PPP Loan Forgiveness Application Step-by-Step Guide
Updated June 24, 2020
We know how important it is to get timely information on the PPP program, so we created this step-by-step guide to help you through the PPP Loan Forgiveness Application.
The SBA released the new Loan Forgiveness Application following recent legislative updates to the program.
Highlights:
Borrowers who received their loan before June 5, 2020 may now elect to use either the 24-week Covered Period or one of the 8-week Covered Periods. Borrowers who received the loan after June 5th will be under the 24-week loan Covered Period
Payroll costs may be “paid” or “incurred” during the loan Covered Period.
FTE employee calculations will follow an accounting method.
Borrowers may elect to use one of two “base” reference periods for purposes of determining if the number of FTEs was reduced during the Covered Period.
Safe Harbor exemptions and exceptions from forgiveness reduction for:
Employees who decline a written offer for re-employment;
Employees who are terminated for cause, resign voluntarily, voluntarily request and received hours reduction;
Employees whose salaries are restored to their previous wages if reduced during the Covered Period;
Restoration of FTEs to the same level as before the Covered Period if restored by December 31, 2020;
New! Safe Harbor for reduction in FTEs due to compliance with CDC, HHS, or OSHA covid-related safety regulations/guidance;
New! EZ application available for borrowers meeting specific criteria;
New! 60% of forgiveness amount must be for eligible payroll expenses or entire loan will not be forgivable;
New! Loans issued after June 5, 2020 have a 5-year loan maturity period (loans before June 5th are still 2 years);
New! Borrowers electing the 24-month covered period carry new salary caps per individual; max cash compensation is different for employees versus owner-employees, independent contractors, and general partners.
New? Requirement to reporting employees to unemployment as part of the FTE safe harbor for declined offers of reemployment is no longer referenced in the application or instructions. The question remains whether this requirement has been removed or just the language in the application form itself.
There are a lot of details to cover, and the below gets a bit granular- grab some strong coffee, and let’s dive in.
COMPLETING THE APPLICATION: TIME & DOCUMENTATION
All borrowers will be required to submit a Forgiveness Calculation Form and a PPP Schedule A Form to the lender that is servicing their loan. Also included with the application is a Schedule A Worksheet, which must be retained, and an optional PPP Borrower Demographic Information Form, for which the veteran/gender/race/ethnicity data collected will be used for program reporting purposes only.
Be prepared to spend a decent amount of time on this application. The more employees you have, the longer it will take you to complete. You will need to have documentation specific to individual employees for the loan Covered Period as well as comparator Reference from “the before time”. As we warned you up front, the forgiveness application is a lot more documentation-intensive than the initial loan application. Don’t expect to complete this app in 10 minutes like the last one. Don’t wait until the last minute. Review the application instructions, get familiar with what documentation you’ll need to complete it when the time comes, schedule yourself time to complete it.
Get Organized: To complete the application and accompanying worksheets, you will need information about the salary/wages for each individual employee on payroll during the Reference Period(the applicable time period before the loan) and the 8-week or 24-weeek loan Covered Period. You will also need records applicable to non-payroll-related costs submitted for forgiveness. Much of this documentation will also need to be submitted and/or retained.
Best Practice: Get your documentation together and organized before you start. Grab two file folders. Label one “submit” and the other “retain”. Everything in your “submit” folder will also have to be retained, but this will help you stay organized as you go. Once you copy everything from your “submit” folder, including the forgiveness application itself, move the originals to the “retain” folder. Some documentation will go straight into the “retain” folder.
CALCULATING LOAN FORGIVENESS: LOAN COVERED PERIOD & CLARIFICATIONS FOR COSTS ELIGIBLE FOR FORGIVENESS
LOAN COVERED PERIOD OR ALTERNATIVE PAYROLL LOAN COVERED PERIOD
Borrowers may have the option to use one of the three periods of time below for their 8-week loan Covered Period.
Note: only borrowers who received their loan before June 5, 2020 may elect to use one of the 8-week Covered Periods OR the 24-week period. Loans obtained after June 5th will use the 24-week period.
8-week periods:
The “standard” 8-week Covered Period begins on the date of the first disbursement of PPP loan proceeds;
The “alternative” 8-week Covered Period begins on the first day of their first pay period following the loan disbursement date.
Only available to borrowers with a biweekly (or more frequent) payroll schedule.
Borrowers may elect to use the new 24-week loan Covered Period beginning on the date loan proceeds are disbursed and ending on the earlier of 24-weeks or December 31, 2020.
Whichever covered period you elect should be used consistently each time the loan Covered Period is referenced.
Terms Defined: For our purposes, the term “Covered Period” will be used to refer to whichever 8-week or 24-week period the borrower elects to use, whether it be the alternative period or the standard. Additionally, I’ll be using the term Reference Period for any time period from “the before time” used for purposes of comparing FTEs or salary/hourly wage levels with those during the Covered Period of the loan.
COSTS ELIGIBLE FOR FORGIVENESS: PAID OR INCURRED
Payroll:
Payroll costs are considered “paid” on the day that paychecks are distributed or direct deposit is initiated.
Payroll costs are considered “incurred” on the day that the employee’s pay is earned.
Payroll costs incurred but not paid during the last pay period of the Covered Period are eligible for forgiveness if paid on or before the next regular payroll date.
Don’t forget, for each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the Covered Period.
New! For borrowers electing the new 24-week covered period, the dollar amount for which forgiveness is requested cannot exceed 2.5 months-worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $20,833 per individual.
New! Employee cash compensation under the new 24-week period is capped at $46,154 per individual (excluding owners/self-employed/partners as above).
Borrowers electing an 8-week covered period are limited to 8-weeks-worth of 2019 compensation, capped at $15,385 per individual.
New! 60% of the forgiveness amount must be attributable to payroll costs or the entire loan will be unforgivable.
Eligible Non-Payroll Costs:
Eligible non-payroll costs must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the bulling date is after the Covered Period.
Cannot exceed 40% of total forgiveness amount.
CALCULATING LOAN FORGIVENESS: FORGIVENESS REDUCTION CALCULATIONS, EXCEPTIONS, & SAFE HARBOR
Borrowers will need to list each of their employees, separately, on the Schedule A Worksheet, not including independent contractors, owner-employees, self-employed individuals, or partners using the last 4 digits of the employee’s social security number as the employee identifier.
For each employee, the borrower will record the total sum of gross salary/wages, tips, commissions, paid leave (other than FFCRA paid leave), with total cash compensation paid to individual employees not exceeding $15,385 $46,154 for the 24-week period ($100,000 annualized). Eligible forgiveness amounts will be reduced by any decrease in FTEs and/or salaries/hourly wages by over 25% unless an exemption applies.
New! For borrowers using the 24-week base period, cash compensation per employee is capped at $46,154 ($100,000 annualized), excluding owner-employees, sole proprietors, and general partners who are capped at $20,833 (2.5 months-worth of $100,000 annualized, limited to 2.5 months-worth of 2019 compensation).
Borrowers using the 8-week period are subject to the same 8-week cap as before.
CALCULATING FTEs: THE MATH
FTEs are to be calculated using an accounting method that includes the hours are worked by part-time employees.
For the Loan Covered Period:
For each employee, enter the average number of hours paid per week.
Divide by 40 and round to the nearest tenth.
The maximum value for each employee is 1.0.
Simplified Method: Borrowers may instead elect to use a simplified method by assigning a value of 1.0 to each employee who works 40 hours or more per week and 0.5 for each employee who works fewer hours.
The sum total for all employees during the Covered Period is your number of FTEs during the Covered Period.
For the Loan Reference Period:
Borrowers may elect to use either of the below time periods to serve as their Reference Period:
February 15, 2019 to June 30, 2019; or
January 1, 2020 to February 29, 2020.
Seasonable employers may use either of the above or a consecutive 12-week period between May 1, 2019 and September 15, 2019.
For each employee, use the same calculation as used above for the Covered Period. If the simplified method was used, use it here as well.
FTE Reduction Exceptions:
Reductions in FTEs because of a reason listed below will not reduce the borrower’s loan forgiveness.
Any positions for which the borrower made a good-faith, written offer to rehire an employee during the Covered Period o who was employed on 2/15/2020 which was rejected by the employee and the borrower is unable to hire a similarly qualified employee for unfilled positions on or before December 31, 2020;
Any positions where a good faith, written offer to restore any reduction in hours, at the same salary/wages, during the Covered Period and the employee rejected the offer; and
Any employees who, during the Covered Period, were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in hours.
Borrowers will need to indicate applicable FTE Reduction Exceptions on their Schedule A Form.
FTEs should only be included on the Reduction Exception line if the position was not filled by a new employee.
FTE Reduction Safe Harbor:
New: There are now two Safe Harbors related to FTEs. Borrowers will be exempt from the reduction in loan forgiveness based on FTEs if either:
Both of the following conditions are met:
The borrower reduced its FTEs in the period beginning February 15, 2020 and ending April 26, 2020; and
The borrower then restored its FTEs by December 31, 2020 to its same FTEs levels as in the borrower’s pay period that included February 15, 2020;
OR
The FTE reduction is attributable to, and the borrower is able to document that, the business was unable to operate between February 15, 2020 and the end of the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with Covid-related safety requirements or guidance issued by HHS, CDC, or OSHA between March 1, 2020 and December 31, 2020.
CALCULATING SALARY/HOURLY WAGE REDUCTION: THE MATH
To determine whether forgiveness reduction applies, you must determine whether the salary or hourly wages of certain employees was reduced during the Covered Period as compared to the period from January 1, 2020 to March 31, 2020.
Salary/Hourly Wage Reduction Safe Harbor: if the borrower restored salary/hourly wage levels during the Covered Period to the January 1 to March 31, 2020 levels, the borrower may be eligible for elimination of the forgiveness reduction amount.
For each employee listed on the borrower’s Schedule A Worksheet, complete the following:
Determine if pay was reduced more than 25%:
Enter average annual salary/hourly wage during the Covered Period.
Enter average annual salary/hourly wage between January 1, 2020 and March 31, 2020
Divide 1.1. by 1.2.:
If 1.3. is 0.75 or more, enter “0” in the column for box 3 for that employee.
If below 0.75, proceed to step 2.
Determine if salary/hourly wage reduction safe harbor is met:
Enter annual salary/hourly wage as of February 15, 2020.
Enter average annual salary/hourly wage between February 15, 2020 and April 26, 2020.
If 2.2. is equal to or greater than 2.1., skip to step 3.
If lower, proceed to 2.3.
Enter the average annual salary wage as of the earlier of December 31, 2020 or the date the forgiveness application is submitted.
If 2.3. is equal to or greater than 2.1., the Salary/Hourly Wage Reduction Safe Harbor has been met. Enter “0” in the column for box 3 for that employee.
If lower, proceed to step 3.
Determine the salary/hourly wage reduction:
Multiply the amount entered in 1.2. by 0.75.
Subtract the amount entered in 1.1. from 3.1.
If the employee is hourly, compute the total dollar amount of reduction that exceeds 25% as follows:
Enter the average number of hours worked per week between January 1, 2020 and March 31, 2020.
Multiply the amount entered in 3.2. by 3.3.
Multiply this amount by 8or 24, depending on length of covered period elected.
Enter the value in the applicable column for that employee.
If the employee is salary, compute the total dollar amount of reduction that exceeds 25% as follows:
Multiply the amount entered in 3.2 by 8 or 24, depending on length of covered period elected.
Divide this amount by 52.
Enter this value in the applicable column for that employee.
NEW! EZ APPLICATION AVAILABLE FOR SOME BORROWERS
The SBA additionally released a new, simplified version of the forgiveness application.
Borrowers may elect to use the EZ version of the application if one of the following apply:
Self-employed, independent contractors, or sole proprietors who had no employees at the time of the PPP loan application and didn’t include employee salaries in the computation of average monthly payroll in the initial application form;
Borrowers who:
Did not reduce annual salary or hourly wages of any employee (excluding compensation for individual employees above $100,000 annualized) by more than 25% during the Covered Period compared to the period between January 1, 2020 and March 31, 2020, AND
Did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered period (ignoring reductions caused by an inability to rehire individuals who were employed on February 15, 2020 if unable to hire a similarly qualified individual to fill that position on or before December 31, 2020, and also ignoring reductions in hours that the borrower offered to restore and the employee refused); OR
Borrowers who:
Did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period compared to January 1, 2020 to March 31, 2020, AND
The borrower can document that they were unable to operate during the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with COVID-related safety regulations or guidance issued by HHS, CDC, and/or OSHA between March 1, 2020- December 31, 2020.
Borrowers must use the long-form forgiveness application if one of the above does not apply.
DOCUMENTATION REQUIRED
Documentation must be retained for 6 years following the date that loan proceeds are forgiven or the loan is paid in full. Retain all submitted documentation as well as other documents outlined below.
DOCUMENTATION BORROWERS MUST SUBMIT WITH FORGIVENESS APP
Payroll: Documentation verifying the eligible cash compensation and non-cash benefits payments from the Covered Period, consisting of each of the following:
Bank account statements or 3rd-party payroll service provider reports documenting the amount of cash compensation paid to employees.
Tax forms (or equivalent 3rd-party payroll reports) for the periods that overlap with the Covered Period:
Payroll tax filings reported, or that will be reported, to the IRS (typically Form 941); and
State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the state.
Payment receipts, canceled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans included in the forgiveness amount.
FTEs: Documentation showing:
At the election of the borrower:
The average number of FTEs on payroll per month between February 15, 2019 and June 30, 2019; or
The average number of FTEs on payroll per month between January 1, 2020 and February 29, 2020 (or alternative timeframe for seasonal employers).
The selected time period must be the same as selected for purposes of completing Schedule A line 11.
Documentation may include payroll tax filings reported, or that will be reported, to the IRS and state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the state.
Documents submitted may cover periods longer than the specific time period.
Non-Payroll: Documentation verifying existence of obligations/services prior to February 15, 2020 and eligible payments from the Covered Period.
Business Mortgage Interest Payments: copy of lender amortization schedule and receipts or canceled checks verifying payments from covered period or lender account statements from February 2020 and the months of the covered period through 1 month after the end of the covered period verifying interest amounts and eligible payments.
Business Rent or Lease Payments: copy of current lease agreement and receipts or canceled checks, or statements from February 2020 and months of the loan covered period as above.
Business Utility Payments: copy of invoices from February 2020 and those paid during the covered period and receipts, canceled checks, or account statements verifying payments.
DOCUMENTATION BORROWER MUST RETAIN BUT NOT REQUIRED TO SUBMIT
Record Retention Requirements: 6 years following loan forgiveness or loan payoff.
PPP Schedule A Worksheet and the following:
Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 1, including the Salary/Hourly Wage Reduction calculation, if necessary.
Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 2, specifically that each listed employee received during any single pay period in 2019 compensation at an annualized rate of more than $100k.
Documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for a reduction in hours.
Documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for a reduction in hours, and inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020.
Documentation supporting PPP Schedule A Worksheet “FTE Reduction Safe Harbor".
Documentation supporting certifications that the business was unable to operate to full capacity because of guidance or regulations issued by HHS, CDC or OSHA from March 1, 2020 to December 31, 2020 related to Covid safety. Documentation must include copies of applicable requirements for each borrower location and relevant borrower financial records.
All records submitted relating to borrower’s PPP loan, including:
Documentation submitted with the loan application,
Documentation supporting borrower’s certifications as to the necessity of the loan and eligibility for a PPP loan,
Documentation necessary to support the forgiveness application, and
Documentation demonstrating borrower’s material compliance with PPP requirements must be retained for 6 years after the date the loan is forgiven or repaid in full.
Borrowers must permit representatives of the SBA or the Office of Inspector General to access said files upon request.
Certifications will require borrowers to, once again, certify their need for the loan proceeds and eligibility for the PPP loan. Additionally, borrowers will be required to acknowledge that potential fines and/or civil or criminal fraud charges may be pursued by the government for knowingly using PPP loan proceeds for unauthorized purposes or knowingly making a false statement to obtain forgiveness. Listed penalties include, for those submitting to a Federally insured institution, imprisonment of not more than 30 years and/or a fine of not more than $1,000,000. The SBA and the Office of the Inspector General may conduct compliance auditing for any borrower, and those with a loan principal balance of $2 million or more (together with its affiliates) will be required to indicate as such on their application.