First Draw PPP Loan forgiveness terms
First Draw PPP Loans made to eligible borrowers qualify for full loan forgiveness if during the 8- to 24-week covered period following loan disbursement:
- Employee and compensation levels are maintained
- The loan proceeds are spent on payroll costs and other eligible expenses; and
- At least 60 percent of the proceeds are spent on payroll costs
Second Draw PPP Loans made to eligible borrowers qualify for full loan forgiveness if during the 8 to 24 week covered period following loan disbursement:
- Employee and compensation levels are maintained in the same manner as required for the First Draw PPP loan
- The loan proceeds are spent on payroll costs and other eligible expenses; and
- At least 60 percent of the proceeds are spent on payroll costs
How and when to apply for loan forgiveness
A borrower can apply for forgiveness once all loan proceeds for which the borrower is requesting forgiveness have been used. Borrowers can apply for forgiveness any time up to the maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender.
Additional Notes on Forgiveness:
The SBA has created a PPP forgiveness portal for loans of
$150,000 or less. Clients should check
with their lender to find out if they are using the SBA forgiveness portal
(which is optional), or if they are using their own PPP forgiveness
process. Keep in mind that the lender
manages the forgiveness process, so check with them first.
New SBA procedure for appealing lender decision to either
reduce amount forgiven or deny forgiveness:
The SBA has enacted a new process for PPP borrowers that had
their requests for forgiveness either declined or reduced by their lender. In addition, lenders are now required to
provide borrowers written notification to affected borrowers that they (the
client), has the right to request the SBA to review the decline decision. In addition, lenders are now also required to
provide borrowers written reasons why their request for forgiveness was
declined or reduced. However, this
process could result in the SBA reducing the amount forgiven by the lender, or
the agency could determine that none of the amount forgiven by the lender was
eligible for forgiveness.
Amounts Eligible for Forgiveness
Payroll costs
- Compensation to US-resident employees in the form of salary, wages, commissions, cash tips (including a good-faith effort employer estimate), vacation pay, parental, family, medical, or sick leave, allowance for separation, group insurance, retirement, state, and local taxes assessed on employee compensation
- For self-employed or independent contractor, wages, commissions, income, or net earnings from self-employment
- Excluded from this calculation: qualified wages considered in determining the Employer Retention Credit are not eligible for loan forgiveness (for both 1st and 2nd Draw loans)
Non-payroll costs
- Interest payments on business mortgage obligations for debts incurred before 2/15/2020
- Business rent obligations incurred before 2/15/2020
- Utility payments, including electricity, gas, water, transportation, telephone, or internet access for services in effect on 2/15/2020
- Covered operations expenses for any business software or cloud computing to facilitate business operations, service delivery, processing, payment, or tracking payroll expenses, human resources, sales, and billing functions, or accounting or tracking of supplies, inventory, records, and expenses
- Covered property damage costs related to vandalism or looting from public disturbances in 2020 not covered by insurance or other compensation
- Covered supplier costs include an expenditure made by borrower to supplier of goods that are, 1) essential to the operation of the borrower at the time at which the expenditure is made, 2) made resulting from a contract, order, or purchase order (a) in effect at the time before the covered period; or(b) for perishable goods, in effect before or at any time during the covered period
Covered worker protection expenditures
Defined as:
- An operating or capital expenditure to facilitate compliance with requirements or guidance from HHS, CDC, OSHA, or state or local equivalent government agency, related to COVID-19, beginning 3/1/2020 thru the end of guidance period including:
- The purchase, maintenance, or renovation of assets that create or expand:
- Drive-through window facilities
- Indoor or outdoor, or combined air or air pressure ventilation or filtration system
- Physical barriers such as sneeze guards
- Expansion of additional indoor, outdoor, or combined business space
- Onsite or offsite health screening capability
- Other actions taken concerning assets, including:
- purchase of materials covered by federal regulations 328
- Particulate filtering respirators
- Other kinds of personal protective equipment (PPE)
- Excluded: any residential real property or intangible property
Self-employed individuals that file a Federal 1040, schedule C or F
Payroll costs
- Salary, wages, and tips, up to $100,000 of annualized pay per employee, prorated for the period during which the payments are made. Based on an 8-week covered period, maximum compensation will be $15,385 per eligible employee, and for a 24-week covered period compensation is capped at $46,154). Also included â covered benefits for employees (but not owners) and related eligible expenses, but excluding Employer Retention Credit wages
- Owner compensation replacement, based on 2019 or 2020 net profit, limited to either (a) prorated 2019 or 2020 net profit for covered period up to 2.5 months, or (b) 2.5 monthsâ worth (2.5/12) of 2019 or 2020 net profit (up to $20,833)
Non-payroll costs
- Non-payroll costs include the same elements as for other entities, but can only obtain forgiveness for applications filed after 12/27/2020
General forgiveness process
- To receive forgiveness for either 1st or 2nd Draw loans, applicants must apply using the size-appropriate applications. For 2nd Draw loans more than $150,000, the borrower must submit its 1st Draw forgiveness before or simultaneous to their 2nd Draw forgiveness application, even if the amount of the 1st Draw forgiveness is -0-.
- It is important to remember that borrowers continue to have 10 months after the proceeds are used to apply for forgiveness, and that lenders have 60 days to review their application, and the SBA has an additional 90 days to determine forgiveness eligibility. If any amounts were declined, the lender is required to notify the borrower.
Timeline for payroll costs
- To obtain maximum forgiveness, payroll costs incurred during the covered period, which is the period beginning on the date the lender disburses the PPP loan and ending on a date selected by the borrower that occurs during the period (a) beginning on the date that is 8 weeks after the date of disbursement, and (b) ending on the date that is 24 weeks after the date of disbursement
- The covered periods for 1st and 2nd draw loans cannot overlap, and the borrower must use all the 1st Draw loan proceeds before disbursement of the 2nd Draw loan
- Payroll costs are considered paid on the day that paychecks re distributed or the borrower originates an ACH credit transaction
- Payroll costs incurred during the borrowerâs last pay period of the covered period are eligible if they are paid on or before the next regular payroll date.
Payroll for furloughed employees
- Furloughed employees are, under the CARES Act, are the same as actively employed personnel, and therefore, can be included in the payroll calculation, if it does not exceed $100,000 on a prorated basis
- Hazard pay and bonuses are also considered to be eligible for forgiveness because they are a supplement to salary or wages
Caps for loan forgiveness for owner-employees and self-employed individuals
- Capped at 2.5 monthsâ worth (2.5/12) of an owner employee or self-employed individual based on 2019 or 2020 compensation, capped at $20,833
- C-corp. owner-employees are capped at a prorated amount of their 2019 or 2020 employee cash compensation and related benefits
- S-corp. owner-employees are capped at a prorated amount of their 2019 or 2020 employee cash compensation and employer retirement contributions. However, health and other insurance contributions cannot be separately added, for they are already included in employee cash compensation
- Schedule C or F filers are capped by the prorated amount of their owner compensation replacement, calculated based on 2019 of 2020 net profit
- General partners are capped by the prorated amount of their 2019 or 2020 net earnings from self-employment (reduced by 179 expenses, unreimbursed partnership expenses, and oil and gas depletion expenses) multiplied by .9235
- Self-employed Schedule C and F filers and general partners cannot separately add certain benefits to their payroll calculations because they are included in their self-employment income
- Self-employed 1040 filers or Schedule F with no employees, gross income may be used instead of net profit
- Self-employed Schedule F filers with employees, the difference between gross income and employee payroll costs may be used instead of net profit