April 23, 2020

PPP Loan Forgiveness Essentials

The news last week that the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL) funding had lapsed sent a shockwave through the business community. Atlanta businesses in the process of completing their application or awaiting submission confirmation were left wondering what was next. The announcement that the initial $349B in funds had been exhausted also served as an important reminder to recipients about the loan forgiveness process. The rules require borrowers to spend at least 75% of funds on payroll expenses and no more than 25% on qualifying mortgage interest, rent, and utility expenses. However, many questions have emerged about best practices for managing loan funds to ensure loan forgiveness. To help clients, prospects, and others, Wilson Lewis has provided a summary of key insights to maximize loan forgiveness.

Loan Forgiveness Requirements

The Small Business Administration (SBA) has outlined the requirements businesses need to follow in order to be eligible for partial or full forgiveness. The full amount of the loan including principal and accrued interest can be refunded assuming loan proceeds were used on eligible payroll costs and employee retention. It is important to note the loan amount must be exclusively used for these purposes starting in the eight weeks following funding.

Payroll Costs

Eligible payroll costs are defined as:

• Employee compensation including wages, commissions, and tips.
• Any costs incurred for employee benefits such as family medical, sick leave, severance, and healthcare and retirement benefits.
• Taxes assessed on compensation.

It is important to note that compensation for employees with a principal residence outside the U.S., individual compensation above $100,000, the employer share of FICA and leave amounts covered under the Families First Coronavirus Act are not considered eligible costs.

Additional Limitations

The SBA outlined additional limitations on how to use funds to qualify for forgiveness. This includes a requirement that the borrower uses at least 75% of the loan for payroll costs and no more than 25% on other expenses. There are also rules regarding how staff retention and compensation reductions should be measured. These include:

• Employee Retention – Businesses need to carefully monitor the decrease in the number of full-time employees as it can impact the forgiveness amount. Any termination during the 8-week period will result in a forgiveness reduction. Reductions are calculated by determining the average number of full-time equivalents (FTEs) divided by the average number of FTEs during the period of January 1, 2020 – February 29, 2020, or February 15, 2019 – June 30, 2019.
• Payroll – Reducing salaries and wages by more than 25% (for those that made less than $100,000 in 2019) can impact the forgiveness amount.

Loan Forgiveness Tips

Since there are several requirements which require careful planning to meet, it’s important to ensure the proper tools and process are in place to ensure funds are properly spent. Below are a few tips to help make the process easier.

• Separate Bank Account – It is a good idea to open a separate bank account for PPP loan funds. Since specific documentation will be required in the forgiveness process it makes it easier to have a single account from which qualifying expenses can be tracked. In addition, this will also prevent the co-mingling of funds and makes it more difficult to inadvertently use funds for non-qualifying purposes.
• Documentation – The SBA will want to see documentation proving loan funds were spent on eligible expenses. For this reason, it is important to identify the documentation which will need to be compiled. In some areas this will be a relatively easy task, but if the business uses a payroll provider it may be more cumbersome. Take time to discuss the need for documentation with a payroll provider to ensure the right information is being collected.
• Monitor Employee Compensation – Carefully review employee compensation changes to ensure no reductions beyond 25% of base compensation. Not following this requirement will reduce eligibility for loan forgiveness.

Loan Forgiveness Process

Borrowers interested in receiving loan forgiveness need to file an application with their lender. The application should be submitted after June 30, 2020, or at the conclusion of the eight-week period.  Included within the application should be documentation reflecting payroll costs, the number of full-time employees and pay rates, copies of invoices, and payment confirmations for eligible lease, mortgage, and utility bills. A certification the information provided is accurate and funds were used only for qualified purposes will also be needed. Once received, the lender must review the application and submit it to the SBA for approval. Under the law, the SBA needs to decide on forgiveness within 60 days.

Contact Us

The loan forgiveness feature is an opportunity that many Atlanta businesses can not afford to miss. Since the devil is in the details, it’s important to properly track payroll costs and changes to staff levels to ensure proper decision making. If you have questions about the information outlined above or need assistance with a COVID-19 issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us.