What should I know about PPP loan forgiveness?The federal government is continuing to provide guidance on the requirements to have your loan forgiven. PPP loans (the full principal amount and any accrued interest) may be forgiven, meaning they do not have to be repaid. However, you must meet the following requirements:
- You must apply for forgiveness, which you can do directly with your lender, as they are required to process forgiveness requests within 60 days.
- You must use the PPP loan for payroll and other acceptable expenses (rent, interest on covered mortgages, utilities) that occur for 8 weeks after you get your PPP loan.
- You must maintain your number of Full Time Equivalent (FTE) employees (or rehire them by June 30, 2020).
- You must maintain 75% of the salary or wages for FTEs that make less than $100k/yr. Otherwise, your loan forgiveness will be reduced in proportion with your salary and wage decreases.
What if I can’t maintain my Full Time Equivalent (FTEs) or reduce my FTE salaries below 75%?For each employee, you must maintain salary or wages (under $100K/yr per employee) to within 75% of the total before the covered period. In other words, If the crisis requires you to have to reduce employee salaries/wages by more than 25%, your forgiveness amount will be proportionally reduced by the amount in excess of 25%.
Caveat: if you reduced your FTE employee levels between Feb 15, 2020 and April 26, 2020, and then restored those levels back to your pre-February 15th levels by June 30, 2020, you may be exempt from a loan forgiveness reduction.
We are still waiting on final guidance from the SBA on how this will be implemented, but details are provided here at SBA.gov.
How do I calculate PPP loan forgiveness?Our calculator above will provide the calculations for you, but we highly suggest referencing the SBA’s instructions on calculating and applying for loan forgiveness. Here’s a quick summary on what goes into calculating loan forgiveness:
- Step 1: Take your payroll costs you will incur during the 8 weeks after you receive your PPP loan, which may include wages, salary, cash tips, commissions, retirement benefits, health insurance and/or sick pay, PTO, and employer assessed State and local taxes (remember to cap compensation earnings at $100K/yr for FTEs).
- Step 2: Take other forgivable costs (rent, utilities, and/or interest paid on covered mortgages) that you will incur during the 8 weeks after you receive your PPP loan. Important: loan forgiveness is capped at 25% for these forgivable costs, and must have been in place on or before February 15, 2020.
- Step 3: Your total loan forgiveness amount will be the total of these estimated costs.
Example of PPP loan forgiveness calculationsAs an example, let’s say you were approved for a PPP loan of $25,000.
When applying for forgiveness, you estimate 8 weeks worth of payroll costs to be $10,000, and forgivable expenses (rent, utilities, and covered mortgage interest costs) of $7,000.
In this case, your total loan forgiveness would be $16,250 and not $17,000, and your expected amount to be repaid would be $8,750. This is because forgivable expenses (rent, utilities, mortgage interest) may not exceed 25% of your total loan amount, which in this case, is $6,250.
This also assumes that you’ve maintained at least 75% of the salary or wages for FTEs (less than $100K/yr) or have plans to rehire your staff by June 30, 2020 in order to be exempt from reducing your loan forgiveness.
When does the clock start for my 8 week loan forgiveness period?The 8 week period starts when the lender sends your first PPP loan disbursement, and you are expected to use the loan during this period. This will vary depending on when the loan is approved and acted upon by the borrower.
Due to COVID-19, I won’t be able to re-hire all my employees. Should I still consider the PPP loan?From what we’ve seen, the forgiveness portion of the PPP has been the most challenging part for small business owners to navigate with the program, especially with so much uncertainty around if small businesses will have the capacity or need to maintain a majority of their staff during the COVID-19 crisis.
However, the PPP loan is still a great deal for small business owners, even without forgiveness. Consider: where else can you get a 1% fixed APR loan with a two year term, without personal guarantee or collateral requirements?
Interest rates and fees should be carefully considered for any loan product, but a 1% APR loan is practically “free” in the lending space. For example, on a $10,000 PPP loan, you’d pay about $150 of interest at the end of two years, which means if you end up not needing the loan, you’ll be out $150.
What does the SBA consider as utilities for loan forgiveness?Utilities are expenses that you will incur during the 8 weeks after receiving your PPP loan. Eligible utilities include electricity, gas, water, telephone, internet access, or fuel costs for business transportation. Utility agreements must be in place on or before February 15, 2020.