshold for receiving any loan forgiveness. 

Payments of interest on business mortgages on real or personal property (such as an auto loan) are eligible for loan forgiveness. Interest on unsecured credit is not eligible for loan forgiveness because the loan is not secured by real or personal property. Although interest on unsecured credit incurred before February 15, 2020 is a permissible use of PPP loan proceeds, this expense is not eligible for forgiveness.

Utility payments for these purposes include electricity, gas, water, transportation, and telephone/internet on contracts that began before February 15, 2020. Other common utilities such as garbage collection or security monitoring may also be classified as a utility, but a borrower should confirm with their bank before including those amounts in their forgiveness amount. 

The amount of loan forgiveness requested for nonpayroll costs may not include any amount attributable to the business operation of a tenant or sub-tenant of the PPP borrower. For example, assume you rent space for $10k per month, then sublease 25% of that space for $2.5k per month, or get a $2.5 reimburse from another business who shares the space with you. Only $7.5k of the $10k would be eligible for forgiveness. Also, if you’re a home-based business, the amount eligible for forgiveness would be the same amount that you would use for the home office deduction on your 2019 or 2020 personal returns. Assume you work from home, pay $10k in rent over the 24 weeks, and have a home office (10% of your home) that is solely dedicated to your business. 10% of your rent will be eligible for forgiveness. 

Costs Paid or Incurred

To qualify for forgiveness, expenses must be paid or incurred during the covered period. Incurred means accrued, and paid means payment is issued. For example, if a payroll period covers 5/18 – 5/24, and payment is issued to employees on 5/27, then the expenses for this payroll are incurred between 5/18 and 5/24, and paid on 5/27. 

For expenses to be eligible for forgiveness, they must be either:

(1) paid during the covered period; or

(2) incurred during the covered period and be paid by its next regular due date (for non-payroll costs) or by the next regular pay date (for payroll costs).

For example, if you issued payment to employees during the covered period for work performed before the covered period, then this payment would qualify for forgiveness. However, payroll costs and nonpayroll incurred in the covered period but paid outside of the covered period must be paid on or before the next regular pay date or next regular billing date respectively. This means you could potentially prepay or pay overdue amounts for qualified nonpayroll costs and have the amounts forgiven. However, Treasury has clarified that advance payments of interest on mortgage obligations are not eligible for forgiveness.

It is important to remember that payroll costs include the employer portion of health benefits and retirement contributions. However, forgiveness is not provided for employer contributions for retirement benefits accelerated from periods outside the Covered Period.

What will impact the amount that is forgiven?

Workforce Reduction 

  • If you reduce your workforce during the covered period
    • This is calculated by comparing the number of average full-time equivalent (FTE) employees for each pay period during the covered period to the average number of FTE employees between either January 1, 2020 – February 29, 2020, or February 15, 2019 – June 30, 2019. Seasonal employers can choose either of those two date ranges or any 12-week period between 5/1/2019 and 9/15/2019. A seasonal employer that elects to use either of the two preceding methods or a consecutive 12-week period between February 15, 2019 and February 15, 2020. 
    • If the average number of FTE employees during the covered period is less than during the reference period, the total eligible expenses available for forgiveness is reduced proportionally by the percentage reduction in FTE employees. For example, if a borrower had 10.0 FTE employees during the reference period and this declined to 8.0 FTE employees during the covered period, the percentage of FTE employees declined by 20 percent and thus only 80 percent of otherwise eligible expenses are available for forgiveness.
    • The reduction in loan forgiveness for reducing your workforce will not apply if the borrower:
      1. eliminates the reduction in full-time equivalent employees by December 31, 2020 (or, for a PPP loan made on or after December 27, 2020, not later than the last day
        of the loan’s covered period); or 
      2. makes a good-faith, written offer to rehire or restore the reduced hours of an employee during the covered period, the offer was rejected, and the borrower has documentation of the offer and rejection; or
        1. The offer must be for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the reduction in hours; 
      3. can document in good faith the inability to rehire individuals who were employees on February 15, 2020 and hire similarly qualified employees for unfilled positions on or before December 31, 2020 (or, for a PPP loan made on or after December 27, 2020, not later than the last day of the loan’s covered period).
        1. Borrowers are required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer.
        2. The documents that borrowers should maintain to show compliance with this exemption include, but are not limited to, the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of efforts to hire a similarly qualified individual.
      4. has a PPP loan of $50,000 or less; or
      5. fired an employee for cause or have an employee that voluntarily resigns or voluntarily requests a schedule reduction
        1. the borrower may count such employee at the same full-time equivalency level before the reduction event 
        2. Borrowers that avail themselves of this de minimis exemption shall maintain records demonstrating that each such employee was fired for cause, voluntarily resigned, or voluntarily requested a schedule reduction. The borrower shall provide such documentation upon request 
      6. in good faith is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 20200 (or, for a PPP loan made on or after December 27, 2020, not later than the last day of the loan’s covered period), related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.
        • Borrowers using this exception are required to certify that they have documented in good faith that their reduction in business activity during the covered period stems directly or indirectly from compliance with sanitation, social distancing or any other worker or customer safety requirement related to COVID-19.
  • If you reduce the salaries/wages to employees making less than $100k annually by more than 25% during the 24 week period.
    • The forgivable amount is reduced dollar for dollar by any wage reduction greater than 25%. The reduction for hourly wages is based on an hourly basis, not on total wages paid, so as long as you maintain the same hourly wage rate then you shouldn’t have any reduction for that employee. 
    • The reduction in loan forgiveness for reducing your employee’s wages beyond 25% will not apply if the borrower:
      • reduced the wages between February 15, 2020 and April 26, 2020 (30 days after the enactment of the CARES act), then eliminated the reduction in wages at any point before December 31, 2020 (or, for a PPP loan made on or after December 27, 2020, by the last day of the loan’s covered period).
      • has a PPP loan of $50,000 or less; or
    • For purposes of calculating reductions in the loan forgiveness amount, the borrower should only take into account decreases in salaries or wages. 

The average # of FTEs during the covered period and the other relevant time periods is calculated by dividing the total number of hours worked by each employee per week, by 40 hours. The max number per employee is 1.0 per week. Alternatively, you can use a simplified method which considers any employee with 40+ hours as 1 FTE, and any employee with less than 40 hours as .50 FTE.

If you laid off or furloughed your staff, there’s nothing in the bill that states you’re required to rehire the same workforce or for the same purpose. You can hire employees who would be more suited for your current operations. For example, if you need delivery drivers instead of bartenders, then you could either hire delivery drivers or repurpose your bartenders as delivery drivers in order to meet forgiveness requirements.

Owner’s Pay

The amount of loan forgiveness for owner-employees, self-employed individuals, and managing partners is limited to the lesser of

  • (1) $20,833 ($100k annualized over 2.5 months) during the 24-week covered period or;
  • (2) 2.5/12 x 2019 compensation.

If you choose to use 8 weeks as your covered period, then this amount is limited to the lesser of

  • (1) $15,385 ($100k annualized over 8 weeks) or;
  • (2) 8/52 x 2019 compensation.

Payroll costs for C-corp and S-corp owner-employees as stated above are generally calculated the same way as other employees. Since an S-corp owner’s health insurance contributions are reported as W-2 wages, you should be careful not to count these contributions towards the forgiveness amount twice. 

2019 compensation for Schedule C filers is based on their 2019 net profit, which is line 31 of your 2019 schedule C. If your 2019 Schedule C line 31 was showing a loss then the amounts you pay yourself are not eligible for forgiveness.

2019 compensation for General partners or managing partners is the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235. 

Owner-employees with less than a 5 percent ownership stake in a C- or S- Corporation are not subject to the owner-employee compensation rules. This exemption is intended to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated.

EIDL

Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan ONLY if the borrower applied for forgiveness prior to the enactment of the Economic Aid Act on December 27, 2020. Otherwise, these amounts will not be deducted from the forgiveness amount. 

Errors in the Calculation of the Loan Amount

If the lender or SBA determines that a borrower was ineligible for any portion of its loan amount due to errors made by the borrower or lender in calculating the loan amount on the loan application, then forgiveness will be denied for the ineligible portion and the borrower must begin making payments on the remaining loan amount. 

Applying for Forgiveness

To qualify for forgiveness, the borrower must complete and submit the Loan Forgiveness Application (SBA Form 3508, 3508S, 3508EZ, or lender equivalent) to its lender any time on or before the maturity date of the loan if the borrower has used all of the loan proceeds for which they’re requesting forgiveness. Payments of principal and interest on the loan are not due until the lender determines the loan forgiveness amount. If the borrower does not apply for loan forgiveness within 10 months after the last day of the covered period, or if SBA determines that the loan is not eligible for forgiveness (in whole or in part), then the PPP loan is no longer deferred and the borrower must begin paying principal and interest. If this occurs, the lender must notify the borrower of the date the first payment is due. A borrower applying for forgiveness of a Second Draw PPP Loan that is more than $150,000 must submit the loan forgiveness application for its First Draw PPP Loan before or simultaneously with the loan forgiveness application for its Second Draw PPP Loan. 

Borrowers with loans of up to $150k are now eligible for “automatic” forgiveness. “Automatic” forgiveness means that borrowers can file a simple one-page application to request loan forgiveness and will not have to submit documentation. The SBA may not require additional materials unless necessary to substantiate revenue loss requirements or satisfy relevant statutory or regulatory requirements. Borrowers will only be subject to audit if they commit fraud or use the proceeds for improper purposes, therefore they’re required to retain relevant records related to employment for four years and other records for three years. The one-page application will ask for:

  • the number of employees the borrower was able to retain because of the loan
  • the estimated total amount of the loan spent on payroll costs
  • the total loan amount

For loans between $150,000 and $2 million, borrowers are not required to submit documentation but must complete related certifications, retain relevant employment records for four years, and retain other records and worksheets for three years. As a reminder, lenders and/or the SBA may review and audit all PPP loans.

The lender has 60 days after the application has been submitted to issue a decision and request for pay off of the debt to the SBA. SBA will, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to SBA. If the forgiveness is denied, the lender will notify the borrower. 

The loan forgiveness will trigger the extinguishment of debt income, which will not be subject to income tax. The expenses attributable to the forgiveness amount will be deductible for tax purposes thus offering taxpayers a double benefit.

For loan forgiveness applications that require documentation, the following will be required:

  • Documentation verifying the number of FTEs on payroll and pay rates for the following periods:
    • The covered period after the loan was disbursed
    • 2/15/2019 – 6/30/2019
    • 1/1/2020 – 2/29/2020
    • 2/15/2019 – 6/30/2019 (for a seasonal employer)
    • 2/15/2020 through 4/26/2020 
  • Quarterly Form 941 and state unemployment reports or payroll processing records will satisfy these requirements 
  • Evidence of any retirement and/or health insurance contributions such as cleared checks, payment confirmations, or bills for the 8-week period. 
  • Evidence of business rent, business mortgage interest payments on real or personal property, or utility payments for the 8-week period.

For PPP loans over $2M, the borrower will need to submit a loan necessity questionnaire. The questionnaire form is provided from the lenders to the borrowers. Borrowers must return the completed form to the lender within 10 business days of receiving the notice. If the questionnaire is not submitted, the SBA may determine the borrower was ineligible for either the PPP loan, PPP loan amount, or forgiveness, at which point the SBA may seek repayment of the loan or pursue other available remedies. 

If the lender decides that the entire amount will not be forgiven, and that decision is affirmed by the SBA, then the borrower can request that the SBA review the lender’s decision through a process that is TBD. If the lender and SBA decide that the loan was ineligible or forgiveness is entirely ineligible, then you have the right to an appeal with the SBA Office of Hearings and Appeals (OHA). The appeal process is out of the scope of this article, but you can read more here. 

This post will be constantly updated with new developments. We suggest following our blog for daily updates on taxes and relief available for small businesses and nonprofits. We hope that this information has been helpful, please don’t hesitate to contact us if you have questions or need guidance.

Raffi Yousefian is a licensed CPA who advises small to enterprise-level businesses on accounting and tax issues in his role as Managing Principal at RY CPAs.