Now That PPP Is Here It’s Time to Talk About Forgiveness

Dear Small Business Owners, 

On the subject of the Paycheck Protection Program (PPP), the deadline to apply is June 30, 2020, when the PPP loans program ends. Although it’s still not too late if you didn’t apply, time is running out and awards will depend on your Lender, given the backlog of applications already at banks to obtain Paycheck Protection Program (PPP) loans. To learn more about the program, you can start by downloading and filling out the application form on the SBA website. 

If you applied for a PPP — which I hope you did – it’s time to focus our attention on the word of the day…”Forgiveness.”

To apply for forgiveness of your Paycheck Protection Program (PPP) loan, you (the Borrower) must complete the application as directed by the instructions provided by the “Federal Government Interim Final Rule on Paycheck Protection Program” posted as (85 FR 20811), and submit it to your Lender (or the Lender that is servicing your loan). Borrowers can also complete the application electronically through their Lender.

The link above is “hot off the press” and in providing updated guidelines for PPP forgiveness, contains some restrictions that we didn’t know about before.  The biggest one that’s going to affect most small business owners is that the payroll costs attributed to an owner/employee cannot exceed 8/52 (8 weeks worth) of your 2019 compensation.  To find out what your 2019 compensation is, see the calculation on Box 1 of your 2019 W-2.  This amount x 8/52 will represent the maximum that is forgivable based on your payroll costs.  A new clarification is that health insurance is considered part of payroll costs, so that’s not going to end up helping you.

As an example, if Box 1 of your 2019 W-2 shows a payroll of $100,000.00 than the maximum forgivable amount attributed to payroll as part of the PPP = 100,000 x 8/52 = $15,384.62 

Another favorable clarification is that costs can be either paid, or incurred in the 8-week period, as opposed to both paid and incurred, which was previously understood.  What that means to you is that you have to pay attention to when you received the PPP loan disbursement because that is the start date of the 8-week period for usage, which will in turn trigger your Forgiveness calculations. 

Additionally, the Forgiveness application specifies that the SBA will pay your forgiven amount to your bank, less any Economic Injury Disaster Loan (EIDL) advance amounts you may have also received as part of your original PPP application.  Although not yet clear, it does appear likely that your PPP Lender will also expect you to repay any EIDL amounts.

In summary, here’s what’s covered and capable of Forgiveness:

• Eligible payroll costs. Borrowers are generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the eight-week (56-day) Covered Period.

1. Non-payroll costs eligible for forgiveness consist of:
   1. Mortgage obligations: payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020.
   2. Rent obligations: business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020  
   3. Utility payments: business payments for a service for the distribution of electricity, gas, water.
   4. Transportation, telephone, or Internet access for which service began before February 15, 2020.

On Page 3 of the Paycheck Protection Program Loan Forgiveness Application, there is a calculation you must go through to determine the exact amount that is “forgivable” which is the amount you or your small business will not be required to pay back.  The calculation will:

• Determine and confirm whether at least 75% of the potential forgiveness amount was used for payroll costs
• Determine the Forgiveness amount does not include non-payroll costs in excess of 25% of the amount requested

In Conclusion

1. Read this summary and outline of Plan highlights to give you a baseline understanding of potential PPP Forgiveness 
2. If you haven’t already, immediately contact your Accountant and work closely with them to navigate the process, fill-out the PPP Forgiveness form, and make sure you have the correct documentation that supports the figures you will be using in the Forgiveness calculations.
3. Reach out to your Lender – see how they will be handling Forgiveness and any eventual payback
4. Keep in mind two Key points:
   1. The 1st caveat: that payroll must account for at least 75% of the Forgiveness
   2. 2nd: Eligible nonpayroll costs cannot exceed 25% of the total forgiveness amount

I know It’s a bit to digest.  But as a final reminder and even encouragement to my small business friends, know that for any amount not forgiven, the repayment terms are pretty good!  At 1% fixed rate, with a 6-month deferral, and a 2-year term with no pre-payment penalties, any amounts received and not forgiven should have helped your business during this critical period and will hopefully, not break the bank as a result of pay back.

For information on what qualifies as payroll costs, see Interim Final Rule on Paycheck Protection Program posted on April 2, 2020 (85 FR 20811).

Thank you and my sincerest wishes to stay safe, stay positive, and have faith – there is an end in sight. 

-Ernane

To learn more about how business owners can scale and drive more growth, through tools like Factoring and other important considerations, please check out the list of blogs on this website, or you may contact us directly at info@eifunding.com. You can also find me on Twitter and LinkedIn.