If you are reading this, I’m guessing you have already applied for a Payroll Protection Program “PPP” loan. You, like all the other borrowers, immediately want to know how much of the loan proceeds can be forgiven. After all, “free” money is significantly more desirable than a loan, even if the interest rate is only 1%.
For starters, I am going to keep this simple, without all of the exceptions, what-ifs, and safe harbors. In the simplest terms, how can you obtain 100% forgiveness? Now, if you follow future posts, it’s likely that some of those other details will be discussed and perhaps more importantly some planning ideas. Oh yes, you can have a significant impact on how much is forgiven by actions you take during the 56 days following the SBA loan disbursement. If you want more details, visit the SBA.
Right now (This could change.) 75% of the loan must be spent for payroll. For our “simple” explanation, assume everyone earns less that $100,000 per year.
Payroll Costs
Payroll costs include
- Employee gross pay,
- Owner gross pay limited to $15,385, (If Sole Proprietorship or Partnership, then use distributions also capped at $15,385)
- Employer contributions to employee health insurance (Include benefits for S-Corp and C-Corp Owners),
- Employer contributions to employee retirement plans (Include benefits for S-Corp and C-Corp Owners), and
- Employer paid state unemployment taxes
For each person you paid in the first quarter of 2020 (1/1/20 – 3/31/20,) determine if you paid them at least 75% of that average weekly amount during the 56 days following your SBA loan disbursement. If so, you had no wage reduction which could have an impact on your loan forgiveness. There are numerous issues and exceptions, but in the interest of simplicity, those items will not be discussed here.
FTE Reduction
Reducing the number of employees also impacts PPP loan forgiveness. There are numerous decisions, alternatives, and exceptions in this
calculation. Simply stated, did you reduce the average number of employees during the covered period – during the 56 days following loan disbursement? In order to make this determination, you need more information. The real question is this. VERY simply stated, did you have less people, on average, during the covered period than you had on payroll 2/15/19 – 6/30/19? Or, at your option, did you have less people, on average, during the covered period than you had on payroll 1/1/20 – 2/29/20. If you did not have less people, on average during the covered period, then you had no FTE reduction which could have an impact on your loan forgiveness.
Nonpayroll Costs
If all of your PPP loan proceeds were not spent on payroll, then, for full forgiveness, up to 25% can be spent for business mortgage interest payments, rent or lease payments, and business utility payments.
Remember, even if you had no wage reduction, no reduction in the number of employees, and you spent all of the proceeds on payroll, interest, rent, and utilities, you should expect to receive full PPP loan forgiveness – maybe. We have significantly understated the complexity and omitted many of the loan forgiveness details. These details and omissions may affect the amount ultimately forgiven. Also, if you received a EIDL grant, your forgiveness amount will be reduced by the amount of the EIDL grant.