Borrowers of Paycheck Protection Program (PPP) loans have begun working through their forgiveness applications and are learning that the process is quite complex. While applying for forgiveness is different for each borrower, here are five issues that have surfaced as common concerns and that may affect the amount of forgiveness you receive:
1. Different inputs can equal different outputs.
Application instructions include a variety of options, including several eligible costs, different reference periods, several safe harbor options, and different methods of calculations. Your amount of forgiveness will vary depending on the options you use.
- If you complete the application and are not pleased with your projected level of forgiveness, make sure you have considered all your options. For example, did you consider the different reference periods used to determine the FTE Reduction Quotient? Have you compared both the standard and the simplified methods in calculating the FTE count? Have you considered all safe harbor options for the FTE reduction and average annual salary/hourly wage reduction?
2. Coordination with the EIDL advance.
If you received an Economic Injury Disaster Loan (EIDL) Emergency Advance or Emergency Grant (EIDLG), your PPP loan forgiveness will be reduced by the amount of your advance or grant. You must include the advance or grant amount as well as the EIDL application number on your PPP loan forgiveness application.
- Be sure that you include only the EIDL advance or grant amount on the EIDL advance amount line, not the entire EIDL amount. Note that EIDL Advance amounts will not exceed $10,000.
- Do not reduce your projected forgiveness amounts listed on the forgiveness application by your advance or grant amounts. The SBA will reduce the forgiveness amount provided to your lender.
3. Eligible payroll costs.
Payroll costs eligible for forgiveness include employer contributions for employee health insurance.
- Include only the employer portion of the contribution as an eligible payroll cost. Employee contributions are already included in the employee’s gross payroll or cash compensation. As such, employers cannot rely on the totals indicated on your health insurance bills. Additional limitations apply if you are an owner of 2 percent or more of an S corporation as well as to those owners’ family members. For those individuals, employer contributions for health insurance are considered cash compensation.
4. Ratio of forgivable payroll and non-payroll costs.
The Paycheck Protection Program Flexibility Act of 2020 (PPPFA), passed by Congress on June 5, provides that no more than 40 percent of forgiveness can be attributed to non-payroll costs. You are required to certify this on the S application and show it as a calculation on line 10 of the Standard application or line 7 of the EZ application.
- Calculation: On line 10 of the Standard application and line 7 of the EZ application, follow the instruction to divide line 1 (eligible payroll costs) by .6. The calculation determines a potential amount of forgiveness if the payroll costs are reported equal to 60 percent of that forgiveness. This potential forgiveness amount will be compared with the PPP loan amount and the calculation including your FTE and annual salary/hourly wage reductions, where the lowest of the three will be used as the application’s forgiveness amount.
5. Ensure your data is easy to understand by the lender and the SBA.
Business owners understand their businesses better than anyone else. Even payroll reports can have quirks or customizations that they, their managers and employees find it easy to understand but that might not be clear to those reviewing your reports for loan forgiveness.
- Make the data as transparent as possible. While the SBA provides specific documentation requirements, maintaining and in some cases submitting clarifications, reconciliations and other data may make it easier for the lender and SBA to review their documentation—especially where prorations or limitations apply. Appeals processes are available but not guaranteed, so it is important to ensure your data and justification are clear in your initial submission.
Contact your HBK advisor with your PPP loan forgiveness application questions or concerns.