PPP Forgiveness Requirements: A Business Owner’s Guide to Navigating the Rules

Latest update: 2/1/2021
Business owners all over the country have taken advantage of the SBA’s Payroll Protection Program (PPP). So many, in fact, that the PPP has already exhausted its $350 billion budget. Although some of you may still be waiting for your funds to be deposited, many others have already received their money. But what do we do with the money now that we have it? After all, the beauty of the PPP is its forgiveness provision. In today’s article, I will detail some ways to get the most out of your PPP forgiveness.

Conditions of PPP Forgiveness

They say that the best things in life are free. In my opinion, this is especially true when you’re talking about money. One of the greatest benefits of the Payroll Protection Program is its ability to be forgiven. However, there are some conditions attached to that forgiveness. The SBA wanted to ensure that the money was being used in appropriate ways so they made some expenses forgivable while others are not.

In addition, they included some language that penalizes certain actions when employees are affected. As we go further into today’s subject, we will focus on maximizing your PPP forgiveness value.

The recently signed Consolidated Appropriations Act (CAA) has modified or extended some of the benefits, restrictions, and/or language of the CARES Act. Upon its signing, the CAA made an additional $284 billion available to small businesses via PPP funding. Business owners seeking this second round of PPP money must employ fewer than 300 people AND be able to demonstrate at least a 25% reduction in gross revenues between comparable quarters in 2019 and 2020.

Even if you haven’t received your financing just yet, this information will be valuable to you once you have. But before we go any further, I want to remind you that this is for educational purposes ONLY. As with all financial decisions, you should speak with your financial advisor to come up with a plan for your unique situation.

Which Expenses Are Forgivable?

The entire purpose of the Cares Act was to lend a helping hand to the men and women who drive our economy by issuing Economic Injury Disaster Loans* (EIDL’s) and PPP loans. In an effort to incentivize the synergetic relationship between employer and employee, the SBA offered some direction in how business owners should use their funds. The bill first released with an eight-week loan forgiveness window that began to countdown once you received your funds. Since then, however, they have extended that window to twenty-four weeks.

Under the new CAA guidelines, they have simplified the forgiveness application process for loans under $150,000 while increasing SBA’s ability to audit and review forgiven loans. Borrowers that qualify for this new streamlined forgiveness will complete a one-page forgiveness application. Additionally, they will need to provide very little in the way of backup information and have been exempted from the forgiveness reduction that comes from reducing salaries or staff.

As I stated, the clock begins to countdown on the day that you receive your funds. From that point, you have up to twenty-four weeks to spend as much of the money as you can on forgivable expenses. So which expenses are forgivable under the Paycheck Protection Program?

1. Payroll Costs

Payroll costs are the main driver of PPP forgiveness. In fact, 60% of your loan amount must be spent on “payroll.” If you’ve received $100,000 in loan value, $60,000 of it has to go to payroll. This includes the actual compensation that you pay your team, group insurance (CAA expanded group insurance inclusions to include dental, vision, disability, and life), and retirement benefits. However, there is a maximum that employees who make over $100,000 can make during the forgiveness period.

Currently, the SBA guidelines on the maximum payment to these individuals is a little unclear. If I were to calculate it by dividing $100,000 over 52 weeks, then that individual cannot earn more than $15,385 during the PPP forgiveness period. Additionally, the CAA has imposed a maximum loan size of 2.5x the average monthly payroll costs for non-food service businesses, up to $2MM. Accommodation and food service type businesses can receive up to 3.5x their average monthly payroll costs. This is intended to combat state and local restrictions that hinder these businesses.

2. Interest On Mortgage

As long as you owned the property on or before February 15, 2020, interest payments on your mortgage are forgivable. Forgiveness applies to mortgages on real or personal properties associated with the business. Basically, you will have to do some calculations to determine how much of your mortgage payments are going toward interest during the 24-week PPP forgiveness period. This is especially beneficial with young mortgages where we tend to pay more on the interest than on the principal.

3. Utilities

This section might provide the most leeway in terms of forgiveness. Payments on utilities include internet access, gas, electricity, telephone, transportation, and water are all forgivable expenses. I know one business owner who actually pays for their cell phone through the business. It is unclear if cell phones are considered utilities in this particular setting.

4. Lease or Rental Obligations

Like interest on your mortgage payments, leasing and rental obligations are forgivable if the agreement was in force on or before February 15, 2020. Now, you probably shouldn’t prepay your rent — for example, writing a $10,000 check when your rent is only $1,000 per month — because that would be dishonest, in my opinion. But there are other ways to utilize the funds in a way that allows forgiveness.

RELATED CONTENT: PPP Loans & Taxes – What you need to know about writing off the forgiveness.

Can PPP Forgiveness Be Lost?

There are a couple of actions that a business owner could take that will negatively impact the level of forgiveness they are eligible for. In most cases, you probably want to avoid losing out on your level of available forgiveness. But there may be a few unique instances where it is more beneficial to take a course of action that ultimately decreases the forgivable portion of your PPP loan. There is, however, a caveat provided by the CAA. Borrowers that qualify for streamlined forgiveness have been exempted from forgiveness reduction. Once again, I am not providing financial advice and you will need to discuss your unique circumstances with your own financial planner. So what actions can cause a loss of PPP forgiveness?

Employee Reduction

According to the guidelines associated with the Paycheck Protection Program, a reduction of forgiveness proportionally reduced by any reduction in the number of full-time equivalents (FTE’s) during the 24-week covered period. What does this mean? Basically, if you start the countdown with 10 full-time employees, you need to finish the forgiveness period with 10 FTE’s. If you finish with nine, your forgiveness will be reduced by 10%. Ending with eight FTE’s will reduce forgiveness by 20%, and so on.

One thing of note here is that it is unclear whether the SBA is using the Affordable Care Act’s definition of FTE, which is 30-hours per week, or the standard 40-hour definition. This is another area that I expect the SBA to come out with a little more clarity in their direction, very soon.

Over-Reduction of Employee Salaries

In some cases, it may be necessary to reduce salaries or cut hours. However, we need to be careful when doing this. If an employee earned less than $100,000 in 2019, there is a dollar for dollar reduction of forgiveness if the employee’s salary is reduced by more than 25% during the 24-week forgiveness period. The SBA compares the second-quarter numbers to those of Quarter One in 2020 to make their determination.

There is an exception, however. When discussing rehires, there is an exemption to the reduction of PPP forgiveness IF their salary level is restored by June 30th of 2020. But how does this impact the way you file for PPP forgiveness?

Filing for Forgiveness

The treasury department has created the form 3508 EZ as an easy way to file for PPP loan forgiveness. In addition, they’ve recently updated the requirements for the EZ and, as a result, I feel safe in saying that the vast majority of business owners can simply fill out the 3508 EZ when filing for forgiveness. So what are the requirements? Basically, if you can answer yes to any of these statements, you are eligible for the EZ filing:

1. If you do not include any employee salaries in the computation of your average monthly payroll on the borrower application form. Essentially, if you are self-employed and you don’t have any other employees, this refers to you.
2. If you did not reduce the annual salary or hourly wages of any employee by more than 25% during the covered 8-week period OR the alternative 24-week covered period AND you did not reduce the number of employees OR their average paid hours, you may file with the EZ form.
3. If you did not reduce the annual salary or hourly wages of any employee by more than 25% during the covered 8-week period OR the alternative 24-week covered period AND you were unable to operate at the same business level during the covered periods that you were operating at before February 15th, 2020. This is a condition that many entrepreneurial doctors and people in the hospitality industry found themselves in, as they were forced to shut down or drastically cut their operations.

RELATED CONTENT: US Treasury Dept.’s PPP Resource page

Points of Planning

Whether you’ve received your funding or not, there are things to plan for. By doing the following, it is much easier to know you’re getting the maximum forgiveness. Make maximizing your PPP forgiveness eligibility simple by:

• Using a separate account for PPP funds to be deposited in. Make withdrawals as expenses occur.
• Setting up a separate code in your accounting software to track your PPP dollars for reporting.
• Staffing up during the 24-week forgiveness period will maximize your forgiveness. You can pay employees who aren’t working, too.
• Projecting your gross payroll cost over the next 24 weeks.
• Providing a bonus to your team at the end of the 24-week period to eat up any remaining funds.
• Include your allowable payroll costs, rents, utilities, and mortgage interest.
• Compare the total annualized salary or wages from Q1 to Q2 to ensure that you didn’t reduce anyone’s salary by more than 25%.

Planning around these points can help you to have a handle on things when it’s time to report to the bank. This doesn’t have to be complicated. With a little help from your advisory team, it might even be simple. But what if you aren’t able to spend all of the money?

Dealing With The Surplus

If you’re unable to spend every dime of the PPP loan during the forgivable period, it’s okay! Of course, you want to get the most out of your PPP forgiveness but if there’s some leftover, stay calm. The fact of the matter is this: it’s a five-year loan at 1% interest. On top of that, it has a 6-month deferral with no collateral or personal guarantee. And that’s not even the best part, friends. The forgiveness is NON-TAXABLE income!

How has your own business advisor mentored you through this crisis? If you have questions or just need professional business and financial advice, contact us! The team is here to help.

*Prior to the passage of the Consolidated Appropriations Act, borrowers that received an EIDL Advance (advances between $1,000 and $10,000) had that amount subtracted from their total forgiveness, which had the effect of repaying the EIDL Advance. The Act now provides that EIDL Advances will not reduce PPP loan forgiveness.