Many businesses that received a first or second draw Paycheck Protection Program (PPP) loan are now looking to apply for forgiveness. Review these steps to be prepared for the loan forgiveness application. Consider using the AICPA’s loan forgiveness calculators to assist with these calculations.
This overview of PPP loan forgiveness is not a substitute for authoritative guidance issued by SBA and U. S. Treasury. Please refer to official guidance for additional information, including the Interim Final Rule on Loan Forgiveness Requirements and Loan Review Procedures as Amended by Economic Aid Act.
Reminders:
Borrowers with a first and second draw PPP loan must apply for forgiveness of the first draw loan before or at the same time they apply for forgiveness of the second draw loan.
Applications for forgiveness can be submitted up until the maturity date of the loan.
NOTE: Payments on a loan will be required 10 months after 24 weeks have elapsed since the funding date.
Overview
Step 1
Track eligible costs incurred and paid during the covered period.
Step 2
Determine if loan forgiveness must be reduced due to a salary/hourly wage reduction of more than 25%. Consider if any reduction is remedied by meeting the safe harbor.
Step 3
Determine whether a full-time equivalent (FTE) reduction occurred. Consider whether FTE reduction exceptions or FTE reduction safe harbor 1 or 2 applies.
Step 4
Calculate potential forgiveness amount.
Eligible Payroll Reminders
Loan Forgiveness Application Notes
Additional Considerations
Step 1
Track eligible costs incurred and paid during the covered period. The Interim Final Rule on Loan Forgiveness Requirements and Loan Review Procedures as Amended by Economic Aid Act is a great resource for details on eligible costs for forgiveness.
Note: As outlined in SBA guidance, the "Covered Period begins on the date the loan was originally disbursed. It ends on a date selected by the Borrower that is at least 8 weeks following the date of loan disbursement and not more than 24 weeks after the date of loan disbursement. For example, if the Borrower received their PPP loan proceeds on Monday, April 20, 2020, the first day of the Covered Period is Monday, April 20, 2020 and the final day of the Covered Period is any date selected by the Borrower between Sunday, June 14, 2020 and Sunday, October 4, 2020."
Eligible Payroll Costs* See IV 1. and 3 of the IFR for details.
Cash compensation
Cash compensation to employees (including part-time and/or seasonal) items such as:
Gross amount of salary, wages, commissions or similar
Cash tips or the equivalent
Payment for leave
Allowance for separation or dismissal
Housing allowance or stipend
Notes on cash compensation:
Employer federal payroll taxes (FICA and Medicare) are not eligible payroll cost.
Maximum cash compensation is $100,000 annualized, as prorated for the period during which the payments are made or the obligation to make the payments have incurred.
Non-cash compensation
Employer contributions for group health, group life, disability, vision or dental insurance (including self-insured employer-sponsored group health plans)
Contributions by employees are not included
Employer contributions to employee retirement plans
Payment by the borrower of state and local taxes assessed on employee compensation
Compensation to owner-employees (includes partners, self-employed individuals, independent contractors and C or S corporation employees owning more than a 5% stake) Important note: there are different limits on eligible compensation depending on owner type. Please read IV. 3. C. for a more detailed description.
Cash compensation limits: For each individual owner in total across all businesses, this amount is capped at (a) $20,833 (the 2.5-month equivalent of $100,000 per year), or (b) the 2.5-month equivalent of the individual's applicable compensation in the year that was used to calculate the loan amount (2019 or 2020), whichever is lower.
For a second draw borrower with a NAICS code beginning with 72 (Accommodation and Food Services), owner-employee compensation is limited to $29,167 because these borrowers were eligible for 3.5 months of average payroll costs.
Self-employed special calculation: Refer to IFR and owner income replacement goal.
General Partners special calculation:
Box 14a of IRS Form 1065 Schedule K-1 (less §179 deductions, unreimbursed partnership expenses claimed and depletion claimed on oil and gas), times 0.9235
Refer to IFR on Loan Forgiveness Requirements and Loan Review Procedures as Amended by the Economic Aid Act, IV 3c
Non-cash compensation limits by entity type:
C corporation owner-employees additional non-cash eligible payroll expenses include employer health insurance contributions and retirement costs capped at 2.5/12 of 2019 or 2020 employer retirement contribution.
These amounts are in addition to the $100,000 annualized pro-rata cash compensation maximum.
S corporation owner-employees additional non-cash eligible payroll expenses include employer retirement contributions made on behalf of the individual. Health insurance contributions are not included.
These amounts are in addition to the $100,000 annualized pro-rata cash compensation maximum.
Self-employed individuals and general partners’ health insurance contributions and employer retirement contributions are not included as eligible expenses. Review the for additional information.
Eligible non-payroll expenses must be paid either during the Covered Period or 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.
Mortgage interest on real or personal property
For mortgages in effect prior to 2/15/2020
Prepayments are not eligible expenses.
Payments to a related party are not eligible for forgiveness
Related party is defined as any common ownership between the business and the property owner
Rent/lease payments for real or personal property
For lease agreements in effect prior to 2/15/2020
Payments to a related party are limited to the mortgage interest owed on the property during the covered period
Utilities
Includes payment for expenses such as electricity, gas, water, transportation, telephone, or internet access
Service must have been established prior to 2/15/2020.
Covered operations expenditures
Includes payments for software or cloud services that facilitate general business, delivery, payroll, human resources, sales or accounting operations.
Covered property damage costs
Includes costs arising from property damage or vandalism associated with public disturbances that occurred in 2020 and not covered by insurance or other compensation.
Covered supplier costs
Includes costs for the supply of goods essential to operations
Made pursuant to a contract, order, or purchase order in effect prior to the beginning of the covered period
Contracts for perishable goods may have been in effect prior to or at any time during the covered period
Covered worker protection expenditures
Includes operating or capital expenditures to adapt the business to comply with federal, state, or local mandates
Period begins 3/1/2020 and ends on the date the national emergency expires
Excludes residential real property or intangible property
Step 2
Determine if loan forgiveness must be reduced due to a salary/hourly wage reduction of more than 25%. Consider if any reduction is remedied by meeting the safe harbor.
Applicable for any employee who did not receive, during any single pay period during 2019, wages/salary at an annualized rate of pay more than $100,000
Salary/hourly wage reduction calculations are not required for employees who had an annualized rate of pay of more than $100,000 during any pay period in 2019, or for owner-employees.
Determine for applicable employees whether their average annual salary/hourly stated rate of pay during the covered period was reduced by more than 25% in comparison to the most recent full quarter before the covered period.
Determine if the salary/hourly wage reduction safe harbor is met by:
Comparing the annual salary/hourly wage as of 2/15/20 (a) to the average salary/hourly wage between 2/15/20 and 4/26/20 (b)
If (b) is lower, compare average annual salary/hourly wage at 12/31/20 (for a PPP loan made before 12/27/20) or the last day of the covered period (for a PPP loan made after 12/27/20) (c)
If (c) is greater than (a), then the safe harbor has been met and no salary/hourly wage reduction will impact loan forgiveness.
If (b) is higher than (a), skip to the next section to calculate the amount of the reduction that exceeds 25 %.
Calculate the amount of the reduction that exceeds 25%:
For hourly workers:
Calculate 75% of the hourly rate of pay for the most recent full quarter before the covered period
Subtract the average hourly rate of pay for the covered period
Multiply that amount times the average number of hours work per week during the most recent full quarter prior to the covered period
Multiply that amount times the number of weeks in the covered period
For salaried workers:
Calculate 75% of salary rate of pay for the most recent full quarter before the covered period
Subtract the average salary rate of pay for the covered period
Divide this amount by 52
Multiply that amount by the number of weeks in the covered period
Confused? See the examples in Section 5. e. of the Interim Final Rule on Loan Forgiveness Requirements and Loan Review Procedures as Amended by Economic Aid Act
Step 3
Determine whether a full-time equivalent (FTE) reduction occurred. Consider whether any FTE reduction exceptions apply and/or if FTE reduction safe harbor 1 or 2 applies.
Calculate average FTE during the covered period for each employee
Calculate based on the average hours worked per week divided by 40 and rounded to the nearest tenth
OR use a simplified method to assign 1.0 for employees who work 40 hours or more per week and .5 for employees who work fewer hours per week
Calculate average FTE for each employee during the chosen reference period:
2/15/19 through 6/30/19
OR 1/1/20 through 2/29/20 (Borrowers not in operation in 2019, must select this period)
For seasonal employers, use 2/15/19 through 6/30/19, 1/1/20 through 2/29/20 or any consecutive 12-week period between 2/15/19 and 2/15/20
Some employees may be paid in a manner that doesn't easily allow for calculating FTEs based on hours worked. In those circumstances, borrowers will need to use their judgment to determine an approach that best aligns with the intent of the guidance provided. Document the rationale used to calculate FTEs if hours worked is not available and ensure that a consistent method is used for each comparison period.
Consider whether any FTE reduction exceptions apply. If applicable, the position is not included in the FTE reduction calculation which may help remedy any FTE reductions.):
Positions for which a good-faith written offer to rehire someone who was employed on 2/15/20 and the employer was unable to hire a similarly qualified employee on or before 12/31/20 (for PPP loans made prior to 12/27/20) or the last day of the covered period (for PPP loans made after 12/27/20)
Positions where a good faith written offer was made to restore any reduction in hours, at the same salary/wage during the covered period and the offer was rejected
Employees who were fired for cause, voluntarily resigned or voluntarily requested a reduction in their hours.
Use these to offset a reduction in FTEs if the position was not filled by a new employee.
Maintain documentation if using these exceptions
Consider whether either of the FTE Safe Harbors are met.
Safe Harbor 1: Borrower is unable to return to the same level of business activity as before 2/15/20 due to compliance with requirements established or guidance issued related to COVID-19. (see language in the PPP Loan Forgiveness Application
and Instructions).If safe harbor 1 is met, there is no need to proceed to safe harbor 2.
Safe Harbor 2: Borrower will not have to reduce forgiveness if a) they reduced their FTEs in the period beginning 2/15/20 and ending 4/26/20; and b) they restored FTEs to the same level as the Borrower’s pay period that includes 2/15/20 no later than i) 12/31/20 for a loan made before 12/27/20, or ii) the last day of the covered period for loans made after 12/27/20.
After consideration of exceptions and if no safe harbor is available, divide average FTE during the covered period by the average FTE during the reference period to determine the FTE reduction quotient.
Confused? See the examples in Section 5. of the Interim Final Rule on Loan Forgiveness Requirements and Loan Review Procedures as Amended by Economic Aid Act
Step 4
Calculate potential forgiveness amount.
Sum all eligible expenses, subtract salary/wage reduction (if any) and multiply times the FTE reduction quotient (if less than 1.0).(A)
Divide the sum of all eligible payroll costs by 60%. This methodology backs into the total amount of the loan that can be forgiven based on the amount of eligible payroll costs and meeting the 60% payroll requirement.(B)
Note the total loan amount (C)
Forgiveness amount is the lower of A, B or C
NOTE: A borrower with a loan of $50,000 or less, other than any borrower that together with its affiliates received First Draw PPP Loans totaling $2 million or more or Second Draw PPP Loans totaling $2 million or more, is exempt from any reductions in forgiveness based on reductions in FTE employees or reductions in employee salary or wages.
*Eligible Payroll Reminders
The following are excluded from payroll costs:
Taxes imposed or withheld under chapter 21, 22, or 24 of the IRC of 1986 (e.g. the employer’s share of FICA and Medicare are not included as payroll costs)
Compensation of an employee whose principal place of residence is outside the US
Qualified sick or family leave for which a credit is allowed under §7002 or §7004 of the FFCRA
Qualified wages considered in determining the employee retention credit
Payments to independent contractors
Amounts attributable to the COBRA premium assistance tax credit
Loan Forgiveness Application Notes
The AICPA has developed a forgiveness application decision tree to assist in determining the forgiveness form to use. Use this link or the below outline when considering which forgiveness form to use.
Borrowers who received a loan of $150,000 or less can use the streamlined loan forgiveness application Form 3508S.
Form 3508 EZ loan forgiveness application applies to borrowers that:
Borrowed more than $150,000, did not reduce salaries or wages of their employees by more than 25%, and did not reduce the number of hours of their employees OR
Experienced reductions in business activity as a result of health directives related to COVID-19 and did not reduce the salaries or wages of their employees by more than 25%
If none of the above apply, the borrower must use the full Form 3508.
A separate loan forgiveness form is required for a first draw and a second draw loan.
Additional Considerations
Some payroll providers have developed PPP-compliant reports to track both payroll and benefits.
Some lenders required that PPP loan proceeds be put into a separate bank account. Disbursing eligible costs from a separate account may assist in the documentation process.
Loans greater than $150,000 require the borrower to retain PPP documentation for six years after the date the loan is forgiven or repaid in full. Loans of $150,000 or less require the borrower to maintain payroll documents for four years and all other documentation for three years following the date the loan forgiveness application is submitted.
Additional guidance is available at sba.gov and additional guidance may be issued by the SBA. Please revisit this document regularly for updates.