PPP Loan Forgiveness

July 2020


Disclaimer: The information below is subject to forthcoming SBA regulations. We will continue to monitor those developments, and will update this page as additional guidance becomes available. This information is a summary only meant to give PPP borrowers a general understanding of the PPP forgiveness program and could change at any time. The SBA and the Treasury have continued to post guidance and explain regulations on a regular basis.  We strongly encourage all borrowers to read and review the Interim Final Rules for more specifics.

 

Please not do submit PPP forgiveness applications to us at this time.  The following is for informational purposes only.

 

How does the PPP loan forgiveness work?

It is possible that we will be utilizing a third-party processor for our customers to submit their applications.  If we decide to process forgiveness applications directly then you will be required to request the forgiveness of PPP loan proceeds by completing and submitting to the Bank SBA Form 3508.  If you are a borrower who meets any one of these three criteria, then you can use the simplified Form 3508EZ

     • Applied for the PPP loan as self-employed, an independent contractor or a sole proprietor with no employees; or
     • Did not reduce salary or wages for any employee by more than 25%, and did not reduce the number or hours of their employees (excepting laid-off employees who refused an offer to return); or
     • Did not reduce salary or wages for any employee by more than 25% during the covered period and experienced reductions in business activity as a result of health directives related to COVID-19.

Instructions for Form 3508 can be found here and for Form 3508EZ here.

Forgivable Costs

The "Covered Period" over which a borrower may accumulate forgivable costs was extended from 8 weeks to 24 weeks, or December 31, 2020, whichever comes first. Borrowers with loans taken out prior to June 5, 2020, however, may elect to continue to use an 8-week covered period.  Note that any funds not used for qualifying purposes within that "Covered Period" are not eligible for forgiveness and must be paid back.

1. Cash Compensation Payroll Costs includes the sum of gross salary, wages, tips, commissions, paid leave (vacation, parental, family, medical or sick leave, not including leave covered by the Families First Coronavirus Response Act), and allowances for dismissal or separation paid or incurred during the Covered Period¹ or the Alternative Payroll Covered Period² up to $100,000 of annualized pay per employee for 24 weeks, a maximum of $46,154 per individual (or for 8 weeks, a maximum of $15,385 per individual).

Keep in mind:
     • Payroll costs must be at least 60% of the forgiven amount.
     • Payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction.  Payroll costs are considered incurred on the day that the employee earned the pay.  Payroll costs incurred but not paid during the borrower's last pay period of the Covered Period (or Alternative Payroll Cover Period) are eligible for forgiveness if paid on or before the next regular payroll.
     • You can only include compensation of employees who were employed by you at any point during the Covered Period (or Alternative Covered Period).

2. Non-Cash Compensation Payroll Costs (covered benefits): for employees (but not owners), the total amount paid for employee health insurance, including employer contributions to a self-insured, employer-sponsored group health plan, but excluding any contributions made by employees, the total amount paid for employer contributions to employee retirement plans, but excluding any contributions made by employees, and the total amount paid for employer state and local taxes assessed on employee compensation (e.g., state unemployment insurance tax), but not including any taxes withheld from employee earnings.

3. Owner compensation: the SBA's guidance allows for the forgiveness of amounts paid to businesses that file Form 1040 Schedule C, Profit or Loss From Business (owner-employees, a self-employed individual or general partners):
     • For borrowers using a 24-week Covered Period, this amount is capped at $20,833 or the 2.5-month equivalent of their applicable compensation in 2019, whichever is lower. For borrowers using an 8-week Covered Period, this amount is capped at $15,385 or the 8-week equivalent of their applicable compensation in 2019, whichever is lower.
          a. C-corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health care contributions made on their behalf.
          b. S-corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement contributions made on their behalf (but not health insurance contributions).
          c. General partners are capped by 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.

For self-employed individuals (including Schedule C filers) and general partners, retirement and health insurance contributions are included in their net self-employment income and therefore cannot be separately added to their payroll calculation.

4. Business mortgage interest payments paid or incurred during the Covered Period for any business mortgage obligation on real or personal property incurred before February 15, 2020 (do not include prepayments or payments of principal).
     • Interest paid on loans for equipment, autos and other personal property items are includable and can be forgiven (e.g., auto loan interest on a car you own to make business deliveries).

5. Business rent or lease payments paid or incurred for real or personal property during the Covered Period, pursuant to lease agreements in force before February 15, 2020.

6. Business utility payments paid or incurred during the Covered Period, for which service began before February 15, 2020. 
     • The guidance defines "business utility payments" as electricity, gas, water, transportation, telephone, or internet access.

The SBA's guidance further provides that an eligible non-payroll cost must either be (1) paid or (2) incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.

Note: (1) that if your loan is forgiven, these expenses covered by the loan are not tax-deductible, see IRS Notice 2020-32 and (2) you must have claimed or be entitled to claim a deduction for such expenses on your 2019 Form 1040 Schedule C for them to be a permissible use during the Covered Period.

What Can Reduce My Forgiveness Amount?

1. You spend less than 60% of the loan on payroll costs.

2. If you had a reduction in the number of full-time equivalents (FTEs) during the Covered Period as compared to either:

     a. January 1 to February 29, 2020 or
     b. February 15 to June 30, 2019 (whichever is the most favorable period for you). 
     c. In the case of seasonal employers, either of the preceding periods or a consecutive 12-week period between May 1, 2019 and September 15, 2019 may be used. See below for Exceptions and Safe Harbor provisions. 

3. If the salary or hourly wages of applicable employees (those earning less than $100,000) were reduced by more than 25% during the Covered Period (or the Alternative Payroll Covered Period) as compared to the period of January 1, 2020 through March 31, 2020.

Full-Time Equivalency

Borrowers can calculate their FTEs by taking the average number of hours paid per week for each employee during the Covered Period (or the Alternative Payroll Covered Period), dividing by 40, and then rounding the total to the nearest tenth (maximum for each employee is capped at 1.0). Or by using a simplified method which assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.

Note: the application states that the FTE hours are based on hours paid, rather than worked. Thus, a once-full-time employee who was being paid in full while on furlough or working reduced hours would presumably continue to count as a full FTE.

FTE Reduction Exceptions: The SBA's guidance provides several exceptions to the forgiveness-limitation rules.  One exception provides that a borrower is not penalized for full time equivalent (FTE) reductions that result from the following circumstances:

     1. related to any positions for which the borrower made a good-faith, written offer to rehire an individual who was an employee on February 15, 2020 and the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020;
     2. related to any positions for which the borrower made a good-faith, written offer to restore hours (at the same salary or wages) during the Covered Period (or Alternative Covered Period) and the employee rejected the offer;
     3. Reductions related to any employees who during the Covered Period (or the Alternative Payroll Covered Period) (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours.

Note: these should be recorded only if the position was not filled by a new employee.

FTE Reduction Safe Harbors:

      (1) The borrower is exempt from the reduction in loan forgiveness based on a reduction in FTE employees described above if the borrower, in good faith, is able to document that it was unable to operate between February 15, 2020 and the end of the Covered Period at the same level of business activity as 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 between March 1, 2020 and December 31, 2020.
     (2) The SBA's guidance also recognizes a safe harbor that exempts some borrowers from a reduction in loan forgiveness based on reduced FTE employee levels.  Under this safe harbor, a borrower is exempt if both of the following conditions are met:
          a. the borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and
          b. the borrower, by no later than December 31, 2020, restores its FTE employee level to the FTE employee level that existed during the borrower's pay period that included February 15, 2020.

What Documentation Will Be Required?

Good recordkeeping and bookkeeping will be critical for getting your loan forgiven—you will need to keep track of eligible expenses and their accompanying documentation.

Payroll:  Documentation verifying eligible cash compensation and non-cash benefits during the Covered Period or the Alternative Payroll Covered Period such as:

     a. Bank account statements or third party payroll service provider reports,
     b. Tax forms or third party payroll service provider reports for the periods that overlap with the Covered Period:
          i. Payroll tax filings reported, or that will be reported, to the IRS (e.g., Form 941) and
         ii. State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state.
     c. Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that you included in the forgiveness amount (PPP Schedule A, lines (6) and (7)).

FTE:  Documentation showing (at the election of the borrower):

     a. the average number of full time equivalent (FTE) employees on payroll per month employed by the borrower between February 15, 2019 and June 30, 2019;
     b. the average number of FTE employees on payroll per week employed by the borrower between January 1, 2020 and February 29, 2020; or
     c. in the case of seasonal employers, the average number of FTE employees on payroll per week between either of the preceding periods or any consecutive 12-week period between May 1, 2019 and September 15, 2019.

The selected time period must remain the same when completing PPP Schedule A, line 11.  Documents submitted may cover periods longer than the specified time period.

Non-payroll: Documentation verifying the existence of the covered obligations/services prior to February 15, 2020 and eligible payments from the Covered Period includes:

     a. Business mortgage insurance: a copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments from the Covered Period; or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments.
     b. Business rent or lease payments: a copy of current lease agreement and receipts or cancelled checks verifying eligible payments from the Covered Period; or lessor account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments.
     c. Business utility payments: a copy of invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks or account statements verifying eligible payments.

 

¹ Covered Period: The Covered Period is either (1) the 24-week (168-day) period beginning on the PPP Loan Disbursement Date or (2) if the borrower received its PPP loan before June 5th, the borrower may elect to use an 8-week (56-day) Covered Period.  In no event may the Covered Period extend beyond December 31, 2020.
² Alternative Payroll Covered Period: Borrowers with a biweekly or more frequent payroll schedules may elect to calculate eligible payroll costs using the 24-week (168 day) period (or the 8-week period if elected by borrowers who received PPP loan proceeds before June 5, 2020) that begins on the first day of the first pay period following the disbursement date for the purposes of aligning its covered period with the beginning of a pay period.  So, if you received your PPP funds on April 20th, and the first day of your first pay period following loan disbursement is April 26th, then you may elect to count the payroll costs — and only the payroll costs — for the 24-week (or 8-week) period beginning April 26, 2020.  In no event may the Covered Period extend beyond December 31, 2020.