After you’ve been approved for an SBA Payroll Protection Program (PPP) Loan, it is important to understand how the calculation for forgiveness of the loan will work. The following information is designed to provide those who were recently funded with information that may be helpful in determining the forgivable portion of their recently funded PPP Loan.
The following information can be used as a resource. Please note that currently, we do not have all the guidance needed to know which costs qualify and how much of your debt will actually be forgiven in the end. We are still waiting for additional guidance from SBA, IRS, and ultimately the banks that you applied for the loan with (as they will approve/deny the debt forgiveness application). All the guidance we have provided is subject to change with additional guidance expected in the coming months. We plan to pass along this additional guidance as it becomes available.
We have created an excel template that can be used as a guide to know how to best utilize the funds provided by the SBA Program. It is very possible that you may not have 100% forgiveness, which as we explain below is okay, the additional amount will simply continue as a loan. We would prefer you plan to use these funds as efficiently as possible. To request a copy of our Forgiveness Calculation Template, please contact us.
For the sake of the forgiveness calculation, the following information should help you better understand how the calculation for forgiveness will work:
Start the Clock
Once you have received the funds from your bank, you have 8 weeks to spend the funds for qualified expenses. Any use of the funds outside the 8-week period, will not be included in the calculation to determine the forgivable portion of the loan.
What expenses qualify?
– There are 2 different sections of qualified expenses – Payroll Costs and Operating Costs:
•. Payroll Costs – include the following:
- Gross payroll (before pretax cafeteria plans; and subject to $100,000 annualized compensation limits)
- Retirement benefits,
- SUTA expenses,
- Workers Compensation Expenses,
- Net Health Insurance benefits paid
•. Operating Costs – include the following:.
- Utilities – including Gas, Electric, water, transportation, phone and internet, etc.
- Rent expenses
- Interest on debt (as long as the debt was in place before 2/15/2020)
Limits on Forgiveness
– A maximum of 25% of the approved loan amount may be spent on Qualified Operating Costs (as listed above)
– Limits on wages:
- The CARES Act will ding you, on a dollar-for-dollar basis, for any employee whose pay is diminished during the measurement period by more than 25%, when compared to pre-crisis levels (we assume this to mean around the 2/15/2020 time period)
- You will be dinged if your employee headcount during the measurement period does not match your pre-crisis headcount. The headcount penalty is more severe, especially for small employers, because it is not done on a dollar-for-dollar basis. Rather, your headcount ratio will be multiplied by your forgiveness amount. If you bring back only 75% of the workers, then you lose 25% of your forgiveness.
- **However, either of these “dings” will be overlooked if you have restored your employee salaries and headcount by June 30, 2020. ** (More guidance expected to come in this area)
Lender Makes the Decision – After receiving your application for forgiveness, your lender will have 60 days to make a determination as to forgiveness. During this time (and, in fact, during the 6-month period after the loan is originated), there will be no payments due.
If It’s Not All Forgiven – Any part of the loan that is unforgiven will accrue interest at a rate of 1% and will have a 2-year maturity date. For those employers who don’t need that cash, it can be repaid at any time without penalty. I suspect most employers will hang onto the excess cash, considering it to be a loan with better terms than any commercial line of credit.
We will continue to monitor and keep you abreast of any additional guidance as it becomes available. In the meantime, please do not hesitate to reach out with any questions.
Treasury Circular 230 Disclosure
Unless expressly stated otherwise, any federal tax advice contained in this communication is not intended or written to be used, and cannot be used or relied upon, for the purpose of avoiding penalties under the Internal Revenue Code, or for promoting, marketing, or recommending any transaction or matter addressed herein.