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Steps for PPP Loan Forgiveness


If you received a PPP loan, here is what you need to know - track and document everything. Keep detailed records of your expenses! Supporting documentation is necessary for potential loan forgiveness, and for a possible audit by the SBA in the future. The SBA has already issued interim guidance for loan forgiveness as discussed below, and we expect final guidelines any day.

The loan might be forgiven if at least 75% of the funds were used for payroll costs. The remaining funds can be used for eligible interest on mortgage loans, rent, and utilities (those in effect prior to February 15, 2020).

The amount of forgiveness of a PPP loan depends on the borrower’s payroll costs over an eight-week period. The eight-week period begins on the date the lender makes the first disbursement of the PPP loan to you.

PPP loan forgiveness is not dollar for dollar. Reductions can occur depending on how you spend your loan proceeds. There are two main situations that will reduce your loan's forgiveness, therefore it is important that you avoid these actions:

  • Using more than 25 percent of your loan on non-payroll costs: In this situation, your maximum forgivable amount will be equal to payroll costs divided by 0.75.

  • Reducing head count or salary: To maintain 100 percent forgiveness, you'll need to either maintain your payroll as it was pre-February 15, 2020, or hire back and restore wage reductions by the end of the PPP "covered period" on June 30. The total amount forgiven will be reduced proportional to the reduction in head count, or decreased by the total amount of reduced salary if you cut an employee's wages by more than 25 percent.

If you laid off employees or reduced their wages and then received a PPP loan, it's time to hire them back or reinstate their salary. Every dollar that you don't spend on doing so is a dollar you will need to repay, plus interest. You have until June 30, 2020 to eliminate the reduction in employees or wages that occurred during the period beginning on February 15, 2020, and ending 30 days after enactment of the CARES Act to prevent a reduction of the amount of loan forgiveness.

Under the Act, payroll costs are calculated on a gross basis without regard to federal taxes withheld, such as income taxes required to be withheld from employees. As a result, payroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of payroll tax. For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs.

Payroll costs have been further clarified to include:

  • salary, wage, commission, or similar compensation;

  • payment of cash tips or equivalent;

  • payment for vacation, parental, family, medical, or sick leave;

  • allowance for dismissal or separation;

  • payment required for the provisions of group health care benefits, including insurance premiums;

  • payment of any retirement benefit; or

  • payment of State or local tax assessed on the compensation of employees; and

  • the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period;

There are certain staffing requirements you have to maintain, and payroll costs are capped at $100,000 on an annualized basis for each employee.

Don’t forget, your loan application required you to certify that you were in compliance with applicable OSHA requirements, and would remain in compliance during the life of the loan. This is an enforcement opportunity and potentially a way to deny the ‘forgiveness’ clause of the PPP loan program if you are found to be out of compliance.

If the loan is not forgiven, the outstanding balance will accrue interest at 1 percent, and must be repaid within a 2-year period. There is no prepayment penalty, and the outstanding balance can be paid off at any time.

Both the SBA and your lender have a say in what documentation will be required, and lenders must give you a response to your loan forgiveness application within 60 days of receiving the request with all supporting documentation.

Though the initial $350 billion in PPP loan funds has been exhausted, some large companies that received PPP loans in the initial round have been pressured to return the funds to the program. The SBA announced that $2 billion has been returned. Starting April 27, 2020, another $310 billion has been approved for a second round of PPP loans.

Please contact ECS and we will be happy to help you with PPP loan application, tracking your expenses or any other accounting needs.

About the Author - Galit Shkurenko recently joined ECS Financial Services, Inc. as an Accounting Supervisor. Galit has more than 12 years of experience in public accounting and has provided audit, review, compilation and accounting services in a variety of industries including manufacturing, distribution and healthcare organizations, HUD multifamily housing, employee benefit plans, not-for-profit, and others. Galit received her Bachelor of Science degree in Accounting and Finance from DePaul University in 2007. In her free time, Galit enjoys outdoor activities, home improvement projects, but mostly catching up with her family and friends.

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