Updated February 22, 2022
PPP Loan Forgiveness is where qualified program participants are NOT required to pay back loaned funds, effectively making it a full or partial grant. Application for PPP loan forgiveness is required; it is not automatic.
The purpose of loan forgiveness is to encourage small businesses to be able to maintain headcount and payrolls to ensure stabilization of the economy throughout the COVID-19 pandemic. For those businesses, to ensure they didn’t take on more debt, the government created a loan forgiveness program, a lending program that uses a straight-forward and minimal-documentation process. The stipulation was if employers don’t lay off employees or cut wages, the loans can be FULLY forgiven, effectively making them full (or partial if layoffs or wage reductions occurred) grants, depending on how borrowers put the proceeds to use.
To qualify for full loan forgiveness on first draw loans during the 8- to 24-week period following loan disbursement ALL PPP forgiveness requirements below must be met:
A portion of the loan is forgivable if the following conditions are met:
The total of the following costs incurred, and payments made during the covered period can be forgiven:
Learn how to prepare for loan forgiveness in this video which digs into the known and unknown variables and takes a deeper look into the qualifications for forgiveness.
The original Coronavirus Aid, Relief, and Economic Security (CARES) Act clearly exempted forgiven amounts from being included in gross income but left unaddressed anything to do with the deductibility of the expenses used for forgiveness. In this vacuum, the IRS issued guidance this fall that such expenses could not be deducted, nor could they be pushed into 2021 if no forgiveness application had yet been submitted.
Section 276 of the new law tackles that issue head-on, stating that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income” of the forgiveness amount. Going one step further, partnerships and S corporations may treat forgiven amounts as tax exempt income and any increase in the adjusted basis of a partner’s interest in a partnership under section 705 of the Internal Revenue Code “shall equal the partner’s distributive share of deductions resulting from costs giving rise to forgiveness.”
There have been several areas that borrowers still had questions, in which we hopefully have provided clarification for these “gray” areas:
The much-anticipated PPP loan forgiveness application and instructions became available on May 15, 2020. This application provides borrowers with both the form on which they will need to submit the loan forgiveness application to their lender, along with the needed guidance in the form of attached instructions.
The form itself contains four components:
Deadlines to apply for loan forgiveness are within 10 months of the end of the covered period under which a business had to spend the money. That means, for loans granted in April 2020, there was an eight-week covered period, which would put the deadline in the middle of July 2021. For loans operating under a 24-week covered period, that would mean a deadline in September 2021.
The PPP loans will automatically convert to a standard loan at 1% interest if the deadline is missed. To avoid deadlines altogether, borrowers can apply for forgiveness any time up to the maturity date of the loan once all proceeds have been used.
To apply for loan forgiveness, the following general steps must be taken. It is greatly encouraged to use assistance for this step of the process to ensure everything is filed accurately to ensure continued eligibility.
If your business received, or will receive, a PPP loan of $2 million or more, you will need to file a Form 3509 to be eligible for forgiveness. In this video, our experts explain how to navigate the form’s open-ended questions, when to file it, what supplemental documentation to include, and the story you need to tell to keep your application from being rejected.
In October 2020, the SBA released Form 3508S for borrowers with loans under $50,000, which greatly simplified the process of applying for forgiveness, essentially requiring only a few certifications by the borrower that the loan was put to proper use.
With this new law, this simple forgiveness process has been expanded to any loan under $150,000. By January 20, 2021, the Small Business Administration (SBA) is required to publish a new forgiveness form to be used by any borrower who has not yet filed for forgiveness, and who has a loan up to $150,000. This simple form will require the borrower to provide:
While the documentation required upon submission of the forgiveness application has been simplified, borrowers should note documentation must be maintained by the borrower to support the forgiveness application for 3 years (non-payroll costs) or 4 years (payroll costs only) in the event of a subsequent audit. In addition, the law expressly prohibits lenders from requiring any documentation to be submitted by the borrower beyond the items above.
In early June, the SBA and the Treasury Department introduced an EZ form, to be used only by borrowers with any of the following:
In the EZ application, they now allow retirement insurance contributions on behalf of owner-employees “capped at 2.5 months’ worth of the 2019 contribution amount.” But in the main application, they do not indicate this is allowable or limited if allowable.
We anticipate that the majority of borrowers using the EZ form will be the ones who meet bullet point one above. Many businesses will struggle with the “average paid hours” issue in bullet point two, and we expect few will be impacted by bullet point three all the way through the end of the year.
So, why file sooner rather than later? There are several reasons:
The following outline the general steps in order to calculate your loan forgiveness:
There are two factors that can reduce a borrower’s net forgiveness:
The actual amount of loan forgiveness depends on whether the average salary or hourly wages of certain employees (those under $100,000 annualized) during the Covered Period or Alternative Payroll Covered Period was less than during the first quarter of 2020. If the average during the Covered Period was more than 25% lower for any employee, the reduction factor applies. If the borrower restores the salary/hourly wage levels as of June 30, 2020, the borrower will qualify for elimination of this reduction.
PPP Schedule A Worksheet must be completed (but not submitted) for all employees and must include: employee’s name, employee identifier (Last 4 digits SSN), cash compensation, average FTE, and, for employees who earned an annualized rate of pay of $100k and less during any single pay period in 2019, any salary/hourly wage reduction.
The reduction in loan forgiveness is calculated for each eligible employee, but borrowers may be able to eliminate this reduction by restoring the salary/hourly wages of that employee by June 30, 2020. However, the guidance language for this test is confusing: it uses the “average annual salary or hourly wage as of June 30, 2020” without defining the applicable time period for which to calculate the “average”. This suggests that a borrower could use the rate of pay on June 30 to find safe harbor, even if pay was restored to that level only on June 29. This is another area where additional clarifying guidance may be forthcoming.
It also means that many borrowers will hold off on submitting their applications for forgiveness until after June 30 — which covers about four million borrowers funded prior to May 6 — and suggests a massive wave of forgiveness applications hitting lenders’ portals in the first two weeks of July.
Additionally, although borrowers don’t need to submit Worksheet A, the application should not be based solely on summary payroll data without completing the detailed employee by employee information. Plan accordingly.
In order to compare the reduction in average employees from one of two periods (February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020) to the Covered Period or Alternative Payroll Covered Period, the PPP requires the borrower to calculate full-time equivalency (FTE) during both periods and determine a reduction quotient. Interestingly, the borrower may skip the detailed calculation and simply assign 1.0 to all employees who work 40 hours or more per week and 0.5 to any part-time employee.
Seasonal Employers(which have not been clearly defined)have the option to include either of the two elective periods or a consecutive twelve-week period between May 1, 2019, and September 15, 2019.
There is an FTE reduction exception for:
FTE Reduction Safe Harbor: Borrowers will not have loan forgiveness reduced based on this calculation if:
Borrowers can calculate each individual employee’s FTE to the tenth of a percentage or take the administratively easier approach to count any employee who works less than 40 hours a week as 0.5 FTE. Borrowers should consider both methods as one method may result in a greater reduction in loan forgiveness over the other.
Additionally, borrowers should pay attention to the changes in the FTE reduction exception and safe harbor as the requirements have been updated from prior interim guidance. Borrowers should also note that any layoffs that occurred after April 26, 2020, are not considered in the safe harbor calculation other than to the extent they impact the FTE count at June 30, 2020.
The video below discusses in more in detail about the two key factors above around PPP loan forgiveness reduction that could lower forgiveness amount.
With little fanfare, the Small Business Administration released a procedural notice on January 27, 2022 offering PPP borrowers who received less-than-full forgiveness of their loan the possibility of appealing their lender’s decision to the SBA if they do not agree with the outcome.
Importantly, this is a time-sensitive situation. Borrowers with partial forgiveness must now be notified by their lender that they have 30 calendar days from receipt of the notification to submit a request through the lender for the SBA to review the loan. The SBA is not required to accept the borrower’s request, but if they do there are three possible outcomes:
But, what about the vast majority of PPP borrowers who have already filed for and received forgiveness? For those borrowers, lenders have until February 26, 2022 to notify borrowers of their right to receive an SBA review. Borrowers will then have 30 days from the receipt of the lender notification to submit their request through the lender for the SBA loan review.
If the borrower applied for less than full forgiveness when they submitted their forgiveness application, this new process does not apply. It is only for borrowers whose forgiveness was reduced by the lender in their review process.
Here is the entire procedural notice from SBA: https://www.sba.gov/sites/default/files/2022-02/SBA Loan Reviews of PPP Lender Partial Approval Forgiveness Decisions Procedural Notice 5000-827666-508.pdf
Navigating PPP
Despite being touted as simplistic, the PPP loan and forgiveness processes are not without complexities. Ensure you have the right calculations for your business and all the appropriate supporting documentation to gain the maximum amount of loan forgiveness.