If you secured a loan through the Payment Protection Program (PPP), getting your head around exactly how you might be able to get your loan forgiven is probably top of mind.
To help Azlo customers navigate through the complexities of the PPP, on Wednesday, May 27th, Azlo’s COO Bryan Crumpler teamed up with Fundera’s Senior Director of Finance Justin Ridgley to present a webinar on understanding PPP loan forgiveness. Since the webinar, The House has passed a bill to expand PPP loans in major ways.
Here’s what you need to know:
What is PPP loan forgiveness? The PPP loan may be forgiven in full. For this to happen, it’ll need to meet certain criteria. Here’s what the SBA has released how to be eligible for PPP loan forgiveness:
What are payroll costs?
Payroll costs generally fall into two major buckets:
1. Cash compensation
This typically includes:
- hourly wages
- family, medical and sick leave
- hazard pay and bonuses
- severance pay
Note: Leave under the CARES Act isn’t covered.
You can only include up to $100,000 annual pay for any individual. This breaks down to $15,385 of cash compensation for any individual during a 24-week payroll period, or by the end of 2020, whichever comes first. Borrowers can choose between an 8-week or 24-week period.
Please note: to keep things simple, in this FAQ we'll assume you opt for the 24-week option.
2. Non-cash compensation
This includes: - Employer contributions to group health insurance plans - Retirement contributions paid by the employer - State and local taxes paid by the employer
What if I’m a sole proprietor and don’t have any employees? How much can I pay myself under payroll costs?
If you’re self-employed and file a Schedule C, you calculate your payroll by dividing your net profits in 2019 by 8 or 24. This amount can’t exceed $15,385.
What non-payroll costs are eligible for forgiveness?
- Mortgage interest payments. This is any interest you paid for a property that is used for your business.
- Rent for your business (including home office)
- Utilities eligible for forgiveness include electricity, gas, water, transportation, internet, and phone that you use for your business.
Your business needs to have been in operation by February 15, 2020. Any utility bills that are eligible for loan forgiveness also need to have been established by February 15, 2020.
These are generally expenses incurred to support your businesses. So if you work from home and deduct, say, your home internet for tax purposes, it could be eligible for forgiveness.
What’s the application process like to apply for loan forgiveness?
The application has four parts:
- The PPP loan forgiveness calculation form
- PPP Schedule A
- PPP Schedule A worksheet
- PPP borrower demographic form (this is optional)
You, the borrower, need to submit Parts 1 and 2 to your lender. Please check with your lender on their forgiveness criteria.
Can you use your PPP to pay 1099 employees?
You cannot. 1099 employees are considered self-employed, so each of these employees needs to file for a PPP loan on their own behalf. In turn, they don’t count toward loan forgiveness.
How do my business expenses fit into the covered periods?
For the PPP, there are two covered periods:
Covered Period. This is a 24-week period or until the end of 2020, whichever comes first. This is either the 8-week or 24-week period of your PPP loan. It starts the first day you received your loan disbursement and ends either 8 or 24 weeks after that.
Alternative Payroll Covered. This is the 8-week or a 24-week period that starts on the first pay period right after the money from the loan drops into your bank account. In other words, you can begin that 8-week clock at the start of the next payroll cycle.
For example: If you received your loan proceeds on April 10th, but paydays for your business are on the 15th and 30th of each month. In that case, then the 24-week period starts on April 15th and not on the 10th.
Both paid and incurred expenses are eligible for forgiveness. What’s the difference?
Paid costs are expenses that you actually paid for during the 24 weeks.
Incurred costs are those that were incurred during the same period, but weren’t paid for because of timing, or where they fall on the calendar.
Note: For you to qualify for loan forgiveness, payroll costs must be paid on the next payroll date, and non-payroll costs are paid on the next billing date.
How much of my loan needs to go toward payroll, and how much can go toward non-payroll costs?
Mind the 60/40 rule. For your loan to be entirely forgiven, at least 60% needs to go toward payroll. And up to 40% can go toward eligible non-payroll costs such as rent, mortgage interest payments, and utilities for your business.
If you received a $100,000 PPP loan, and $80,000 went toward payroll, $18,000 went toward rent and $2,000 toward utilities, then the entire amount of your loan would be forgiven.
You cannot go lower than 60% of your payroll costs and put the difference toward non-payroll expenses. Remember: Non-payroll expenses can’t exceed 40% for forgiveness.
What could potentially bump down the forgiveness amount?
Here’s what could potentially bump down your PPP loan forgiveness amount:
1. Full-time equivalency (FTE). You compare the number of employees at the end of the 24-week loan period following the disbursement of the loan to a reference period. If the headcount is less or reduced the number of hours, this could trigger a reduction on your loan forgiveness amount.
How it works: A reference period, which is either a period at the beginning of 2020 or in 2019, is referenced against the end of the 24-week covered period.
Let’s say you had 10 employees during the reference period, and 8 employees during your 24-week loan period. Your “FTE reduction quotient” would be 80%, and if you had a $100,000 loan, only $80,000 would be eligible for forgiveness.
2. Reduction based on wages and salary. If you bumped down your employees’ wage rates at the end of the 24-week loan period compared to Q1 of 2020, then this reduction could be triggered.
These wage rates are either an hourly rate, and can’t be reduced by more than 25% of Q1. The SBA has provided tables and more details on how to go about calculating this.
Here’s the kicker: Both of these reductions could be avoided by safe harbor rules that focus on restoring FTE or compensation levels by December 31, 2020, at the latest. If you brought back either the headcount, hours, or wage rates by the end of June, that amount could still be forgiven.
What happens if an employee quits or they decline to be rehired?
If an employee quits, or they decline to be rehired, and you can’t find a replacement, you won’t be penalized for not having the same headcount as the reference period.
What’s the term and interest rate of a PPP loan?
It’s a five-year loan at a 1% annualized interest rate. Interest does start accruing as soon as funds are dropped into your account.
Interest may be forgiven as well. For example, If you get $70,000 forgiven on a $100,000 loan, interest will only accrue on the $30,000.
When do I have to start making payments on my loan?
Loan payments will be deferred for six months. So you have six months after the loan disbursement before you need to start making payments.
How long does the lender have to calculate forgiveness?
The lender has 60 days from the date they received your application to review it and calculate forgiveness.
What documentation will I need to provide for payroll costs?
A lot of the required documentation for forgiveness will most likely be similar to what you needed to provide when you applied for the PPP loan. Please check with your lender for the exact list required.
And while the SBA has rolled out these criteria, when looking at the details as to what documentation is to be expected, different banks might have slightly different guidelines on how to apply for loan forgiveness.
Payroll documents that support cash compensation.
This includes: -Bank account statements -Third-party payroll service provider reports (i.e., Gusto) -Tax forms like Form 941
Healthcare and retirement contributions
Supporting documentation could include: - Payment receipts - Canceled checks - Account statements - Third-party payroll service provider reports - If you’re a sole proprietor, you need to provide some documentation to show what you paid yourself. If your business and personal income are mixed together, this might be something you create, such as an Excel sheet.
State and local taxes This might include: - State quarterly business and individual employee wage reporting - Unemployment insurance tax filings
What documentation will I need to provide for non-payroll costs?
Mortgage interest payments:
- Lender amortization payments
- Lender account statements from February 2020 and the months of the covered chosen period
Lease or rent statements -Copy of current lease agreement and canceled checks or receipts that verify payment -Lessor account statements from February 2020 and the months of the covered chosen period
Utility payments -Copies of invoices from February 2020 and the months of the covered chosen period -Receipts, canceled checks, or account statements verifying eligible payments
What documentation do I need to provide for full-time equivalent (FTE) hours?
You’ll need to provide proof of your FTE headcount for both the reference and covered periods, which could include:
- Payroll tax filings reported to the IRS
- State quarterly business and individual employee wage reporting
- Unemployment insurance tax filings reported
If you have a unique situation, such as an employee requesting reduced hours, the documentation you need to provide will depend on the exact situation.
What documentation should I hold on to?
Besides your application, you’ll want to keep your:
- Schedule A worksheets
- All supporting documents
Don’t throw anything away or dump them in the “trash” bin on your computer.
You’ll need to keep these documents on hand for six years after your loan has been completely forgiven or the loan amount has been completely repaid.
How early can I apply?
This largely depends on your lender. Right now, there’s no hard deadline as to when you need to apply. But in order to turn this loan into a grant, it’s a good idea to apply sooner than later.
What changes might come?
The PPP loan is ever-evolving, and you can anticipate that there might be more changes. One possible tweak is changing the covered period from 8 weeks to 24 weeks. Stay tuned!
Can I still apply for a PPP loan? As of June 8, 2020, there was nearly $110 billion in the PPP loan bucket available. Azlo has collaborated with Fundera and Kabbage to help Azlo customers apply for this source of financing for businesses.
The current deadline to apply for a PPP loan is June 30, 2020.
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