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Under the Paycheck Protection Program (PPP) created by the CARES Act, loans may be forgiven if borrowers use the proceeds to maintain their payrolls and pay other specified expenses.
Congress recently changed the rules regarding loan forgiveness. The Treasury Department and Small Business Administration are responsible for updating the application form and instructions for loan forgiveness. You can find the most up-to-date information here.
PPP borrowers must apply for loan forgiveness with the lender that processed the loan.
This guide is designed to help borrowers understand the process by which their loan forgiveness amount will be calculated and the overall approach of the loan forgiveness process.
*As of May 31st, 2021, the Paycheck Protection Program (PPP) is no longer accepting applications.
The process to calculate the amount of loan forgiveness requires three steps:
Determine the maximum amount of possible loan forgiveness based on the borrower’s expenditures during the 24 weeks after the loan is made;
Determine the amount, if any, by which the maximum loan forgiveness will be reduced because of reduced employment or reduced salaries and wages; and
Apply the 60% rule that requires that at least 60% of eligible loan forgiveness expenses go towards payroll costs.
1A. Expenses Qualifying for Loan Forgiveness:
The following expenses incurred or paid by the borrower during the 24 weeks following loan origination (see below for determining the 24-week period) are eligible for forgiveness:
Payroll Expenses, defined as:
Note: For an independent contractor or sole proprietor, payroll costs only include wages, commissions, income, or net earnings from self-employment, or similar compensation.
Non-Payroll Expenses, defined as:
Note: For an independent contractor or sole proprietor, you must have claimed or be entitled to claim a deduction for these expenses on your 2019 Form 1040 Schedule C in order to claim them as expenses eligible for PPP loan forgiveness in 2020.
1B. Identifying Your 24-Week Period:
The 24-week period during which expenses must be incurred or paid:
Tip: If you are using an online date calculator, remember to count the date of the disbursement of the loan as part of the 168 days. For example, if the loan was disbursed on April 20, the last day of the 56 days would be October 4).
2A. Determine loan forgiveness reduction based on a reduction in salaries or wages of more than 25%:
For employees who earned $100,000 or less in 2019 (or were not employed by the borrower in 2019), the borrower’s loan forgiveness will be reduced for each employee whose average pay (salary or hourly wage) during the 24-week period is less than 75% of their average pay from the full quarter prior to the 24-week period (for most borrowers: January 1 to March 31, 2020). The amount of the reduction in loan forgiveness is based on the amount of the reduction in pay.
Safe Harbor: Borrowers can avoid having their loan forgiveness amount reduced if they restore an employee’s pay. Specifically, if by not later than December 31, 2020, the employee’s annual salary or hourly wage is equal to or greater than their annual salary or hourly wage on February 15, 2020, the borrower’s loan forgiveness is not reduced.
2B. Determine loan forgiveness reduction based on a reduction in the average number of employees.
The borrower’s loan forgiveness will be reduced if the average number of weekly full-time equivalent employees (FTEs) during the 24-week period is less than the average number of FTEs during the borrower's chosen reference period. Borrowers can choose between the following reference periods:
Exceptions: Borrowers will not be penalized for any FTE reductions if either of the following occurred:
Safe Harbor: There is no reduction in the forgivable loan amount for borrowers who reduced their FTEs during the period beginning on February 15 and ending on April 26, 2020, but who by no later than December 31, 2020 restored the FTEs to the level that existed on February 15.
A borrower’s maximum loan amount could also be reduced if the borrower’s eligible non- payroll expenses exceed 40% of the total eligible expenses. The maximum eligible loan forgiveness is payroll expenses divided by 0.60.
Example: If your payroll expenses for the 24-week period equal $60,000, your loan forgiveness cannot exceed $100,000. Any more than $100,000 would mean your non-payroll expenses represent more than 40 percent of the total forgiveness amount.
Borrowers’ loan forgiveness will equal the smallest of the following:
Your PPP loan amount
The maximum loan forgiveness amount from Step 1 less any reductions from Step 2
The maximum loan forgiveness amount where eligible payroll expenses equals or exceeds 60% of the total forgiveness (i.e. your eligible payroll expenses ÷ 0.60)
For any loan amounts not forgiven, the original loan terms – two-year maximum loan at 1% interest rate with payments deferred until the date on which the amount of forgiveness is remitted to the lender —will apply. (For loans made after June 4, 2020 the loan term is five years.)
There are no prepayment penalties or fees.
Borrowers will be required to submit certain documentation with their loan forgiveness application:
Full-Time Employees (FTEs):
Borrowers that received a loan before June 5, 2020 may elect to use the original week period after origination for purposes of determining forgiveness.
PPP borrowers may now also delay payment of the employer portion of payroll taxes through the end of the year.