On June 5, 2020 President Trump signed into law several critical fixes to the forgiveness terms of the Paycheck Protection Program (PPP), providing much needed relief for small business borrowers. While this is good news for loan recipients, it’s important to keep in mind these five key points for maximizing PPP loan forgiveness:
1. Keep Good Records
Know ahead of time that a lot of detail is going to be needed for any loan forgiveness documents. If you use an outside payroll service, be sure to gather all information on payroll records and keep them on hand for six years, as the SBA announced that it can review PPP loans of any size at any time. Borrowers must retain their PPP documents for at least six years after the date the loan is forgiven or paid in full.
Although the banks required certain information to approve loans, there is likely to be additional information needed to meet the full loan forgiveness. More guidance is expected in the coming weeks and months in regards to loan forgiveness documentation.
Keep in mind that you will need to submit an application for forgiveness to your lender, including documentation verifying the number of full-time equivalent employees and pay rates for the now extended 24-week period commencing when the loan is made. The documentation should include payroll tax filings with the IRS, state and local income, payroll and unemployment insurance filings, cancelled checks, payment receipts, or other documents verifying payments. You will need to certify that the documentation is true and correct and that the amount of the requested forgiveness was used for the permitted purposes.
2. Know Your Qualifying Expenses
As the law now stands, forgiveness is centered on 60 percent for payroll costs and the remainder on mortgage interest, rent, and utilities payments over the extended 24 weeks after getting the loan. Business owners will also owe money if they do not maintain their staff and payroll as intended by the loan. Your loan forgiveness will be reduced if you decrease your full-time employee headcount or if you decrease salaries and wages by more than 25 percent for any employee that made less than $100,000 annualized in 2019.
3. Bring Back Employees
New guidance from the SBA states that employers will not be penalized with reduced PPP loan forgiveness if a worker rejects an offer to return to their job—a significant concern for operators given the reality that many employees are making far more money on unemployment. The owner must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the owner. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
Also keep in mind that owners do not have to hire the same position or keep employees in the same jobs as before. Lenders will be looking at the amount you spent on payroll, not who fills what job. This is a good way to make use of the funds in a positive way and allows business owners to shift roles and responsibilities of existing employees to meet the needs of their changing business models. Just note that the position must be a full-time employee and not a contractor in order to count towards forgiveness.
A provision in the new law states that business owners now have until December 31, 2020 to restore full-time employment and salary levels for any changes made between February 15, 2020 and the end of 2020. If you offer to rehire and the employee declines, you will want written proof of both in order to show your lender.
The bill also states that borrowers who are able to show a loss of full-time employees due to an inability to return to the same level of business activity due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, the amount of loan forgiveness will NOT be reduced.
4. Know What Reduces Forgiveness
It’s important to remember that the spirit and overall intent of the bill is to either keep people working or bring them back to work. The SBA explained that the forgivable amount will be reduced if an employer decreases its full-time employee headcount or cuts salaries and wages by more than 25 percent for any employee who made less than $100,000 (annualized) during all pay periods in 2019.
Employers can choose to compare workforce reductions during the eight-week loan period with the average number of employees on staff from either: February 15, 2019, to June 30, 2019 or January 1, 2020, to February 29, 2020. Therefore, if a business employed 20 workers during the comparison period and only 10 workers during the loan period, the forgivable amount would be reduced by 50 percent.
5. Watch the Clock
Once a business owner submits their forgiveness application their bank has 60-days to issue a decision and submit their findings to the SBA. Throughout this period owners are advised to closely monitor their email for any clarifying questions the lender may have. The SBA then has another 90-days to make the final determination. Any funds not forgiven convert into a 1 percent loan.
In the CARES Act, the SBA assigned a two-year maturity date to the portion of any PPP loan that was not forgiven, but the new bill has extended this period to five years. While technically, this prolonged repayment period applies only to PPP loans made AFTER passage of the bill, lenders and borrowers are free to renegotiate the terms of any existing PPP loan to match the permitted 5-year period. In addition, while the CARES Act required lenders to defer the payment of principal and interest for six months, the new bill allows for deferral until the date the lender receives the forgiveness amount from the SBA, which in most cases will be significantly longer.
The pandemic and the corresponding government shutdown are unprecedented challenges to the economy. I’m encouraged by the strong bi-partisanship required to establish and now fix PPP. I’m grateful for all the bankers who logged record hours to originated 4 million loans in just eight weeks. Finally, I believe future economists will determine that PPP kept countless businesses out of bankruptcy.
Mike Rozman is CEO and co-founder of BoeFly.com, the online marketplace connecting business borrowers with 5,000+ lenders. Mike is passionate about helping small business owners most efficiently secure competitive financing to start a business or grow an existing business. He’s been committed to bringing innovation to the franchise industry so brands can successfully address the unique capital access needs of their new and existing franchisees. For more information about International Franchise Association (IFA) supplier member BoeFly, click here.