UPDATED November 30, 2020
This article is not meant as legal, tax, or business advice. The official guidance on the CARES Act and associated SBA Loan Programs changes on a frequent basis, and I do my best to interpret and update the information, but ultimately everybody is responsible for making the best decisions for their own businesses.
Important updates to the Paycheck Protection Program forgiveness rules were passed on June 5 in the PPP Flexibility Act of 2020. The new rules extend the time period with which to use funds on allowable expenses from 8 to 24 weeks and alter the 75/25 (payroll/rent & utilities) ratio to 60/40, among other exemptions that make full forgiveness attainable for many more businesses.
How can I use the funds?
The eligible uses have not changed, however the amount of time and ratios have relaxed a bit. To be eligible for full forgiveness of your loan, at least 60% of the proceeds must be used for payroll - Salaries, wages, benefits, bonuses, state & local employer taxes. No more than 40% can be used on rent, mortgage interest, and utilities. You can use up to 100% on payroll costs if you choose. See the SBA website for more information.
You now have 24 weeks from the date of loan disbursement to use the funds. If you received your loan prior to June 5, you can still elect to use the 8 weeks covered period.
If you are using a 24 week covered period, owner compensation will be capped at $20,833 (the 2.5-month equivalent of $100,000 per year) for each individual or the 2.5-month equivalent of their applicable compensation in 2019, whichever is lower. For an 8- week Covered Period, this amount is capped at 8/52 of 2019 compensation (up to $15,385).
What if I don't maintain my pre-COVID staff levels?
Originally, you were required to maintain your Full Time Equivalent staffing levels or restore them by June 30 to be eligible for full forgiveness. You now have until December 31, 2020 to restore FTE to your chosen look back period.
First to calculate FTE, choose a look back period. The periods you can choose are:
February 15, 2019 - June 30, 2019
January 1, 2020 - February 29, 2020
Any 12 weeks from May 1, 2019 - September 15, 2019 (for seasonal employees)
For each employee, divide the total weekly average hours worked by 40 and round to the nearest tenth (0.1).
Make the same calculation during the 24 weeks covered period and compare with look back period.
Divide current FTE by look back FTE to get ratio. If the ratio is 100% or higher, you are eligible for full forgiveness. If it is lower, your total forgiveness will be lowered by that ratio.
FTE during look back period is 10.
FTE during 24 week covered period is 9.
Total PPP Loan amount is $100,000. The reduction in FTE causes forgiveness to be reduced to $90,000.
Exceptions - You may exclude an employee from FTE calculation if:
You offer an employee their job back by Dec 31 and they refuse.
You fire them with just cause.
They resign voluntarily.
They voluntarily request a schedule reduction.
You could not hire a replacement employee with similar skill level by Dec 31.
Business could not return to regular operations by Dec 31, due to safety/compliance or government mandates.
This last point is open for some interpretation. Does it refer to businesses who were mandated to close such as tattoo shops and bars? Or those which saw a reduction in income due to secondary effects of the lockdown (which is most businesses)? I think more guidance is needed.
If you reduced FTE during your covered period, but restored levels by December 31, 2020, that FTE will NOT be considered reduced. This is sometimes referred to as safe harbor. Essentially, if hours and wages in your payroll reports on December 31, 2020 match your reports from February 15, 2020, you are golden.
In addition, if you reduced salary or hourly wages by more than 25% for any employees, your forgiveness will be reduced by that amount.
Exception - Wage reduction will not effect forgiveness if:
You lost an employee, but hired a new one and started them at a lower wage than the original employee they replaced.
It is super important to document everything if you believe you are eligible for FTE exemptions - you many need to provide proof.
How do I apply for forgiveness?
The SBA has released three applications for PPP Loan forgiveness - Forms 3508, 3508EZ, and 3508S. Since you received and signed documents with a bank or lender, you will apply for forgiveness through that lender. Some banks will have their own applications or online portals, but the expectation is that they will be very similar to the SBA's applications. Your lender should contact you when they are accepting applications.
Which form do I use?
The simplest form released, form 3508S, is for loans of $50,000 or less. This form does not require you to show your calculations, rather it has you certify to certain attestations. The FTE reduction penalty is waived in this form, however, you still must certify that you used the money for approved expenses and in the correct ratio.
Form 3508EZ is appropriately named because it is much more straightforward and easier to fill out than 3508.
You can use this form if you meet one of the following requirements:
Are self-employed and have no employees
Have employees but did not reduce their wages by more than 25%, did not reduce employee numbers, and did not cut employee hours
Have employees but did not reduce wages by more than 25% and could not operate as normal as a result of reduced business activity due to COVID-19 health guidance compliance
If you are self-employed and have no employees, or are a partnership, you would have gotten a loan for less than $50,000 so you would most likely use 3508S.
If you have employees and want to use 3508EZ, you will have to attest that you did not reduce FTE or reduce wages more than 25% during the covered period.
If you experienced reductions in business as a result of health directives related to the Coronavirus AND did not reduce the salaries or wages of your employees more than 25%, you can still use 3508EZ. Click here for 3508EZ instructions.
All other businesses must use form 3508. If you are unsure how to calculate FTE, having an experience accountant or bookkeeper help with the forgiveness application is a good idea. Here are the instructions for Form 3508.
When can I apply for forgiveness?
Your lender will let you know when they are accepting forgiveness applications. As of November 2020, many banks and lenders have started accepting applications.
If you received funds before June 5, you can still elect an 8 week covered period or a 24 week covered period.
Most businesses will elect to use the 24 weeks covered period. Since the safe harbor date to restore FTE is December 31, 2020 it makes sense for some businesses to wait until 12/31 to request forgiveness.
If you have finished your 24 week period earlier than 12/31 and would like to request forgiveness then, you may, but just know that your safe harbor date will be the date of application, not 12/31.
Since the rules have already changed several times since the CARES Act passed in late March, it wouldn't be a surprise if more flexibilities are written into law as time goes by.
There are currently talks among lawmakers and big banks about the possibility of blanket forgiveness of PPP loans under $150,000 if the borrower submits a one page letter to their lender!
If you don't apply for forgiveness within 10 months after the last day of your covered period, loan payments are no longer deferred and you must begin making payments on the loan. So, you have some time, although I understand the urge to complete this step early.
What documentation will I need to provide?
Each lender will ask for slightly different documents, but here are the most commonly requested.
For payroll expenses:
Bank account statements or reports from your payroll provider
Tax forms (typically form 941)
State quarterly business and individual employee wage reporting and unemployment insurance tax filings
Payment receipts, cancelled checks, or bank statements showing employer contributions to group employee benefits plans
For non-payroll expenses:
Business mortgage interest payments: a copy of the amortization schedule with corresponding receipts OR mortgage statements from February 2020 and the months of the covered period.
Business rent or lease payments: a copy of the current rent/lease agreement with receipts verifying payments OR lease statements from 2020 and from the covered period through one month after the end of the covered period.
Business utility payments: a copy of invoices from February 2020 and those paid during the covered period with corresponding receipts or account statements.
For self-employed with no employees:
If you used your PPP loan for owner compensation, you will have to provide your 2019 Schedule C.
What if I don't get full forgiveness?
If you received funds after June 5, you will have 5 years instead of 2 years to repay the balance of the loan at 1% interest.
If you received the EIDL Advance ($1,000 per employee grant up to $10,000), your PPP forgiveness will be reduced by that amount. So, you will have to pay back that amount.
Is it too late to apply for a PPP loan?
Yes. Unless a new round of PPP funding is approved in a forthcoming COVID-19 relief bill, that ship has sailed.