Now that you have applied for and received your low-interest Paycheck Protection Program (PPP) loan, you probably want to make sure you can be granted forgiveness on the loan. Although the government’s intention was to allow for loan forgiveness, the borrower will only receive 100% loan forgiveness if they’ve used the loan properly. If loan forgiveness is something you are seeking (which is the most likely scenario), you will want to ensure you do the following between the time you receive the loan and the following eight-weeks. If you adhere to the following guidelines in using the PPP loan funds, immediately after the eight-week period, you can contact your lender to apply for PPP loan forgiveness.
Pay Your Employees
The first thing you’ll want to do to make sure you qualify for PPP loan forgiveness is only use the funds to pay your employees, mortgage interest, rent, and utility payments within those first eight weeks. If you spend the PPP loan in any other way, forgiveness may not be fully granted. You must spend at least 75% of the loan on payroll costs. While you can use some of the loan to cover your debt, whatever portion of the funds you use for this purpose will not be forgiven at all.
Keep Your Employees on Staff or Rehire Them
For your PPP loan to qualify for full forgiveness, you must maintain the staff you had on February 15, 2020 and revert any reduction in workers’ compensation you’ve made to what those workers were paid prior to this date. This must be completed by June 30, 2020. If you have reduced your workforce or your employees’ compensation and fail to repay the reduced compensation or rehire them within this timeframe, you may still receive loan forgiveness, though you will not be eligible for loan forgiveness at 100%.
Watch for the Compensation Limit
When you do receive the PPP loan, be sure you adjust the payments you make to your employees, if needed. If you have employees on your payroll that earn more than $100,000 annually, you will probably need to reduce their pay to fall below this amount to ensure forgiveness. If you reduce the compensation of your employees who make less than $100,000 a year by more than 25%, PPP loan forgiveness will also be reduced.
To ensure loan forgiveness, it is important that you keep records of everything you do surrounding the PPP loan you’ve received. When you apply for forgiveness, the lender will request several documents to verify the funds were used correctly. You want to be sure to document these items, at a minimum:
- Verification of your full-time employees;
- Payroll reports for these employees; and
- Eligible mortgage, lease, and utility payments.
Other Important PPP Loan Forgiveness Considerations
One thing to consider, when you apply for a PPP loan, is that the funds are calculated on two and a half months of payroll in 2019 and the forgiveness is calculated on the basis of eight weeks of payroll. So there is a gap in the timing between when funds are awarded and when you have to use them. To make sure you properly use all the funds, you could hire additional paid employees or increase the amount of pay each current employee receives. For payroll, you could possibly offer a 401(k) employer match increase or a bonus to employees. But if you’re looking for the maximum loan forgiveness, make sure not to pay any one employee more than what is equal to $100,000 annually (as mentioned above).
You can apply for forgiveness with the SBA’s PPP Loan Forgiveness Application. This application will calculate how much forgiveness your loan qualifies for. After completing the application it must be submitted to your lender.
There is a lot to consider and do when you receive your PPP loan to ensure forgiveness. Be sure to contact your Untracht Early advisor for help in determining the best options for your business.