As the second round of the Paycheck Protection Program (PPP) winds down on May 31, small business borrowers who have already secured their funding and spent their loan proceeds on covered expenses will soon be applying for loan forgiveness.
After all, the beauty of the PPP is that it was designed to keep Americans working by having their companies continue to pay their salaries. The program reimburses struggling small businesses—ultimately enabling them to survive—by allowing them to apply for forgiveness of the PPP loans they used to keep employees on payroll and certain other expenses.
Before applying, it is important to know the terms of forgiveness for both PPP Draw 1 and PPP Draw 2 loans.
First Draw PPP Loan forgiveness terms
First Draw PPP loans are made to eligible borrowers who qualify for full loan forgiveness if they have done the following during the 8- to 24-week period following their PPP loan disbursement:
· Maintained employee staffing and compensation levels
· Spent the loan proceeds on payroll costs and other eligible expenses; and
· Used at least 60% of the loan for covering payroll costs
Second Draw PPP Loan forgiveness terms
Similarly, Second Draw PPP are eligible borrowers who qualify for full loan forgiveness if they have done the following during the 8- to 24-week period following their PPP loan disbursement:
· Maintained employee and compensation levels in the same manner as required for the First Draw PPP loan
· Spent the loan proceeds on payroll costs and other eligible expenses; and
· Used at least 60% of the loan for covering payroll costs
How and when to apply for loan forgiveness
Small business borrowers can apply for forgiveness once all the money from the loan for which the borrower is requesting forgiveness have been spent. Borrowers can apply for forgiveness any time up to the maturity date of the loan.
If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments will no longer be forgiven, and borrowers will begin making loan repayments to their PPP lender.
Small business owners or their CPAs/accountants can apply for loan forgiveness by using AICPA’s free online platform PPPForgivenessTool.com.
Frequently asked questions:
What does payroll include?
Payroll includes salaries, wages or similar forms compensation; payment of cash tips or equivalent; payment for vacations or parental, family, medical, or sick leave; severance for dismissal or separation; payments for employee benefits, including health insurance premiums; payment of retirement benefits; and state or local tax assessed on employee compensation of employees.
PPP reimbursement covers salaries with a cap of $100,000. All employees regardless of salary above 100,000 are eligible to be counted in PPP loan forgiveness. However, anything above the $100,000 threshold his not covered. For instance, if an employee’s total paid compensation is $125,000, then PPP will cover $100,000 of that individual’s compensation, the remaining $25,000 will not be covered by the program.
Part-time employees do count toward total payroll for PPP calculations. To calculate the compensation amount for part-time workers, take the average of hours worked multiplied by the employee’s hourly rate. However, it is important to note that contractors and other 1099 workers do not count toward the payroll of a business. The reason is that 1099 workers and other self-employed contractors can apply for PPP independently.
What types of businesses are eligible for PPP loans?
· Self-employed individuals, independent contractors, and sole proprietors.
· Small businesses with employee count of 500 or fewer.
· Non-profits – 501(c)(3) and 501(c)(19) with 500 or fewer employees
· Franchises on a location by location basis
For more information specific to Small Business Administration business size requirements visit SBA table-size standards.
What type of documentation does small businesses need to apply for PPP loan forgiveness?
Documentation required to apply for PPP loan forgiveness may vary based on type of business. Loan forgiveness applicants should be able to provide documentation for all payroll periods that overlapped with the covered period of the PPP loan. These documents include:
· 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.
· 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.
· Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the borrower included in the forgiveness amount.
Non-payroll expenses covered by PPP include:
· Business mortgage interest payments. (Provide a copy of lender amortization schedule and receipts verifying payments, or lender account statements.)
· Business rent or lease payments. (Provide a copy of current lease agreement and receipts or cancelled checks verifying eligible payments.)
· Utility payments (Provide copies of invoices and receipts, cancelled checks or account statements.)
· Operation expenditures related to business software or cloud computing service
· Property damage costs related to vandalism or looting
· Payments made to a supplier of goods
· Worker protection expenditures (masks, sanitizer, etc.)
Covered items have expanded from the first iteration of PPP forgiveness, which focused primarily on salary expenses and rent, to items including PPE, software, and supplier costs. Once the documentation is compiled, the small business owner is ready to submit the loan forgiveness application to the lender. If the SBA undertakes a review of your PPP loan application, your lender will notify you of the review and, ultimately, of the SBA’s review decision.
Business owners whose PPP forgiveness requests are denied will have the right to appeal certain SBA loan review decisions. Your lender is responsible for notifying you of the forgiveness amount paid by SBA and the date on which your first payment will be due, if applicable.