The SBA last week release the long awaited Paycheck Protection Plan Loan Forgiveness Application for small business to complete. The application and instructions are only 11 pages! The SBA has made it more complicated than it needs to be but it’s their money, so if you don’t want to pay back the loan, you need to follow their rules. Some of the rules have changed with new laws passed June 2020. See details here.
The application has four parts
- The PPP Loan Forgiveness Calculation Form
- PPP Schedule A
- The PPP Schedule A Worksheet (for your own use)
- The (optional) PPP Borrower Demographic Information Form
All borrowers must submit 1 and 2 or some lenders may have an electronic form that can be used instead. Do not forget there is additional documentation that needs to be submitted with each application to back up your expense claims.
Remember, there are basically three tests for full forgiveness: Do you have as many employees now versus in February 2020? Are these employees making at least 75% of that they were making in February 2020? Is 75% of the requested forgiveness going to eligible payroll expenses? (payroll, taxes, insurance)
Since the forms build on each other, I would suggest completing the PPP Schedule A Worksheet first, then the PPP Schedule A and last the PPP Loan Forgiveness Calculation Form.
Tips for Completing the PPP Schedule A Worksheet
Remember that this actual form does not need to be submitted to the lender but is used to fill out other forms.
Your covered payroll period is 8 weeks (56 days) from the date you received the loan money. There is an alternate payroll covered period. The application states that “for administrative convenience, borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date (the “Alternative Payroll Covered Period”). For example, if the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20.”
- Note the FTE (Full Time Equivalent) Safe Harbor Rule: You can be exempt from reducing your forgiveness if you laid off your full-time employees during the crisis but hired them back by June 30, 2020 to the level you had in February.
- Documentation that needs submitted to back up your claim of forgiveness include bank or third party payroll records, payroll tax filings (941), receipts for contributions to contribution to health insurance, rent payment receipts, mortgage interest payments, copy of the lease or mortgage, and utility payments. Basically, anything you are including as part of the money you want forgiven, you need to provide documentation. Remember you also need documentation of the average number of FTE employees on payroll per month employed by the Borrower between February 15, 2019 and June 30, 2019;
- There are FTE reduction exceptions. The instructions state that the FTE of (1) any positions for which the Borrower made a good-faith, written offer to rehire an employee which was rejected by the employee; and (2) any employees who were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours. In all of these cases, include these FTEs on this line only if the position was not filled by a new employee. Any FTE reductions in these cases do not reduce your loan forgiveness.
Tips for Completing the PPP Schedule A
A lot of what needs to be filled out here comes from the PPP Schedule A worksheet.
Line 3: This includes any reduced wages for employees. Remember, if reductions in compensation were more than 75%, there will be a reduction in forgiveness.
Line 8: Remember state and local taxes can be counted in forgiveness but not federal and any matching taxes taken form employees in their payroll.
Line 9: Compensation to owners: This is capped at $15,385 (the 8-week equivalent of $100K a year) or 8/52 of your 2019 compensation (whichever is less). If you choose the 24 week period, this goes up to $20,833.
Line 13: FTE Reduction Quotient. If you have less employees now than in February 2020, then forgiveness will be reduced unless your brought them back by June 30, 2020.
Remember, owners cannot be paid more on a prorated basis then they were in 2019. So its 8/52 of that annual income that qualify to be forgiven.
Tips for Completing the PPP Loan Forgiveness Calculation Form
Again, information needed here is from the PPP Schedule A.
- Make sure you have the loan number assigned by the SBA. Your lender should have sent this to you.
- Enter the total number of employees you had at the time you applied for the loan and the number of employees that you have now when applying for forgiveness. This is important because it affects your loan forgiveness.
- In Line 4 on business utility payments, this includes “…electricity, gas, water, transportation, telephone or internet access, for which service began before February 15, 2020.” What is included in transportation costs is defined by the SBA as gas and other auto expenses that would usually be part of the auto deductions on your business-tax return.
- Whatever you submit here must be consistent what you have already submitted to the IRS for other purposes under penalty of fraud.
Tips for Self Employed with No Employees
It is still a bit unclear how all this works for self employed individuals or sole proprietors. The best guidance in this area is you will need to show the financial income you are taking this year (net income for the business so far) not to exceed 8/52nd of your annual income in 2019 as reported on Line 31 of your schedule C.
There is no additional forgiveness is provided for retirement or health insurance contributions for self employed in this category.
The limit for deductions for lease payments and utilities is the max you claimed on your 2019 Schedule C.
Home office deductions may count for rent according to some sources.
EIDL Forgiveness
Remember, any EIDL advance (not the loan since that carries interest) you got needs to be deducted from the loan forgiveness (This is up to $10,000). So if you got a PPP loan of $100,000 and an EIDL advance of $5,000, your maximum loan forgiveness is $95,000.
Lenders will have 60 days to approve or reject the forgiveness request. There is a lot of detail here and a correctly completed the application will ensure the maximum amount forgivable.
Note: In June, the SBA announced a new EZ PPP loan forgiveness application. You can use it if you are self-employed and do not have any employees or you did not reduce your employees’ hours or did not reduce their salaries or wages by more than 25%.
