If you were one of the fortunate small businesses that we’re able to secure a Paycheck Protection Program loan (PPP loan), I know you want to make sure that you don’t need to pay it back. I’ve been doing some digging on this, and I hope this post will provide guidance and a better understanding of how you can qualify for PPP loan forgiveness. 

PPP Loan: Application and Terms

Congress created the PPP loan under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to provide forgivable loans to eligible small businesses facing economic hardship to retain their employees during the COVID-19 crisis. According to the NY Times, the average PPP loan that was granted was $79K.

The U.S. Small Business Administration, which is in charge of the $700 million loan program, has put out new guidelines on forgiveness as of May 15th, 2020 These are based on the employer maintaining staff or quickly rehiring employees and maintaining wages. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease prior to June 30th.

Borrowers had to use their average monthly payroll cost for 2019 and multiply it times 2.5 to calculate payroll costs, which then became the maximum amount of the loan. There is still money available if you believe your business is eligible to apply. Many small businesses have been successful in applying online through their business bank or one of the fintech firms such as PayPal or Kabbage. 

In addition to applying for the loan, apparently, you also have to apply for the forgiveness of the loan. PPP loan recipients can be eligible to have their loans forgiven if the funds were used to cover eligible expenses over the eight-week coverage period commencing when the loan was originally disbursed. 

Eligible expenses for the PPP loan include:

1. • Payroll Costs: Salaries, wages, commissions, or tips ($100,000 max per employee—gross earnings).
   • Interest in Mortgages: For loans incurred before February 15, 2020.
   • Rent: Under lease agreements, pre-February 15, 2020.
   • Utilities: If service began before February 15, 2020.

PPP Loan Forgiveness

Ideally, small business owners can get their PPP loans forgiven. However, in some cases, you may be required to pay the money back.  

• The amount of forgiveness may be reduced if the percentage of eligible expenses attributed to non-payroll expenses exceed 25% of the loan.
• You may also have to pay back the loan if the employee headcount decreases or compensation decreases by more than 25% for employees making less than $100,000 (unless the headcount or compensation are restored by June 30, 2020).

There are options for borrowers to calculate payroll costs using an “alternative payroll covered period” that aligns with borrowers’ regular payroll cycles. The SBA has created a PPP loan forgiveness application form to reduce compliance burdens and simplify the process for borrowers to apply for forgiveness. Click here to download the Instructions and Application.

Business owners have some flexibility to include payroll and non-payroll expenses paid or incurred during the eight-week period after receiving their PPP loan. Exemptions from loan forgiveness reduction are based on rehiring by the end of June.  

Unemployment Benefits Have Complicated PPP Loan Forgiveness

Prior to the coronavirus, people receiving unemployment benefits in most states got, on average, less than half their weekly salaries. However, thanks to the additional $600 a week set aside in the federal stimulus package for the unemployed, sitting home until the end of July is helping some hourly wage workers get ahead.

The tricky part of this is if you had already laid off your hourly wage staff and they started collecting unemployment. In many cases, the unemployment they are receiving is far greater than what you were paying them. There are new exemptions from the loan forgiveness reduction for borrowers who have made attempts to rehire workers that were declined. If the employee rejects your re-employment offer, you may be allowed to exclude this employee when calculating forgiveness. To qualify for this exemption:

• You must have made a written offer to rehire in good faith.
• You must have offered to rehire for the same salary/wage and number of hours as before they were laid off.
• You must have documentation of the employee’s rejection of the offer.

You can also qualify for an exemption if any of these conditions apply to an employee:

• They were fired for cause.
• They voluntarily resigned.
• They voluntarily requested and received a reduction in their hours.

Note: Employees who reject offers for re-employment may no longer be eligible for continued unemployment benefits.

The $600 boost in unemployment benefits is the so-called “replacement rate,” or the share of a worker’s wages that is replaced by unemployment benefits. But those additional funds will run out July 31st, and hopefully, you’ll be able to invite your employees back to work again in August. 

Make sure that you apply for PPP loan forgiveness before the end of June. 

I just hope that more stimulus resources become available, or else all of this could be delaying the inevitable (or as my father would say, “Rearranging the chairs on the deck of the Titanic.”) Many of us could go out of business despite stimulus efforts, and as small businesses, we employ 83% of the U.S. workforce. Monetary and fiscal policymakers will hopefully take this into account and make fixing this issue a top priority. Keeping small businesses operating is in everyone’s best interest. 

I hope this information helps you understand PPP loan forgiveness so that you may benefit from these funds without having to pay them back. I would love to hear your stories about how the PPP loan is affecting your business.