3 Things You Should Know About PPP Loan Forgiveness

Since the endorsement application of PPP loan forgiveness, the U.S. Treasury and Small Business Administration (SBA) has been updating its guidelines on a regular basis. As of October 8, they released a new application form and rules to guide Americans on loan forgiveness.  

If you applied for the PPP loan for your practice, there are three things you should know about loan forgiveness: how it works, eligibility factors, and its conditions. 

How PPP loan forgiveness works 

The Paycheck Protection Program (PPP) is a loan that is available through SBA authorized lenders. The program allows the borrower to use the loan amount for certain outlined expenses within a 24-week period (or Dec. 31, 2020, whichever comes earlier). Once the loan is disbursed and hits their bank account, the borrower no longer needs to pay the balance—no fees, no interest. The loan amount becomes a tax-free grant. However, the amount borrowed may not be forgivable for the totality of the loan. An evaluation will take place to verify if the petitioner abided by the rules before qualifying for forgiveness.

Eligibility for the PPP loan forgiveness 

There are two factors to consider when checking the eligibility for loan forgiveness application: 

1. Payroll expense. Loan forgiveness is allowed for different types of paid leaves, including family leave, sick leave, and vacation leave. It also applies to group benefits, such as health insurance programs, dental insurance, or pension contributions. However, independent contractors are not regarded as part of the payroll expense since the PPP only involves full-time or part-time workers. 
2. The 60/40 rule. This rule states that the borrower must use at least 60 percent of the amount on payroll expenses. The remaining 40 percent, on the other hand, can be used on other fees such as rent or lease, utilities, or part of a mortgage payment.? 

It is best to submit all the documents concerning the two eligibility requirements to your financial advisor or payroll provider. They can help determine and monitor your qualifications for the loan forgiveness program since they have more in-depth knowledge on the matter at hand. 

Three conditions under the PPP loan forgiveness 

Now that you are aware of the eligibility specifications, let us now learn the conditions that can influence loan forgiveness. 

The SBA recently announced that those who applied for loans amounting to $50,000 or less are exempted from any FTE reductions or wage reductions. 

FTE reduction is the penalization of the borrower for the following circumstances: 

• The inability to rehire laid-off or furloughed employees during the pandemic within the covered period; and
• The inability to return the reduced wages of the employees by the end of the cover period.?

In recent weeks, the SBA announced that there would be no penalty for borrowers with loans amounting to $50,000 or less despite FTE reductions.

However, supporting documents (such as payroll tax filing reports, bank account statements, etc.) are still required to ensure loan forgiveness despite the new guideline. This means loan forgiveness is not yet guaranteed unless the borrower meets all criteria. 

In line with this, the new forgiveness application form, called the 3508S, was created for the said new rule.

1. Maintaining your staff headcount is essential to ensure that you’re not only using as much pay as you have in the past, but using it among the same number of employees. 

The checking of headcount will take place for seasonal businesses eight weeks after the disbursement, and compare it with another previous period. The comparable period is from February 15 to June 30, 2019. 

For non-seasonal businesses, the evaluation will happen from January 1 to February 29, 2020. 

For example: 

If your staff headcount dropped by 20 percent between January 1 to February 29 this year, this entails a 20 percent drop on loan forgiveness. If the loaned amount was $10,000, the business is now only eligible for forgiveness of $8,000. 

1. The SBA will be monitoring headcounts to check whether the company maintained their wages. At least 75 percent of the employees’ average wages from that same period from the headcount is expected for payment. 

For example: 

If a worker received $4,000 on average for each month during the first quarter of 2020, the employer must pay around $6,000 or 75 percent of that amount to the employee. It is necessary to meet the 75 percent to be eligible for forgiveness on the sum of the loan amount. If it drops below that percentage, the forgiveness will be influenced by that same value. So, if the employee receives at least $3,000 monthly in the first quarter of this year, and the company paid them $2,000 only, the eligibility for forgiveness will drop by $1,000. 

Understanding these guidelines will help you prepare and be mindful of how you will handle the PPP loan you receive in order to qualify for forgiveness. 

The PPP loan application is forgivable within restrictions. 

The eligibility for loan forgiveness is only applicable for paid leaves such as family leave, sick leave, and vacation leave. It also covers health and dental insurance and pension contributions. However, only full-time or part-time workers are counted for eligibility. Also, the 60/40 rule must be observed to become eligible for forgiveness. 

Certain conditions can influence the PPP loan forgiveness: 

1. The new rule issued wherein those who applied for a loan amounting to $50,000 or fewer is exempted from the FTE reduction. The required supporting documents (payroll tax filing report, bank account statements, etc.) must be provided. Also, the 3580S forgiveness application form was released for this specific rule. 
2. If the number of head count dropped, the loan forgiveness amount would also decrease. This condition concerns both seasonal and non-seasonal businesses within the coverage period for each. 
3. At least 75 percent of the employee’s average wages from that same period from the headcount is expected. If the borrower fails to meet this condition, the amount of loan forgiveness will drop. 

 To stay updated, visit the SBA website on the PPP loan or consult your financial advisor. 

Source: 

https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program?