The PPP loan program was the government response to pending massive unemployment.

The Paycheck Protection Program (PPP) was signed into law March 27th, 2020, by President Trump and has made the lives of accountants, bankers and loan recipients a living hell.  The speed with which the CARES act was passed and the loans disbursed, contributed to the feeding frenzy of eager borrowers knocking on the virtual doors of the quarantined bank staff in the first tranche of loans. 

The first round of loans was depleted within two weeks of funding which prompted a second round of funding.  This was approved and signed into law to avoid the political headache of smaller businesses not receiving their PPP loan while the bigger borrowers bask in the glory of government money at 1% interest.

The loans were highly desirable because they include a mechanism to receive loan forgiveness.  Under the promise of the law, if businesses played by Congress’ rules and avoided casting their employees on to a generous unemployment line (where they can receive a raise to sit at home and quarantine), then the business would be rewarded for their courage of carrying payroll costs through the worst health crisis in a century. 

The thinking was if Congress could properly structure the program to allow for forgiveness for wages and only limited other expenses, then employers would do what they could to keep the employees hired so they could receive the money as income (and tax-free income at that!).  This law would enable employees to stay employed keeping their health benefits while the country quarantines and avoids the worst of the disease.  Employers keep their employees, employees keep their benefits and everyone is happy.

Everything is subject to change.

Before I continue with this post, I have no small concern that this information will be very quickly obsolete.  The information regarding the PPP loan has changed faster and more frequently than any policy item I have witnessed.  Rules were passed after loan dispersals with the purpose of saving political face and shaming companies into returning funds.  This even though the businesses clearly qualified to receive the loan based on the loose and broad certification of the borrowers at the time the loan was given. 

On May 28th, the House passed a new bill changing some aspects of this law which will impact this post if it becomes law.  I would wager a fairly substantial amount that something will be signed into law to ease the current restrictions included in this law.  Yet, as of May 29, this is where we are.

With nearly 40 million employees filing first-time unemployment benefits in the past 10 weeks, the jury is still out as to the efficacy of the program.  

We do not know how many businesses will stay alive in the next year and, if they do, how many people they will employ.  Businesses will need to repay the loans should they not use them for the approved purpose meaning they are not forgivable.  Without a George Bailey experience to return to see a world without the impact of this program, we cannot know the impact or effectiveness of this.

It will work for me if I can have my loan forgiven.

Most people aren’t interested in macro policy concerns.  Success will depend on whether or not they can change that loan from debt to income or whether they need to repay it to the lender.  What people are eager to know now is how they can have their loan forgiven.

To receive forgiveness for the loan you must fill out an application.

The SBA released guidance and an application on May 15th to walk us through the details of loan forgiveness.  The short answer to this blog’s title question is borrowers need to fill out this application. Supply the application along with the required documentation for the bank and the loan will be forgiven.  Of course, in an attempt to control for the various provisions of the law, the application is incredibly difficult to understand and even more difficult to complete.

The most helpful insight I’ve seen on this is my favorite tax author Tony Nitti who penned a line by line application instructional article for all to study.  This 8,300 word deep dive into the specifics of the 11 page application reads like a textbook complete with examples.  While available to all, it will not be understandable to most.  This post serves as a higher-level view of what needs to be considered for each section.

Understand the safe harbors before beginning.

There are several safe harbor clauses in the law to allow for a little flexibility.  They include safe exits for the businesses to avoid the risks and burden of repayment based on the actions truly outside their control. 

The first safe harbor is from the SBA & Treasury FAQ #46 borrowers receiving a loan of less than $2 million dollars will assume to have received it in good faith that they needed the loan.  

There will be no audit of their books from the treasury or SBA to verify their business was failing.  This safe harbor followed tough talk from the Treasury Secretary Steve Mnuchin they would audit and criminally prosecute borrowers who improperly received a PPP loan.  If you received a PPP loan of less than $2 million, don’t worry about proving you needed the loan.

This does not mean you don’t need to provide documentation for loan forgiveness. This means you won’t go to jail because you took a loan you didn’t need.

The second safe harbor is the ability to choose the “covered period”.  

The covered period is the 56 days following the loan dispersal.  Recall that only expenses incurred during this period are eligible for forgiveness.  This provision allows a business to choose the upcoming pay date as the start date for the covered period.  This minimizes the risk that the 56 days will not include enough payroll dates.  Choosing your start date allows for additional flexibility.

Another safe harbor releases the borrower from penalties if they provide written documentation of offering a job back to their employees.  

Recall a safe harbor in the law provided the business leeway in furloughing employees if they were rehired by June 30th.  The extremely generous employment benefits offered to the 40 million newly unemployed workers are complicating the rehiring process.  In some cases, employees don’t want to return to work (why work when you can make more money at home?).  This is a safe harbor for the employer if they offer written acknowledgment the position was rejected, that portion of the loan is still forgivable.

Since the majority of the work to receive the loan forgiveness is a properly filed application, spending time on the application is key.  

To start the process, you will need to know the 56 day (8 week) covered period.  This is the day including the loan dispersal date which impacts forgivable expenses.

Once you’ve identified this period, enter the number of employees and your payroll schedule. (Remember you may choose the alternative dates aligning with your payroll schedule.)

There are several groups to identify when it comes to asking for forgiveness. 

The first is anyone not in the US.  Their salaries are not included. 

The next is those earning above $100k per year.  These are the only salaries that may be reduced without penalty. 

The other employees are those who are receiving a credit for their expenses directly due to the coronavirus.  These credits against any taxes will not be included in the forgiveness application to avoid double-dipping.

Continue filling the form by tallying cash compensation for wages, commission, tips, vacation for allowance for dismissal or separation. 

Calculate the full-time equivalent employees (FTEs).  Employees working an average of 40 hours per week count as 1. Those working less have their average hours divided by 40 and rounded to the nearest tenth of a decimal.

The next step is to determine the salary and wage reduction. 

Step 1.      Determine the average annual salary or hourly wage for each employee during the covered period.

Step 2.      Determine the average salary or hourly wage for each employee from January 1, 2020 through March 31, 2020.

Step 3.      Divide step 1 by step 2.

Step 4.      If step 3 is greater than 75%, no reduction is required.

Step 5.      If step 3 is less than 75%, a reduction is required (but may be reinstated).

Remember your forgiveness amount may be limited if FTEs were reduced in comparison to a selected period in time.  (Earlier in 2020, same time in 2019 or seasonal employer time period.)  Calculate the FTEs to know what the number is for this aspect of the application.  Do this by calculating the change in FTEs like above.

After completing the calculations from the “Worksheet to Schedule A”, use these numbers to fill out schedule A.

Payroll costs include not only salaries and wages but other benefits. Health care benefits such as insurance premiums, retirement contributions as well as state or local taxes assessed on employee compensation.  These are all added to the cost of payroll to arrive at the magical 75% so it will all be forgiven.

The remaining 25% of the PPP loan can be allocated to covered rent payments (assuming the lease was in place before February 15th, 2020), the interest of business mortgage payments, and covered utilities.  This includes electricity, water, telephone and gas.

Does that all make sense?

Of course, it doesn’t. 

In an effort to comply with the law and provide any bit of economic stability, Congress, the SBA and the Treasury have worked to push this money out to employers. To complicate matters more, this is an election year. Both parties want to claim the political victory of saving the middle class from the pandemic.

November will be here soon and we’ll find out what the voters think!

How hard can the application be?

The steps to receive forgiveness are straightforward, fill out an application, provide this to your lender and include documentation.

The calculations of this application are atrocious.  With millions of borrowers, we will need hundreds of thousands of trained bankers, attorneys, and accountants to complete these applications.  Hopefully, any changes to this application only make it easier.

Hey, a guy can hope.