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PPP Loan Forgiveness Guidance

Update: The PPP is being re-opened both for first-time borrowers and for existing PPP lenders. See below for information on the 2nd draw. 501 Commons will again be offering technical assistance for applicants. We will begin scheduling appointments on January 25 and they will begin February 4.


Free Support for loan applications and loan forgiveness

501 Commons has secured a foundation grant that allows our finance team to provide FREE consultations and technical support to help organizations in Washington and Oregon monitor their expenses and FTE counts and apply for loan forgiveness.

*Please note, these services are free only for organizations based in Washington and Oregon. For organizations outside these states, the fee is $25 per quarter hour with a 25% reduction for organizations with an annual budget of less than $1.5M.


Important Updates and Changes

Forgiveness:

  • As part of the Consolidated Appropriations Act (CAA), there will now be a simplified one-page application for PPP forgiveness for loans under $150,000. This application will only require:
    • that the applicant to provide a description of the number of employees retained due to the loan, estimated amount of the covered loan used on payroll costs and the total loan value;
    • that the applicant attest that the information provided is accurate, complies with applicable requirements, and the applicant will retain records of compliance for a four year period for employment records and a three-year period for other records.
  • The Economic Injury Disaster Loan (EIDL) Advance will no longer be deducted from the PPP forgivable amount.

Covered Expenditures:

  • For both first and second draw loans, 60% of the loan proceeds still need to go toward payroll. However, in addition to rent, utilities, and mortgage interest, the other 40% may now be spent on:
    • Covered operations expenditures, including payment for any software, cloud computing, and other human resources and accounting needs
    • Covered property damage costs, including costs related to any public disturbances that occurred during 2020 not covered by insurance
    • Covered supplier costs, which includes expenditures to a vendor as a part of a contract or purchase order for goods that was in effect prior to the taking the PPP and were essential to the organizations operations at the time the expenditure was made.
    • Covered worker protection, including personal protective equipment (PPE) and adaptive investment to help the organization respond to federal, state or local health guidelines related to COVID-19.

Factors Impacting Loan Forgiveness

Making it through the process of securing a PPP loan is an important first step if your organization is experiencing economic hardship due the coronavirus pandemic. We recommend giving careful thought and maintaining documentation as you begin accounting for these funds so that you can maximize the amount that is forgiven.

For loans made after June 5, you now have 24 weeks to spend PPP funds, up from eight weeks. If you had already received your loan, you may negotiate with your lender to extend your term. The legislation also provided that you do not have to make employer payroll tax payments through the end of 2020.

These are the key factors for loan forgiveness:

*Note: The SBA plans to release a new consolidated Interim Final Rule in the coming days that will make new clarifications and update the timelines for the dates, etc. below. The information below should give you a general idea of what could affect your forgivable amount, but there may be changes later this month.

  • Use of funds: You may owe money when your loan is due if you use the loan amount for anything other than payroll costs and other covered expenses in the 24-week period* following loan origination. No more than 40% of the funds can be used on mortgage interest, rent, utilities, covered operational expenses, covered property damage, covered supplier costs, and covered worker protections.
  • Level of payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.
  • Number of staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount during the required 24-week period. If you had already received the PPP loan prior to June 5, you should be able to choose between the original 8-week period and the 24-week period.
  • Re-hiring: You have until December 31, 2020 to restore your full-time employment and salary levels for any changes made between February 15 and April 26, 2020.  Congress added safe harbors regarding a return to your FTE count from February 15, provided you can document:
    • Your organization was unable to rehire an individual who was an employee on or before February 15, 2020 and you were unable to hire a similarly qualified employee by or before December 31, 2020; OR
    • Your organization was unable to return to the same level of business activity from February 15, 2020 due to compliance with guidance or requirements issued by government agencies (see the act for list) from March 1-December 31, 2020 relating to sanitation standards, social distancing or any other worker or customer safety requirement related to COVID-19
  • Payback period: If you do have to payback the loan, the payback period has been extended from two years to five for loans originating after June 5. If you have a loan from prior to this date, the loan remains a 2-year loan but you may work with your lender to extend this period up to 5 years.

How to Maximize Loan Forgiveness

The best recommendations we can make as of January 12, 2021, are:

  • Document every PPP loan-related transaction
  • Keep a separate bank account for the PPP Loan
  • Follow the guidelines set forth so far by the US Department of Treasury and SBA

Use these tracking tools

501 Commons has developed the following tools to support your organization throughout your loan period. As guidance from the SBA and U.S. Department of Treasury is still forthcoming, we expect that these models could change.

We recommend that you review the full application for forgiveness on the SBA website here before you begin. We do expect that the SBA and U.S. Department of Treasury will continue to issue guidance, so please check back on a regular basis as we update the tools. Each individual tool below has instructions that all tie back to the overall application.

Start with the PPP Loan Forgiveness Estimator and then review and complete the 25% Salary Reduction Test Estimator and the FTE Quotient Estimator to gain a fuller picture of your forgiveness estimate.  If you are opting to continue with the 8 week loan period, we have a loan tracker that will allow you to go week by week. We also are providing an salary reduction test estimator for the 24-week period:

If you need help working with the documents and gathering information, reach out to us! Use the the form here to set up a Quick Consult.

Keep a separate bank account

  • While it is not a requirement for you to keep a separate bank account for the PPP Loan, we recommend it.
  • Keeping a separate bank account allows you to more clearly see the loan funds and to match them directly to a tracking document, such as the 8-Week PPP Loan Forgiveness Tracker.
  • Whenever possible, you should use your general account to pay all expenses as you normally would and then make a transfer of funds from the loan account to your general account to match your tracking document.

Frequently Asked Questions on the PPP

What about loans of $50,000 or less?

On October 8, 2020, the SBA issued form 3508S and its instructions for borrowers with loans of $50,000 or less. This form may be used for any loan that falls under the $50,000 limit unless the borrower along with its affiliates received more than $2 million in PPP loans. By using this form, these borrowers are exempt from:

  • Any reduction in loan forgiveness amount on account of full-time equivalent reductions
  • Any reduction in loan forgiveness amount on account of reductions in employee salaries or wages

The form and new rule also means that borrowers do not have to provide any calculations for the exemptions above. However, this rule does not exempt the borrower from having to submit the required paperwork to substantiate payroll and nonpayroll costs.

Does the 24-week period expand the cap on cash compensation per employee?

Yes, under the new Interim Rule released on June 16, it is clear that the maximum allowable cash compensation per employee for the 24-week period is $46,154. Please note that for owners, the maximum is $20,833.

What does the "safe-harbor" mentioned in question 46 of the SBA's Frequently Asked Questions released on May 13, 2020, mean for me? The answer to question 46 states:

"Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith."

Though this does relieve organizations with smaller loan sizes from concern over needing to prove necessity, we urge you to document with diligence and care. This also does not seem to extend beyond the very narrow parameter of this specific certification, so borrowers should continue to strictly follow utilizing the loan for its intended purposes as outlined above.

When does the 24-week period begin?

The loan period begins upon the disbursement of funds from the lender to the organization’s bank account (see Treasury Guidance, point 20 of the US Department of Treasury PPP FAQs as of May 6, 2020). This means that the 24 weeks of the loan will not directly correlate to ordinary business operating weeks.

How can I request loan forgiveness?

You can submit a request to the lender servicing your loan. As of June 5, you now have up to 10 months after the last day of your covered period to request forgiveness from your lender. If you do not request forgiveness by the end of this 10-month period, your payments would begin at that time.

The request should include documents that verify the number of full-time equivalent employees and pay rates, as well as payments you made on eligible mortgage, lease, and utility obligations. You must certify that the documents are true and that you used the forgiveness amount to keep your staff employed and for eligible mortgage interest, rent, and utility payments. The lender must make a decision on the forgiveness request within 60 days of your request.

You should plan to be able to present documentation related to payroll, payroll taxes, and all expenses you are planning on having forgiven.

Do I have to wait until the end of 24 weeks to apply for forgiveness?

No, the Revisions to the Interim Final Rule on Forgiveness released on June 22, makes clear that you can apply for forgiveness prior to even the end of your covered period as long as you have used all the loan proceeds for which you are requesting forgiveness.

"A borrower may submit a loan forgiveness application any time on or before the maturity date of the loan – including before the end of the covered period – if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness. If the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages in excess of 25 percent, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period."

Is there any reason not to apply for forgiveness prior to the end of the covered period?

Yes, if you reduced salaries by more than 25% for any one employee during your covered period, you will have to account for the reduction for the entire period. The Revisions to the Interim Final Rule on Forgiveness gives two clear examples:

An example of a 24-week period:

"A borrower is using a 24-week covered period. This borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period, with an FTE of 1.0. In this case, the first $250 (25 percent of $1,000) is exempted from the loan forgiveness reduction. The borrower seeking forgiveness would list $1,200 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by 24 weeks). If the borrower applies for forgiveness before the end of the covered period, it must account for the salary reduction for the full 24-week covered period (totaling $1,200)."

An example of an 8-week period:

"A borrower that received a PPP loan before June 5, 2020 has elected to use an eight-week covered period. This borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period, with an FTE of 1.0. In this case, the first $250 (25 percent of $1,000) is exempted from the loan forgiveness reduction. The 19 borrower seeking forgiveness would list $400 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by eight weeks)."

While this does now provided much needed and more welcome flexibility, you should consider ending your CP or APCP too early if the wage reduction applies to you as it could more negatively impact you than if you extended the CP/APCP.

It is also worth noting, that your lender has to have an application available for you to apply, so it may be that applying prior to the end of your CP/APCP is not an option. Consult your lender to see when they plan to have a PPP loan forgiveness application available.

When must I start paying back the portion of loan that was not forgiven?

The maximum time to repay the loan in full is five years. However, if you received your PPP Loan prior to June 5, you will need to negotiate with your lender to extend beyond the original 2-year term.

What if my loan is not completely forgiven?

Given that there is still no concrete guidance, we recommend you start to plan immediately on how you plan to proceed at the end of the loan period if:

  • You are not able to expend the full amount on allowable expenses during the 24-week period, and/or
  • You are not granted full forgiveness and must pay the loan back within 5 years at 1% interest.

You could make the strategic choice not to expend all of the funds and use a portion of it as a loan. However, we strongly recommend you contact your lender before using this strategy.

Helpful Resources

DISCLAIMER: 501 Commons is not providing accounting or legal advice. Information on this page, including any estimates and potential outcomes, are being provided for informational purposes only. We make no assurances regarding the completeness or accuracy of the model and bear no responsibility for the outcomes of any business decision for which you use this information. For any accounting or legal questions pertaining to your particular circumstances, we recommend that you consult with a licensed professional.

A great deal of guidance is still forthcoming regarding forgiveness for the PPP loan. Any estimated conclusions are based on our interpretation of the CARES Act and are subject to change upon issuance of final regulations from the US Treasury and the SBA. The conclusions and estimates could significantly or materially change as a result of changes in regulations or applicable laws. 501 Commons is under no obligation to update this financial model if changes occur. Differences between estimates and actual results might vary.