PPP Loan Forgiveness

The Paycheck Protection Program can be 100% forgiven if you meet certain criteria. We have put together this comprehensive guide you to achieve full loan forgiveness.

NOTE: In order to get your loan forgiven, you must complete a PPP Loan Forgiveness Application. In the event that you borrowed under $50,000 or are self employed you can possibly utilize the EZ form, here.

Are Paycheck Protection Program Forgiveness Applications Open?

This has become a very common question from our new clients. The answer is, YES! The SBA is currently taking applications, however you must first apply directly to your lender.

Conditions Of The Paycheck Protection Program

To review the terms of the Paycheck Protection Program.

  • The loan amount is based on your average monthly payroll cost for 2019. To help cover eight weeks of payroll, you can receive 2.5X that amount.

PPP Funds can be used for the following purposes:

  • Payroll: Salary, Wage, Vacation, Parental, Family, Medical, or Sick leave, and health benefits
  • Mortgage Interest (As long as the mortgage was signed before February 15, 2020)
  • Rent (As long as the lease agreement was in effect before February 15, 2020)
  • Utilities (As long as the services began before February 15, 2020) Utilities include: Electricity, Water Bill, Gas, Sewage, Telephone (Cell & Landline), Internet bill, and Transportation costs

All expenses that fall under those categories are eligible for forgiveness. The following conditions also apply:

24 Weeks Of Coverage

Eligible expenses are those that are incurred over 24 weeks, starting from the day the payment was made by your lender. In a lot of cases this is not necessarily the date on which you signed your loan agreement.

There is no need to adjust your payroll schedule. All payroll that your employees incur over the 24 weeks is eligible, even if the actual payroll payout date falls outside of the eight weeks.

December 31, 2020 is the final cutoff date for eligible expenses. For loans that were disbursed July 16th and later, this means that you will unfortunately not be able to take full advantage of the 24 weeks.

If you received your PPP loan before June 5, you can still use an 8-week period.

Not sure if you should go with the 8 or 24-week covered period? The main points to consider are whether you are self-employed individual collection an owner compensation benefit, and whether you have enough eligible expenses to spend the loan on. If you need further detail please feel free to reach out to us here at MCDA CCG and we can have one of our finance professionals walk you through your specific situation.

60/40 Rule

You often hear a lot of talk about the 60/40 rule in reference to the PPP. This means that you must use at least 60% of your loan on payroll costs. Payments to independent contracts cannot be included in the payroll costs. Your forgivable amount will scale in proportion to the amount you spend on payroll, up to the total loan amount.

Staffing Requirements

*You must maintain the number of employees on your payroll.**

Here is the calculation you can use to determine if you’ve met this requirement:

First, determine the average number of full-time equivalent employees you had for:

  • The 8-week or 24-week period following your initial loan disbursement, (A)
  • February 15, 2019 to June 30, 2019, (B1)
  • and January 1, 2020 to February 29, 2020. (B2)

Take A and divide that by B1. Do the same with B2. Take the largest number you obtain. If you’re a seasonal employer, you must divide by B1.

  • 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.
Exemptions On Rehiring Employees

Employees who were employed as of February 15, 2020, and were laid off or put on furlough may not want to be rehired onto payroll. If the employee rejects your re-employment offer, you may be allowed to exclude this employee when calculating forgiveness.

Qualifying For This Exemption
  • You must have made a good faith written offer to rehire
  • You must have offered to rehire at the same wage/salary and number of hours as before they were laid off
  • You must have documentation of the employees rejection of the offer
You Can Also Qualify If Any Of These Conditions Apply To An Employee
  • The employee was fired for cause
  • The employee voluntarily resigned their position
  • The employee 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: Employees who reject offers for re-employment may no longer be eligible for continued unemployment benefits.

Pay Requirements

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 of annualized pay in 2019.

If the employee’s pay over the 24 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.

Grace Period For Rehiring

You are able to rehire any staff that were furloughed or laid off and reinstate any pay that was decreased by more than 25% to meet the forgiveness requirements if those changes are made due to COVID-19 between February 15th and April 26th. You are able to do so until December 31, 2020.

If you would like to discuss these exemptions in more detail please contact one of our finance experts here at MCDA CCG and we would be happy to discuss your situation in more detail.

Examples Of Reductions In Your Forgiveness Amount

Utilizing your paycheck protection program funds on the right things is clear enough. Things become more complicated when you don’t keep your employee pay or headcount levels the same.

Reduction In Headcount

In this example – You have three full-time employees and they each made $3,000 per month, meaning your PPP loan amount was $22,500 (3000 x 3 x 2.5). You were forced to lay them off in February due to COVID-19.

You only hired back two out the three employees meaning your workforce is 67% or 2/3 of your original headcount.

During the course of the 24 weeks of the PPP period, you spend $36,000.00 on your employees, more than your PPP loan amount. You claim the full $22,500 of your loan for forgiveness. In this example lets assume that you do not qualify for any rehiring exemptions, when calculating your forgivable amount, your workforce is smaller, meaning your forgivable amount will be multiplied by 0.67 and you would be able to have $15,075 forgiven.

Reduction In Pay

In this example – 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 were forced to lay them off in February due to COVID-19. You hire back all three of your employees, but you decide to 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.

At MCDA CCG we can help you make sense of your specific situation. Contact us today and we can assist you in securing the highest level of forgiveness possible.

Self-Employed Forgiveness For Individuals

You are authorized to use your PPP loan to replace lost compensation due to the impact of COVID-19. You are eligible to claim 2.5 months worth of your 2019 net profit in order to replace pay. If you didn’t have 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 utilizing an 8-week forgiveness period, you can claim 8 weeks worth of your 2019 net profit as owner compensation replacement. You will need to utilize the remaining PPP funds on utilities, rent, 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 for forgiveness.

As an example, 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.

If you are self-employed but received a PPP loan through multiple businesses, you are capped at $20,833 in owner compensation across all the businesses you’ve received a PPP loan through. For example, if you’ve received a PPP loan through two businesses and you’ve received $15,000 in owner compensation replacement from your sole proprietorship, you’ll only be eligible for $5,833 of owner payroll from your other business.

Forgiveness For Partnerships

Your eligible compensation as a general partner in a partnerships based on your 2019 net earnings.

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 24 Weeks

Loan forgiveness applications will be processed by your lender. You will need to fill out a PPP Loan Forgiveness Application Form and submit the completed form 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. Contact us if you would like assistance in deciding the right period for your forgiveness.

Your lender is required by law to provide you with a response within 60 days of submitting your application.

Required Documents For Forgiveness

Below are the required documents you will need to collect and provide with your PPP loan forgiveness application. It is also likely that your lender may have additional requirements.

  • 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 (canceled checks, payment receipts, account statements)

Having great bookkeeping is a crucial step to getting your loan forgiven – you will need to keep track of eligible expenses and their accompanying documentation over the 24 week period. It is likely that your lender will require these documents in a digital format so it is worth the time to scan and documents and keep backups of your digital records.

Your business will need to have complete financial statements at the end of the fiscal year. The SBA and your lender have the right to request and audit your businesses financial records and documents.

If you do not have a strong or reliable bookkeeping solution in place, please contact us and MCDA CCG can prepare your records and documentation, in person or remotely.

What If I Am Not Approved For Forgiveness?

You may ask your lender to allow you to provide additional documentation so that they may reevaluate your request. If you are still not approved, your outstanding balance accrues interest at 1%, for the remainder of the 5 year period.

You are able to pay off the outstanding balance at any time, there are no prepayment penalties and no additional fees.

Will PPP Loan Forgiveness Affect My Taxes?

The IRS confirmed on November 18th that any forgiven expenses will not be tax deductible. It was clarified that you should assume you will receive forgiveness on the eligible expenses regardless of whether you have received (or applied for) forgiveness yet. Any expenses you will be applying for forgiveness on should not be included in your deductions on your tax returns unless suggested by your CPA.

If you are ready to prepare for your loan forgiveness please contact us at MCDA CCG, Inc., we are able to guide you through the process or take over the process with our bookkeeping services. Our goal is to maximize your forgiveness and to prepare you (if needed) for another round of PPP if congress allows it. We are able to work on-site or remotely depending on your state and city regulations. Complete the form below, or contact us directly at sales@mcdaccginc.com or (714) 872-2393

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