Part of the CARES Act passed in March (and then replenished a month later), the Paycheck Protection Program (PPP) is a loan program for small businesses designed to provide a direct incentive for keeping their workers on the payroll. Administered by the Small Business Administration (SBA), these are loans are available through approved lenders and are fully guaranteed. 100% forgiveness of these loans is also available under certain circumstances So, how can you ensure your company is eligible and on track for Paycheck Protection Program loan forgiveness?
** Edited June 8, 2020**
The Senate recently passed the Paycheck Protection Program Flexibility Act, which eases several of the PPP loan’s requirements, including timelines and spending requirements. These new guideline requirements have been updated and included in the information below.
How do businesses ensure funds are being spent appropriately?
PPP loans are up to 100% forgivable if the loan proceeds are:
- Spent within 24 weeks immediately following receipt of the loan, except when a borrower who already has a loan may elect to stick with the original 8 week period
- Funds are used for payroll costs and the other permitted uses, including rent, mortgage interest, or utilities
- At least 60% of the forgiven amount must have been used for payroll costs specifically (see next section for specifics)
- Staffing and pay levels must be maintained during the period immediately following disbursement with the “re-hire” provision lasting until December 31, 2020
How are “payroll costs” defined under the PPP?
As defined under the PPP, payroll costs include:
- Employee gross pay including salary, wages, commissions, bonuses, and tips
- All employer state and local taxes paid on employee gross pay, such as state unemployment insurance and employer-paid state disability insurance
- Employer-paid healthcare benefits, including insurance premiums
- Employer-paid retirement benefits, including employer 401(k) contributions
- Does not include 1099 payments
Do all payroll costs need to be paid within the immediate 8-week period?
- No. The latest federal guidelines state that borrowers are eligible for forgiveness for payroll costs paid and payroll costs incurred, but not yet paid, during the 24-week period
- Payroll costs are considered paid on the date of paycheck distribution or origination of an ACH credit transaction.
- Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred must be paid by the next regular payroll date to be counted towards the forgiveness
What happens if less than 60% of the loan is used on payroll costs?
Some of the loan may not be forgiven and will need to be repaid with interest. Businesses have 5 years to pay off any part of the loan that is not forgiven with a 1% interest rate.
What about Payroll Tax Deferral?
The CARES Act allows employers to defer payment of payroll taxes, but originally excluded employers who had PPP loans forgiven. The recently enacted update deletes the exclusion to make the payroll tax deferral now open to all PPP borrowers.
How do businesses apply for loan forgiveness, and how long could it take?
Loan forgiveness can be applied for through the lender that is servicing the loan. Lenders have 60 days to make a decision on loan forgiveness. The loan forgiveness application from the Small Business Administration can be found here.
How can Netchex help ensure your business is eligible for loan forgiveness?
Just as with the PPP loan application process, Netchex has created a PPP Loan Forgiveness Report that makes the whole process easier. Based on the exact information required on the loan forgiveness application, we have created a detailed, custom report that provides everything you need to fill out the application, including employee names, employee IDs, compensation, employer-paid cost benefits, and employer-paid taxes. This information—which uses the exact same language as the application itself to prevent confusion—can be taken directly from the created report and inserted into the appropriate place on the loan forgiveness application.
** COMING SOON** Netchex has also created a Loan Forgiveness Calculator, which can be used to estimate if your Payroll Protection Loan can be forgiven for the full principal amount or a portion with any accrued interest. All you have to do is enter your loan amount and mortgage interest rate, rent, and/or utilities paid with the funds. The employee cost criteria will be populated automatically based on the parameters you set. Additionally, the calculator will also alert you to any pay changes (salaries reduced by more than 25%) that may affect your loan forgiveness eligibility, therefore giving you the chance to make the necessary adjustments to get them back up to meet the requirements by the June 30 deadline. **This feature will be available in the portal in the coming weeks.**
As we have seen several times already with newly passed COVID-19 relief legislation, clarification on rules and enforcement are continuously being released. All of Netchex’s related resources—including the Loan Forgiveness Report and Loan Forgiveness Calculator—will be updated as needed.