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. Specific criteria to obtain full or partial loan forgiveness are still emerging, so it is important to proceed with caution and stay informed as new guidance is released.
These are the key factors for loan forgiveness:
- Use of funds: You may owe money when your loan is due if you use the loan amount for anything other than payroll costs, mortgage interest, rent, and utilities payments in the 8-week period following loan origination. No more than 25% of the funds can be used on mortgage interest, rent and utilities.
- Number of staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount during the required the required 8-week period.
- 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.
- Re-hiring: You have until June 30, 2020, to restore your full-time employment and salary levels for any changes made between February 15 and April 26, 2020. (Policy-makers are considering extensions in this timeline.)
How to Maximize Loan Forgiveness
The best recommendations we can make as of May 27, 2020, 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
is a PowerPoint document that goes more in-depth on our most current recommendations on subjects such as accounting and recording the PPP loan and interest.
Use these tracking tools
501 Commons has developed the following tools to support your organization throughout your 8-week 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. Each individual tool below has instructions that all tie back to the overall application.
Start with the PPP Loan Forgiveness Tracker before you view either of the other documents.
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 with one of our team at no cost to you.
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 .
- 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. You can use the weekly change in cash number on line 45 on the “PPP Loan Totals by Week” tab of the tracker to see an amount to transfer each week.
Keep up to date on the SBA guidance
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 8-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 8 weeks of the loan will not directly correlate to ordinary business operating weeks. The takes this into account and will calculate the start dates of each week based on the date of your loan disbursement.
How can I request loan forgiveness? You can submit a request to the lender servicing your loan. 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.
At this time, we do not have a full picture of what the forgiveness application will entail, but you should plan to be able to present documentation related to payroll, payroll taxes, and all expenses you are planning on having forgiven.
When must I start paying back the portion of loan that was not forgiven? The first 6 months of repayment will be automatically deferred. The maximum time to repay the loan in full is two years.
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 8-week period, and/or
- You are not granted full forgiveness and must pay the loan back within 2 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.
- PPP Loan Forgiveness Application
- Interim Final Rule on Loan Forgiveness (as of May 22, 2020)
- Interim Final Rule on Lender Responsibilities (as of May 22, 2020)
- Paycheck Protection Program frequently asked questions (FAQ), maintained by the Small Business Administration with input from the Department of Treasury.
- Paycheck Protection Program information sheet, provided by the Department of Treasury.
- The AICPA's Paycheck Protection Program Resources page houses resources and tools produced by the AICPA to help address the economic impact of the coronavirus.
- Managing your PPP Loan & Forgiveness 101 (Fiscal Strength for Nonprofits)
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.