The biggest impact of the CARES Act came via the “forgiveness” provision within the $349 billion Payroll Protection Program (PPP) offered via the SBA loan program. If organizations meet specific eligibility criteria, allocate the funds during a specific timeframe/for specific expenses, while maintaining their workforce, the loan can be completely “forgiven.” On top of the forgiveness, payments can also be deferred for up to 6 months.
So the magic question – If your organization is eligible for a PPP loan, how do you put yourself in a position to receive PPP funds and obtain forgiveness of the entire principal amount before a single payment is due – turning
it effectively into a zero-cost grant?
While many organizations have already applied for their PPP loan, with some even getting the promise of funds by the week of April 13th, let’s take a step back to understand the full scope of this “zero-cost” scenario.
Understanding How Much You Can Apply For
The amount of your loan is equal to 2.5x your average monthly “Payroll” costs from 2019, with the maximum loan capped at $10 million. Payroll includes:
- Salaries, wages, commissions and payment of cash tips/equivalents (including state and local payroll taxes; capped at $100k per employee)
- Vacation, parental, family, medical or sick leave (excluding FFCRA benefits)
- Severance payments
- Health care and retirement benefit costs
Understanding How Much You Should Apply For
For full loan forgiveness, our “zero-cost” scenario, PPP funds would have to be allocated per the following:
- At least 75% of total loan amount must be spent on Payroll costs (outlined above).
- The 25% remaining can be spent on mortgage interest, rent payments, and utility payments.
Understanding When the Funds Can Be Forgivable
If you use the funds on the above mentioned expenses within 8-weeks of the loan origination date (in some cases, as early as the week of April 13th), your loan can be fully forgivable.
Understanding the Fine Print
There is one last requirement and it is a very important one. You will not be granted full forgiveness if you do not maintain your staff and payroll. There is a full calculator on the SBA website, but below is an overview:
- Number of staff: Your loan forgiveness will be reduced if you decrease your full-time employee headcount.
- Level of payroll: Your loan forgiveness will also be reduced if you decrease salaries and wages by more than 25% for any employee compared to the previous quarter.
There is a re-hiring provision for full forgiveness: You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020. In layman’s terms; if you lay off employees/salaries, you have until June 30, 2020 to bring your numbers back up to avoid losing the full forgiveness provision.
Applying for Forgiveness
- Submit a request to your lender servicing the loan.
- Submit backup documentation to verify the expenses from the 8-week period where the loan proceeds were allocated.
- Submit backup documentation for employee count and salary information.
- Recommended to track loan proceeds and all transactions in a separate bank account
Once submitted, your lender will have 60 days to make a decision on whether your organization has met the criteria for full forgiveness.
How Do You Turn the PPP into a Fully “Forgivable” Loan?
- Understand your “8-week” forgivable amount
- Apply for the correct amount
- Allocate the funds to forgivable expenses per US Treasury’s schedule
- Maintain (or increase, if you reduced) employee count and salary levels
- Apply for forgiveness
Make sure you have a banking partner that can help you through the process. Certain “agents” – CPA or attorney partners – are also equipped to assist through the loan process, although some potential agents have decided to bill for their time in lieu of agent commission on the loans. If you plan out your strategy correctly and hit all of the markers above, you can receive a fully forgivable PPP loan; no payments, no cost!
The information provided here does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available are for general informational purposes only. Please consult your own advisors for specific legal and accounting practices
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Senior Vice President | Partner
Jeff Bastien is a Partner and Senior Vice President at RogersGray. With over 12 years in the industry, he serves as a trusted advisor for employee benefit and human resources-related topics, such as Healthcare Reform, HR Business Planning, and Alternative Funding Strategies.