As the Paycheck Protection Program (PPP) enters the second round of funding, loan recipients should be considering a thoughtful approach to pursuing loan forgiveness. Understanding the scope of the forgiveness and monitoring emerging guidelines will be critical for maximizing forgiveness of PPP loans.
In the first round of funding for the Paycheck Protection Program, SBA lenders made loans to over 1.6 million businesses across the country. On April 24th a second round of funding was approved, so now another group of businesses will enter the program beginning April 27th. It is expected the second round of funds will go quickly.
Although the loan forgiveness parameters are still being clarified, the key elements for forgiveness are discussed below.
Have a plan for spending during the 8 week period. If you are awarded funds, you will need to document spending during the 8 week period that begins upon receipt of the funds to support your upcoming forgiveness application. Spending must fall within scope of the loan, which includes payroll, rent, mortgage and certain other interest and utilities.
Amount that can be forgiven. At the end of the 8 week period, you will need to apply for loan forgiveness through your SBA lender. You will need to provide your lender with documentation to support the expenditures for which PPP funding was used. At that time, you can be forgiven up to the full amount of the loan plus accrued interest. However, if your spending doesn’t fall within the loan parameters you may not be forgiven the full loan amount. While the SBA has indicated that further guidance will be issued on this topic, most guidance is still focused on loan eligibility. In the absence of further forgiveness guidance, your individual financial institution is the entity that has the authority to make the forgiveness decisions.
Qualifying for forgiveness. In order to qualify, you shall spend 75% of the loan proceeds for payroll. This includes salary (capped at $100,000 per employee annualized), as well as employer paid health and retirement plan benefits. It cannot include payments to independent contractors. If you reduce individual salaries by 25% or more or your headcount your forgiveness amount may be reduced. Prior payroll and benefit payment records will be used as the point of comparison.
Please note, Schedule C businesses have different requirements, and the definition of utilities has been a topic of debate awaiting further clarification.
Unforgiven portion. The unforgiven portion of a PPP loan can be repaid at anytime without prepayment penalty, but the loan terms of 2 years at 1% are quite generous. Many businesses may find that keeping the unforgiven balance of the loan makes sense. The remaining balance of the loan must still be used for payroll, rent, mortgage and certain other interest, or utilities.
Knowing misuse of funds will require an immediate repayment and is subject to liability such as charges for fraud.
Need help understanding the program and how to maximize your loan forgiveness? Frazier & Deeter can help. Our Paycheck Protection Program Team has developed modeling tools to understand your costs, consider alternative scenarios and arrive at a plan to ensure you understand the requirements for loan forgiveness. We can also provide an attestation to provide to your lender regarding the forgiveness calculation that should speed the lender’s decision to forgive the portion of the loan as calculated.