In our run up to the articles under our US PPL Loan series, we hereby provide a ready reckoner on a full PPP Loan forgiveness.  This article factors in the changes introduced by the PPP Flexibility Act introduced since June 4, 2020.
As you are already aware, the highlight of the PPL Loan program is its eligibility for full forgiveness if you meet the stipulated conditions as provided therein.  So to attain forgiveness, one has to apply for the same after the completion of the forgiveness period in which the loan proceeds have to be expended as prescribed.
Let us briefly revisit the conditions of the PPP to start with:
–       PPP Loan is sanctioned based on a business’s average monthly payroll cost for 2019 multiplied by 2.5, to secure payroll costs for up to Eight weeks.-       PPP Loan proceeds can be used for:a.     Payroll – Salaries, Wages, Vacation, Parental, Family, and Medical leaves plus health benefits.b.     Mortgage Interest – If mortgage was executed prior to February 15, 2020.c.     Rents – If lease or rental agreement was executed prior to February 15, 2020.d.    Utilities – If the same were in subscription or service prior to February 15, 2020.  These include: electricity, water charges, gas, sewage, telephones, internet, and transportation eligible as per tax guidelines.
Hence, all expenses that fall under the aforementioned categories are eligible for forgiveness of the PPP loan.
Ensuing are the additional conditions one has to meet in order to apply for forgiveness:
1.     Coverage of Expenses incurred in 24 weeks:
Expenses incurred over 24 weeks from the day starting when the first PPP proceeds were disbursed by your lender.  It will not necessarily mean the date of signing the loan agreement.  So one doesn’t need to alter their payroll schedule, all payroll costs accrued within the 24 weeks period are eligible.  31^st December 2020 is the deadline of such coverage period, hence borrowers receiving loans after July 16, 2020 shall not have the full 24 weeks coverage period.  However, if you received your PPP loan before June 5, 2020 you can still use an 8-week coverage period instead of 24 weeks, since you have the option.
Reach us at GJM & Co. if you need to understand what coverage period should be opted – 8-weeks or 24-weeks.
2.     60:40 principle
The PPP Flexibility Act prescribes that at least 60% of the PPL loan proceeds should be used for payroll expenses.  Payments to independent contractors shall not be eligible as payroll.  The forgiveness amount shall be scaled proportionate to the amount spent towards payroll.
3.     Employee rules & requirements
A Business must maintain the number of employees on its payroll.  Here is the computation you can use to determine if you’ve met this requirement:
Firstly, determine the average number of full-time equivalent employees you had for:
The 8-week period following your initial loan disbursement, Say that’s – X
February 15, 2019 to June 30, 2019, Say that’s Y1
and January 1, 2020 to February 29, 2020, Say that’s Y2
Take X and divide that by Y1. Do the same with Y2. Take the largest number you obtain. If you’re a seasonal employer, you must divide by Y1.
If you get a number equal to or larger than 1, you successfully maintained your headcount and meet this requirement.
If you get a number smaller than 1, you did not maintain your headcount and your forgivable expenses will be reduced proportionately.
At this point, it is important to also understand the PPP Rules on Rehiring:
Exemptions on rehiring employeesEmployees who were employed as of February 15, 2020, and were laid off or put on furlough may not wish to be rehired onto payroll. If the employee rejects your re-employment offer, you may be allowed to exclude this employee when calculating forgiveness.
To qualify for this exemption:
a.     You must have made an written offer to rehire in good faithb.     You must have offered to rehire for the same salary/wage and number of hours as before they were laid offc.     You must have documentation of the employee’s rejection of the offer
If any of these conditions apply to an employee, you can also qualify for an exemption:
a.     They were were fired for causeb.     They voluntarily resignedc.     They voluntarily requested and received a reduction of their hours
You may also be required to demonstrate you were unable to hire similarly qualified employees for unfilled positions, or document that due to safety requirements, you were unable to return to normal operating levels. Note that employees who reject offers for re-employment may no longer be eligible for continued unemployment benefits.
4.     Employee Pay rules
You must maintain at least 75% of total salary.  This requirement will be individually assessed for every employee that did not receive more than $100,000 in annualized pay in 2019.
If the employee’s pay over the 8 weeks is less than 75% of the pay they received during the most recent quarter in which they were employed, the eligible amount for forgiveness will be reduced by the difference between their current pay and 75% of the original pay.
5.     Grace period to rehire
You can rehire any staff that were laid off or put on furlough and reinstate any pay that was decreased by more than 25% to meet the requirements for forgiveness, if those changes were made due to COVID-19 between February 15 and April 26. You have until December 31st to do so.
Let’s take a look at some examples for reductions in your forgiveness amount:
Expenditures from your PPP funds on the eligible things is straightforward. But things get more complex when your headcount isn’t consistent and employee pay levels remain similar.
Reduction in Headcount
Assume you have 3 full-time employees and they each made $3,000 per month, which means your PPP loan amount was $22,500 (3000 x 3 x 2.5). You had to lay them off in February due to COVID-19.  If you only hire back two out of the three employees, your workforce is 67% (two thirds) of your original headcount.  Over the 24 weeks of the PPP period, you spend $36,000 on your employees, more than your PPP loan amount. You claim the full $22,500 of your loan for forgiveness. If we assume you do not qualify for any rehiring exemptions, when it comes to calculating your forgivable amount, because your workforce is smaller, your forgivable amount will be multiplied by 0.67. You would be able to have $15,075 forgiven.
Reduction in Payroll
Assume you have three employees and they each made $3,000 per month, meaning your PPP loan amount was $22,500 (3000 x 3 x 2.5). You had to lay them off in February due to COVID-19. You hire back all three of your employees, but you only pay them $2,000 a month.  Over the 24 weeks of the PPP period, you spend $36,000 on your employees, more than your PPP loan amount. You claim the full $22,500 of your loan for forgiveness.  When it comes to calculating your forgivable amount, we look at each employee’s individual compensation. The 75% minimum salary is $2,250, so you’re paying each person $250 less than that each month. The difference is scaled up to a 24-week period, ($250 * 6), so $1,500 would be deducted from the forgivable amount. Repeating that for each employee would result in a total of $18,000 forgiven.
Forgiveness for self-employed individuals
You are entitled to use the PPP loan to replace lost compensation due to the impacts of COVID-19. You are eligible to claim 2.5 months’ worth of your 2019 net profit to replace pay. If you didn’t have any other payroll expenses factoring into your PPP loan amount, this means that your entire PPP loan could be forgiven for the 24-week period.  If you are using an 8-week forgiveness period, you can claim 8 weeks’ worth of your 2019 net profit as owner compensation replacement. The remaining PPP funds will need to be spent on utilities, rent, and mortgage interest expenses in order to be forgiven.  If you have mortgage interest, rent, or utilities expenses, you must have claimed or be entitled to claim a deduction for those expenses on your 2019 Form 1040 Schedule C in order to claim them for forgiveness.  For instance, if you worked in an office space in 2019 and did not have a home office, you could not have claimed a deduction on your home mortgage interest. Even if you are currently working at home now, you are not eligible to claim home mortgage interest payments for forgiveness.
Forgiveness for partnerships
As a general partner in a partnership, you are eligible to claim the same amount you claimed as partner compensation expenses when you applied for the PPP.  The maximum partner compensation is capped at the 2019 Schedule K-1 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties), all multiplied by 0.9235.
Applying for loan forgiveness after the coverage period
Applications for loan forgiveness will be processed by your lender. You will need to fill out a PPP Forgiveness Application form and submit that to your lender.
If you had a PPP loan prior to the Paycheck Protection Program Flexibility Act being signed, you can choose to use the original 8-week period instead of the 24-week period.
After you submit your application for forgiveness, your lender is required by law to provide you with a response within 60 days.
Documents required for Forgiveness
These are the required documents you will need to collect to provide with your PPP forgiveness application. Your lender may have additional requirements depending on their policies
Documents verifying the number of full-time equivalent employees on payroll and their pay rates, for the periods used to verify you met the staffing and pay requirements:
–       Payroll reports from your payroll provider
–       Payroll tax filings (Form 941)
–       Income, payroll, and unemployment insurance filings from your state
–       Documents verifying any retirement and health insurance contributions
–       Documents verifying that your eligible interest, rent, and utility payments were active in February 2020
Documents verifying your eligible interest, rent, and utility payments (cancelled checks, payment receipts, and account statements)
Good documentation and bookkeeping will be critical for getting your loan forgiven—you’ll need to keep track of eligible expenses and their accompanying documentation over the 24 weeks. Your lender will likely require these documents in digital format, so take the time to scan any paper documents and keep backups of your digital records.
Furthermore, your business will need to have complete financial statements at the end of your fiscal year. Your lender and the SBA have the right to request and audit your business’s financial documents and records.
If you need a reliable bookkeeping solution in place, GJM & Co. can do your bookkeeping for you, all online.  Schedule a Call today.
What if your business is not approved for forgiveness?Your lender may allow you to provide additional documentation so they can revaluate your request.  Otherwise, your outstanding balance will continue to accrue interest at 1%, for the remainder of the 5-year period.  There is no prepayment penalty. You can pay off the outstanding balance at any time with no additional fees.
If you need help with your PPP Loan forgiveness, reach us today at info@gjmco.in or Schedule a Call.