How to get a PPP loan forgiven – a step by step guide

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act, Public Law 116-136 (the “CARES Act,”).

Under the CARES Act, Congress authorized $349 billion for the Small Business Administration’s (“SBA”) Paycheck Protection Program (the “PPP”), and is likely to soon add an additional $250 billion as funds quickly ran out soon after the PPP program was announced.

Loans authorized under the PPP are forgivable, assuming certain conditions are met, and do not require the borrower’s personal guarantee. The SBA has authorized a wide variety of financial institutions to make loans under the PPP, but most small businesses will get their PPP loan through their bank.

A PPP Loan Overview

Under Section 1102 of the Act and the interim rules, qualifying small businesses, nonprofit organizations, veterans’ organizations, tribal businesses, sole proprietors, and independent contractors are eligible for forgivable loans, provided that these entities generally employ no more than 500 employees.

An eligible borrower may only receive one PPP loan.

In the event a borrower is eligible for a PPP loan, the maximum amount of any loan will be the lesser of (i) $10 million, or (ii) 2.5 times the average total monthly payments for “payroll costs” incurred either during the one-year period before the date the loan application was submitted or, at the borrower’s election, during the 2019 calendar year (with adjustments for seasonal employers and new businesses).

If an eligible borrow was not in business from February 15, 2019 to June 30, 2019, the maximum loan amount is the lesser of (1) the average total monthly payments by the applicant for payroll costs incurred from January 1, 2020 to February 29, 2020 multiplied by 2.5, or (2) $10 million. For purposes of determining the maximum loan amount, “covered period” means February 15, 2020 through June 30, 2020.

Despite the statute appears to authorize loans for a year of payroll expenses, the banks issuing the loans have capped this figure at 2.5 months of payroll costs.

“Payroll costs” is defined as compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation.

Payroll costs don’t include payments to people outside the USA

On the other hand, payroll costs don’t include any compensation of an employee whose principal place of residence is outside of the United States; the compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary; federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees; and qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act (Public Law 116–127, 3/18/2020).

Finally, as noted in the interim final rules (13 CFR 120) and FAQs, in addition to the loan forgiveness feature (described below), no personal guarantee is required for these PPP loans.

However, if the proceeds are used for fraudulent purposes, the U.S. government will pursue criminal charges against the borrower.

How to get your PPP loan forgiven

At the National Bankruptcy Forum, we write a lot about debt relief, in bankruptcy court or otherwise. As such, we want to get the word out to PPP borrowers that these loans have generous forgiveness provisions.

One of the most significant features of the PPP loan program is that loans are forgivable as provided Section 1105 of the Act. 

The amount of “forgivable costs” equals the total amount of payroll costs (as described above), payments of interest on mortgage obligations incurred before February 15, 2020, rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020, over the eight-week period following the date of the loan.

In addition, the loan forgiveness amount is not subject to income tax, as normal tax debt forgiveness is for example.

However, the amount of loan forgiveness will be reduced as follows:

Step 1:  Multiplying the amount of the loan that is forgivable by a fraction (see below);

Step 2: The numerator of the fraction is the average number of full time equivalent employees per month employed by the company during the eight-week period starting on the loan date;

Step 3:  The denominator is the lesser of (a) the average number of full-time equivalent employees per month employed by the company during the period from February 15, 2019 through June 30, 2019, or (b) the average number of full-time equivalent employees per month employed by the company during the period from January 1, 2020 through February 29, 2020 (the denominator);

Step 4. Divide the numerator in Step 1 by the denominator in Step 2.

The amount of loan forgiveness must also be reduced by the amount of any reduction in excess of 25% compensation in the most recent full quarter in which the employee was paid in compensation during the covered period of any employee who was compensated (A) in an amount less than $33,333 during the period beginning on March 1, 2019 and ending on June 30, 2019, or (B) not more than $100,000 on annualized basis during 2019.

In order to obtain loan forgiveness, an eligible borrower must submit an application to the lender that will include documentation verifying (i) the number of full-time equivalent employees on payroll and pay rates for the applicable periods, including payroll tax filings, and state income, payroll, and unemployment insurance filings, and (ii) payments on mortgage obligations, lease obligations and utilities, including cancelled checks, payment receipts, transcripts of accounts, or other documents.

Additional funding requested.  

As of April 16, 2020, the PPP, has run out of funding. Treasury Secretary Mnuchin has requested an additional $250 billion increase to the $349 billion initially allotted for the PPP, but this request is currently subject to heated negotiations in Congress.