The Paycheck Protection Plan (PPP), the loan program established under the Coronavirus Aid, Relief and Security (CARES) Act to help small businesses pay employees, had a chaotic first two weeks. By design, the program uses banks to receive applications and administer loans, however many small businesses experienced technical glitches as well as confusion about lending terms or PPP loan forgiveness rules. Different banks maintain different online processes for applicants. 

By April 15, the SBA approved 1.3 million loan applications totaling $289 billion in loans and is expected to run out of the original $349 billion allocated to the program imminently. Due to its popularity and massive demand, Treasury Secretary Steven Mnuchin requested an additional $250 billion from Congress, but no agreement had been reached as of this writing.

Hopefully more funds will become available soon for small business owners still trying to apply to the PPP. In the meantime, business owners who received loan approvals need to understand the SBA PPP loan forgiveness rules so they can use their funds correctly and achieve maximum loan forgiveness.

Latest PPP loan guidance 

On April 7, the SBA issued additional guidance on PPP loans in this FAQ document to clarify issues regarding borrower eligibility, affiliation issues, and the calculation of payroll costs. Visit the SBA’s website frequently as additional guidance is expected in the coming weeks. 

How to calculate PPP average monthly payroll:

• The maximum loan given under the PPP will be equal to 2.5 times the average monthly payroll costs for the previous calendar year, up to $10 million.

• Borrowers can use trailing 12-month payroll or 2019 payroll to calculate the average monthly payroll for PPP loan. 

• Seasonal businesses can use the time period beginning February 15, 2019 or March 1, 2019 to June 30, 2019.

• Paid sick leave is covered under the PPP loan; however, “sick and family leave wages for which credit is allowed under the Families First Coronavirus Response Act will not qualify.”

• If an employee’s annual salary exceeds $100,000 per year, you cannot include the excess amount (above $100,000) in salary calculation. For example, if a manager earns $125,000 per year, only $100,000 can be included in the average monthly payroll calculation. 

Important clarifications of PPP loan terms and conditions:

• At least 75% of funds borrowed must be spent on payroll (gross wages) in order for the loan to be forgiven.

• Lenders must make the first disbursement of the loan no later than 10 calendar days after the loan is approved

• Loans must be repaid in two years at 1% interest, instead of the original 10-year term. 

Good payroll recordkeeping and compliance needed

Businesses must attest to the accuracy of their payroll cost calculations. The PPP application does not require a credit check or any personal guarantee from business owners, nor is there a collateral requirement. But banks need supporting documentation in the form of payroll records to confirm the available loan amount. 

To ensure your loan will be forgiven, you will need an accurate calculation of your average past monthly payroll and the ability to keep accurate payroll records proving you kept the right number of employees on payroll.  For many small businesses, having a reliable payroll and tax compliance service provider ensures not only accurate payroll calculations but also impeccable payroll records and reporting.

To ensure accuracy and streamline your PPP application process, Asure has created the CARES Act Payroll Cost Report that automatically calculates your average monthly payroll, excluding pay for workers earning in excess of $100,000.

How to calculate PPP loan forgiveness

Businesses should carefully examine the list of forgivable expenses covered in the CARES Act as well as the established loan forgiveness calculation. Withum provides a great example of how to calculate forgiveness assuming a business has the following:

Loan amount: $500,000 (and spent all of the funds on qualifying expenses)

Average number of FTEs from February 15, 2019 to June 30, 2019: 75

Average FTEs during “covered period” following your first loan disbursement: 55

Calculation: 55/75= 73%

Maximum loan forgiveness: $500,000 * 73% = $365,000

In this example, the company will need to repay $135,000 of its PPP loan because it reduced its workforce compared to the look-back period.

Further guidance is expected from the SBA and Treasury Department to clarify the method of calculation for forgiveness as well as how to account for any business actions taken by June 30, 2020 to correct the reduction in forgiveness. 

Tax implications for PPP loans

The CARES Act stipulates forgiveness of the PPP loan will not count as taxable income for the federal government. In general, states are expected to follow this exception—and many with rolling conformity are already set. However, some states must take action to conform to this update. The Tax Foundation points out that several states including California, Wisconsin, and Massachusetts have static conformity dates and will have to vote to update their conformity date in order to adopt provisions set out for PPP loans and other CARES Act programs. Businesses should check their state tax codes to ensure loan forgiveness is reported correctly for 2020 tax filings.

Some businesses have been deferring payment of
the employer portion of Social Security payroll taxes through a program called the Social Security Deferral Election. If you have participated in this program and also received a PPP loan, it’s important to understand how they interact. You can continue to defer the employer Social Security payroll taxes up until you receive the decision from your lender that your PPP loan has been forgiven. From that point on, you must pay your employer Social Security taxes on time. You will also have to pay the deferred Social Security taxes, but that amount is not due right away and can be paid over two installments. Submit 50% of the deferred tax by December 31, 2021. The other 50% is due on December 31, 2022.

Legal risk in the PPP?

A recent Forbes post discusses some of the ambiguity surrounding the following certification in the PPP loan application:

Current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant. 

It’s worth thinking about if your business clearly meets the “hardship standard” required for PPP loan forgiveness or you could risk exposing your business to penalties and additional fees. Law firms are also warning about the lack of clarity surrounding other certifications and possible exposure to legal risks. 

Prepare now for the SBA loan forgiveness process

Before applying for PPP, businesses need to think through several issues regarding eligibility, payroll calculations, and loan forgiveness. Banks will expect businesses to be armed with supporting documentation to validate how money was spent and forgiveness amounts were calculated. Know the SBA PPP rules and plan now about how your business will use the loan in order to receive the maximum amount of forgiveness.