Paycheck Protection Program: Moving from Application to Forgiveness

Since the pandemic began, we have been monitoring and reporting on the Paycheck Protection Program (PPP), as well as all of the guidance and modifications resulting from several acts of Congress. With nearly four million PPP loans already approved, we wanted to provide guidance on how to move from the application phase to applying for forgiveness for these loans. If you need assistance applying or determining your eligibility for these loans or loan forgiveness, your BMF Advisor is here to help with your assessments.

If you’re still planning to apply for either the PPP First Draw (PPP-1) or Second Draw (PPP-2) loan, we recommend you apply quickly as the remaining $68B in funding is expected to be exhausted before the end of April.  

Forgiveness of First Draw PPP Loans

First Draw PPP (PPP-1) borrowers generally have ten months after the end of their covered period to apply for forgiveness and avoid paying principal or interest payments on their loans. According to the Small Business Administration (SBA) website, nearly 40% of loans under PPP have already been forgiven by SBA with a significant amount of additional loans being stalled in the SBA review process.

SBA has not complied with the statutory 90-day review, as many loan forgiveness applications are taking a lot longer to process. While 99% of the loan forgiveness applications processed have been approved by SBA, many (especially applications in excess of $2M) are delayed due to SBA requesting information that was not required by the application, as well as requiring the submission of Form 3509 – Loan Necessity Questionnaire. In addition, some banks have temporarily stopped accepting forgiveness applications due to the volume of PPP-2 loan applications compounded with the extensive list of error checks SBA has implemented to process these applications, which also significantly delays the process.

Forgiveness of Eligible Expenses

PPP borrowers may be eligible for loan forgiveness if the funds were used for eligible payroll costs, payments on business mortgage interest payments, rent or utilities during either the 8- or 24-week period after disbursement. Below is a summary of the expenses that can be submitted for forgiveness.

Payroll Costs
Or owner income replacement for self-employed borrowers.
  • Payroll costs used in determining the Employer Retention Credit (ERC) are not eligible for loan forgiveness; if your company is eligible to claim the ERC (more on this later), we strongly recommend that you claim as much in nonpayroll costs as possible to maximize your credits (although a minimum of 60% of your forgiveness claim does need to be payroll-related costs).
    • Payroll cost is limited to $100,000 (annualized) per person. For anyone owning 5% or more of their company, they are further limited to 2.5 months of payroll as well as the same amount of compensation drawn in the same period in 2019. For schedule C filers the maximum owner compensation is set at $29,167.
  • The Economic Aid Act expands allowable payroll costs to include group insurance payments for vision, dental, disability and life insurance.
  • The American Rescue Plan Act adds premiums used to determine the credit for COBRA premium assistance as provided under Code. Sec. 6432 as being eligible for loan forgiveness
Mortgage Interest
For loans incurred before February 15, 2020.
  • The mortgage interest paid to related parties is not eligible for forgiveness.
  • Previous FAQs issued by SBA clarified that most other interest costs did qualify.
For leases dated before February 15, 2020.
  • Rent to related parties is subject to limitations based on the amount of mortgage interest the related party pays during the covered period.
For services that began before February 15, 2020.
Other Nonpayroll Costs
(added by The Economic Aid Act)
  • Covered operations expenditures include payments for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.
  • Covered property damage costs include costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 that were not covered by insurance or other compensation.
  • Covered supplier costs include expenditures made to a supplier of goods for the supply of goods that (1) are essential to the operations of the borrower at the time at which the expenditure is made; and (2) is made pursuant to a contract, order, or purchase order— (a) in effect at any time before the covered period with respect to the applicable covered loan; or (b)with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan.
  • Covered worker protection expenditures include operating or capital expenditures to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by Federal, State or local government, during the period beginning on March 1, 2020, and ending the date on which the national emergency with respect to the COVID–19 expires related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19. (There is a long list of such expenditures in the regulations.)

Utilization of PPP-2 Funds

Funds borrowed need to be used for eligible expenditures in a covered period ranging anywhere between 8- and 24-weeks.

Loan Necessity for PPP-2 Loans

On March 3, 2021, the SBA announced in an updated FAQ that they will not challenge the economic need for PPP-2 loans. Since all borrowers had to demonstrate a 25% reduction in gross revenues in a 2020 calendar quarter, SBA has deemed that this alone is adequate evidence of economic need.

Reduction in Forgiveness

When you apply for PPP loan forgiveness, SBA is generally looking to determine that you have retained your full-time equivalents (FTEs) and have not provided payroll cuts to 25% or more to employees who made less than $100,000 (annualized) in 2019.

The calculations generally take the average FTEs during the covered period and compare that to the average during a reference period, which would be one of the following:

  • February 15, 2019, to June 30, 2019,
  • January 1, 2020, to February 29, 2020, or
  • seasonal employers only can use one of the above or any consecutive 12-week period between February 15, 2019, and February 15, 2020.
    • Employers that reduced their headcounts after their PPP-1 loan covered period was completed and maintained the reduction may find that this calculation might result in some proportionate reduction in forgiveness since it continues to compare to the same reference periods.
    • A safe harbor has been provided that if the level of FTEs that existed during the pay period including February 15, 2020, is restored by the end of the covered period, the borrower will not need to reduce their forgiveness amount.
    • Additional safe harbors are in place for certain types of FTE reductions, such as terminations for cause, voluntary terminations or offers to return to work that was declined in writing, will not count against an employer for the determination of proportionate reduction in forgiveness.

Applying for Forgiveness

There are various forms that would need to be filed to apply for forgiveness.

To file Form 3508EZ, the following requirements must be met:
  • did not reduce compensation for its employees by 25% or more during the covered period, and
  • did not reduce the number of employees or the average paid hours of employees between January 1, 2020, and the end of the covered period, or
  • was unable to operate during the covered period at the same level of business as before February 15, 2020, due to compliance with government health or safety requirements. All other borrowers are required to file the longer forgiveness form.

If the loan is greater than $150,000 but the above requirements are not met, Form 3508 will need to be completed. Even if a borrower qualifies for Form 3508EZ, some banks may require the full Form 3508 to be completed due to their processing systems.

Forgiveness and Qualifying Tax Credits

If a borrower claims forgiveness for its PPP loan and also meets the eligibility conditions for the Employee Retention Credit (ERC), these credits can be claimed. However, the payroll dollars that are claimed for PPP forgiveness cannot be duplicated in the ERC claim. It is critical that you carefully plan out which costs will be used to apply for PPP forgiveness and which costs will be claimed for the ERC.

If you qualify for the ERC during the first quarter of 2021, any payroll costs incurred prior to borrowing PPP-2 funds would be counted. At least 60% of PPP forgiveness must be based on payroll, so using as much in nonpayroll costs as possible would benefit from having those payroll dollars being available for the ERC.

We are here to help you deal with the complexities of these programs. BMF Advisors can help you determine the eligibility for funding and forgiveness. Contact us if you have any questions about this program or navigating the process.

About the Authors

James E. Merklin
James E. Merklin
Partner, Assurance and Advisory


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