LB Carlson recently hosted a webinar that covered the most frequently asked questions and key considerations regarding the PPP loan forgiveness process. All PPP loan recipients will want to be aware of the general considerations regarding the forgiveness process and the recent changes to the program.
General considerations for PPP loan forgiveness
- Deadline – The forgiveness application can be completed any time prior to the maturity date (generally within 5 years of the loan origination). However, it is encouraged to start the process within the next few months because if you have not received forgiveness prior to 10 months from the end of your covered period, the loan will have to start being paid back.
- Covered Period – The increase of the covered period from 8 to 24 weeks has greatly expanded the opportunity for forgiveness. The recently passed Economic Aid Act allows for a flexible forgiveness period. The recipient may select a forgiveness period that ends on any date after 8 weeks, but not more than 24 weeks, from the date of the loan disbursement.
- Tax Consequences – The loan forgiveness is nontaxable for federal income tax purposes and, as of December 27, 2020, the expenses paid with the loan proceeds are deductible. State taxation will depend on each state deciding whether or not to conform with the federal tax treatment.
- Completeness – Full documentation and verification of loan need are critical.
- Approval Timeline – The lender has 60 days from receipt of the completed application to approve forgiveness; following that, the SBA then has 90 days.
- Sale or Merger Implications – The SBA has released guidance on what to do if there has been a sale or merger with a 50% or more stake.
- Audit Process – The SBA has said it will audit all loans over $2 million. Ensure that if you fall in that category, all your loan documentation is thorough and complete and that you have your loan need and certifications in order.
- Loan Need Certification – The SBA has developed a new form called the “loan necessity questionnaire” (Forms 3509 and 3510). These forms are to be provided by the lender to the borrowers with loans over $2M. The forms focus on your overall need for the loan so this issue is going to be reviewed carefully by the SBA.
- Loan Disclosures – There is potential that your PPP loan will become public record as the SBA has been required by a federal court to provide full disclosures of PPP borrower information.
Considerations for the PPP Forgiveness Application
When it comes to actually filling out the PPP loan forgiveness, there are several considerations to keep in mind.
- Three forms are available, depending on your situation:
- You may qualify for certain safe harbors (thorough documentation is critical):
- Operation safe harbor – For borrowers unable to operate from Feb. 15, 2020, to the end of your covered period due to HHS, CDC, or OSHA guidelines related to virus safety.
- FTE safe harbor – For borrowers who had employees voluntarily resign or who did not accept a return-to-work offer.
- Choose the right reference period for your FTE counts (you can pick the period that gives you the best answer) and ensure you have supporting documentation:
- February 15, 2020, to June 30, 2020, or
- January 1, 2020, to February 29, 2020.
- Seasonal businesses can use option a. or b. or can use any consecutive 12-week period between May 1, 2019, and September 15, 2019.
- Understand the payroll limits:
- Limits exist for payroll forgiveness on employees that make over $100,000 and owners of the company.
- Compensation must be paid or incurred in the covered period and paid by the next period. This does not include amounts paid by the employee for health insurance – that’s covered in gross payroll. For retirement benefits, it’s only the employee contributions that count. Only state unemployment insurance paid qualifies, not federal.
- Mortgage interest and rent or lease payments have specific instructions:
- Mortgage interest reporting requires the lender amortization schedule and receipts or canceled checks from the covered period, or lender account statements from February 2020 to one month following the covered period that verifies interest amounts and eligible payments.
- Rent or lease support requires a copy of the current lease and receipts of canceled checks during the covered prior, or lessor account statements from February 2020 through one month following the covered period. Rent payments made to a related party only qualify for the portion of the rent payment that is equal to the mortgage interest paid.
- Economic Aid Act expanded uses for PPP loan forgiveness:
- Payments for certain cloud computing services.
- Cost related to property damage incurred due to looting or public disturbances that occurred during 2020.
- Payments for personal protective equipment.
- Essential supplier costs with a required commitment to purchase supplies prior to the start of the covered period.
- Documentation required: You must maintain thorough documentation for six years following loan forgiveness or pay off of the loan and permit authorized SBA representatives to access documentation upon request. Maintain:
- All records related to PPP including documentation submitted with the original application and supporting documentation for loan forgiveness and material compliance with requirements.
- Records certifying that annual salaries or wages were not reduced by 25%.
- Records certifying that you did not reduce the number of employees or average paid hours between January 1, 2020, and the end of the covered period.
- Records supporting FTE safe harbor exemptions.
- Records certifying that you were unable to operate due to government agency guidelines.
Some borrowers will qualify for 100% forgiveness solely based on payroll. If that happens, you do not need to provide the information for the non–payroll costs. One other change to the Economic Aid Act allows taxpayers to generate Employee Retention Tax Credits even if they received a PPP loan. If your business had a quarter-over-quarter reduction in revenues of 50% or greater when comparing 2019 to 2020, a more detailed look at how to apply costs towards forgiveness may be required.
Providing the right calculations and thorough documentation is critical to the forgiveness process. Do not leave it up to chance. Contact us for assistance.