PPP Forgiveness Guidance Update

Now that most businesses have applied and received their PPP funds, the next step for them would be to apply for forgiveness. The SBA released a forgiveness application form on May 15, 2020 and also clarified some of its existing guidance. For a copy of the application form, click here. Here is a recap and what you need to know in a nutshell.

Covered Period/Alternative Payroll Covered Period – while most accountants had hoped that the SBA would defer to a cash method of accounting, the SBA provided an alternative on counting the 8 weeks period based on costs incurred, not paid. At the end of the day, regardless of which method you choose, as long as a company sticks to a consistent method on ALL eligible expenses and pays out ALL eligible costs, it would be considered appropriately spending the funds in the 8 weeks period.

Payroll costs – The requirement that 75% be used for payroll costs (and no more than 25% for eligible non-payroll costs) remains in place. However, the calculation is not based upon 75% of the total PPP loan amount received.  Rather, it requires that at least 75% of the amount of forgiveness must be used for payroll costs (i.e., divide the total payroll costs by .75).  This may surprise some businesses. If a business does not wish to end up with a loan, i.e. a portion of the proceeds remains unforgiven, it should immediately consult with a CPA to ensure the end goal will be achieved.

Mortgage interest – the SBA clarified that mortgage interest on both real and personal (e.g. equipment) properties are considered eligible expenses.

Utilities – qualified utilities expenses include electric, gas, water, transportation, internet service, telephone.

Rent – on real and personal property.

Salary reduction and head count reduction safe harbor – forgiveness will depend on whether a company reduced its head count or salary level during the covered period (or alternative payroll covered period) but the rules also provide for exemptions under certain situations.

Certification – the SBA will rely on a company’s certification for loan amount less than $2 million and take it at face value that the company needed the loan as a result of COVID-19 and will not audit these loans.

Deadline – the application form does not specify a deadline. Some financial institutions are taking the approach that since the remaining loan is on a 2-year term, companies will have 2 years to apply for forgiveness.

BOTTOM LINE: The application form and its related guidance is very fluid and will continue to change or be clarified by the SBA in the coming weeks. At the present time, companies should focus more on making sure that funds are disbursed for allowable purposes and periods and accumulate supporting documents (some must be submitted to the lenders with the application form and some to be maintained by the companies) as they pay these expenses. Companies should continue its dialogue with their lenders and CPAs to ensure that compliance and their intended goals are met. We have familiarized ourselves with the PPP and would be able to help companies to navigate the forgiveness process. Contact us now.

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