What Businesses Need to Know About PPP Loan Forgiveness

If your business received or expects to receive a loan under the Paycheck Protection Program (“PPP”), here are some rules of the road for using the loan and qualifying for loan forgiveness:

  • “Covered Period” is important to know: it is the 8 week period starting the date the lender makes the first PPP loan disbursement.
  • Loan forgiveness can be up to the full principal amount of the loan plus accrued interest.
  • The amount of loan forgiveness will depend (in part) on spending during the Covered Period for “Covered Expenses” (described below).
  • Maximum loan forgiveness: at least 75 percent of the amount forgiven must be attributable to payroll costs; not more than 25 percent of the forgiven amount may be for authorized non-payroll expenses (mortgage interest, rent, utility payments)
  • Covered Expenses are:
    • Payroll costs, which includes employee compensation (including commissions and similar payments, tips); paid leave (vacation, family leave, sick leave); severance payments; retirement benefit payments; premiums/costs for group health insurance for active employees; state and local employment taxes; and (only for independent contractors who receive loans) earnings from self-employment.
    • Costs and premiums for group health care benefits for employees who are on paid sick, medical, or family leave.
    • Mortgage interest payments for the business (not prepayments or principal payments) if loan incurred before February 15, 2020
    • Business rent payments on lease agreements in force before February 15, 2020
    • Business utility payments for service started before February 15, 2020
  • Payroll costs DO NOT include: payments to independent contractors, compensation for employees who live outside the U.S., compensation to employees in excess of a $100,000 annual rate, federal employment taxes (i.e., FICA, income taxes withheld from employees, etc.); payments to employees for leave under the Families First Coronavirus Recovery Act for which tax credits are taken.
  • If you use PPP Loan proceeds for anything other than Covered Expenses in the percentages discussed above, the forgiveness amount will decrease. Other events that might affect your loan forgiveness are:
    • Loan forgiveness is proportionately reduced if you decrease your employee headcount during the Covered Period.
    • BUT … you have until June 30, 2020, to restore employee headcount and salary/wage levels for reductions made between February 15, 2020 and April 26, 2020 – doing so could increase the amount of loan forgiveness. Some confusion remains about how this restoration exemption will actually work in practice and we might expect further guidance from the SBA on this point.
    • Loan forgiveness is reduced if you decrease salaries and wages by more than 25% for any employee who made less than $100,000 in 2019.
  • Applications for loan forgiveness ( submitted to the lender) will need to include documentation showing:
    • number of FTE employees and pay rates during the Covered Period;
    • payments for eligible mortgage interest, leases, and utility obligations;
    • payroll tax filings reported to the IRS;
    • state income, payroll, and unemployment insurance filings; and
    • certification that the documentation is true and correct and that the forgiveness amount requested was used for the Covered Expenses.
  • Lenders may request more information, so keep all records related to loan use.
  • Lenders must make a decision on forgiveness requests within 60 days of receiving your application.

If you have any questions, please contact Joseph Hofmann or the Stevens & Lee attorney with whom you normally work.