How Are PPP Loans Forgiven? What We Know Now

Mary Ellen Biery
May 1, 2020
Read Time: min

When, how much, how - all questions about PPP forgiveness

Lenders furiously funding Paycheck Protection Program (PPP) loans are keeping one eye on the U.S. Small Business Administration (SBA) as they anxiously await additional guidance on how borrowers might receive forgiveness for all or a portion of their loans. 

Banks, credit unions, and other lenders are looking for clarity on:

  • Application forms for borrower forgiveness
  • Deadlines for borrowers to seek forgiveness
  • What documents constitute acceptable evidence for forgiven expenses
  • How much verification and evaluation is required of lenders reviewing applications for forgiveness, and
  • Instructions on how and through what system lenders will process approved forgiveness applications so that the SBA purchases the forgiven portion of the loan.

In the meantime, here’s what lenders have learned so far about the forgiveness process, based on the CARES Act, interim final rules published by the SBA, and other guidance published on the SBA and Treasury websites.

When do borrowers apply for PPP loan forgiveness?

The start of the PPP loan forgiveness process is tied to at three important dates:

  • The date the lender receives a loan number from the SBA.
  • The date the lender disburses the PPP loan funds to the borrower.
  • The end of the eight-week period over which the borrower must maintain or rehire employees and maintain salary levels, and incur forgivable expenses.

The amount of PPP loan forgiveness depends on the borrower’s payroll costs and other covered expenses over the eight-week period beginning on the date the lender disburses the PPP loan funds to the borrower. Lenders must disburse funds within 10 calendar days of receiving a loan number by the SBA, according to SBA’s interim guidance and recent FAQs (FAQ #20) from the Treasury and SBA.

After the eight weeks, borrowers can submit a request to the lender servicing the loan to forgive the loan. So far, the guidance has been silent on any deadline for applying for forgiveness. However, loan payments are deferred for six months, so presumably, borrowers would want to apply before payments come due.

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How much of a PPP loan can be forgiven?

To have the entire loan forgiven, borrowers will need to show they spent at least 75% of loan proceeds on covered payroll costs, and the remaining 25% on other forgivable purposes during the eight-week period. What are other forgivable purposes? Payments of interest on mortgage obligations incurred before Feb. 15, 2020, rent payments on leases dated before Feb. 15, 2020, and utility payments under service agreements dated before Feb. 15, 2020. The interim final rule published April 2 said maintaining employee levels and compensation levels are also requirements of forgiving the full principal and accrued interest of a PPP loan.

Some borrowers are reporting they cannot maintain employee hiring or compensation levels while government stay-at-home orders are in effect. However, the program outline notes keeping employees on the payroll or quickly rehiring is a must. It says forgiveness will be reduced if full-time employee headcount is reduced and if salaries and wages are reduced by more than 25% for any employee that made less than $100,000 annualized in 2019. Borrowers have until June 30, 2020 to restore salary and full-time employment levels for any changes made between Feb. 15-April 26, 2020.

What is the PPP loan forgiveness application?

SBA guidance is also silent so far on the form or format required for the application to forgive the PPP loan. However, the SBA has made it clear the forgiveness request must include:

  • Documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations
  • A borrower certification that the documents are true and that the forgiveness amount was used to keep employees and make eligible mortgage interest, rent, and utility payments.

For purposes of loan forgiveness, the standard of “full-time equivalent employees” (FTEs) determines the extent to which the loan forgiveness amount will be reduced if the borrower has reduced its workforce (FAQ 36). The SBA has not clearly defined how to calculate FTE employees, but it has noted that its calculation of employees for size eligibility purposes (the 500-employee threshold) was not based on FTEs. Rather, it required borrowers to count each individual employee, whether full- or part-time.  

The SBA has provided specific guidance on forgiveness eligibility  for loans to individuals with self-employment income who file a form 1040 Schedule C. Documents that should be filed with the forgiveness application for these self-employed borrowers include:

  • The borrower certification noted above
  • IRS Form 941
  • State quarterly wage unemployment insurance tax reporting forms or equivalent payroll processor records that best correspond to the covered period (with evidence of any retirement and health insurance contributions)
  • Evidence of business rent, business mortgage interest payments on real or personal property, or business utility payments during the covered period if borrower used loan proceeds for those purposes
  • 2019 Form 1040 Schedule C that was provided at the time of the PPP loan application in order to determine the amount of net profit allocated to the owner for the eight-week covered period.

Guidance for other employers in general on documentation for forgiveness isn’t spelled out specifically. However, the American Institute of CPAs recently published recommendations for PPP loan forgiveness documentation aimed at driving consistency among lenders and reducing borrower confusion. Among documents the AICPA recommends as forgiveness documentation for employers:

Payroll tax reports: 2020 IRS Forms 941, state income and unemployment tax returns, and other reports from payroll providers that reflect employment tax returns filed

Payroll reports that include: gross wages for each employee for eight-week covered period and the most recent full quarter before the 8-week covered period; the identification of any employees whose principal place of residence is outside the U.S. or who received annualized pay of more than $100,000 during any period in 2019; state and local employer taxes assessed on an employee’s compensation (i.e., State Unemployment Tax Act, or SUTA) during the eight-week covered period

Employee counts: The average number of FTEs per month for both the eight-week period and either a) Feb. 15 through June 30, 2019, or b) Jan. 1 through Feb. 29, 2020. The borrower elects whether to compare a) or b) to the eight-week covered period. [According to recent SBA guidance, seasonal businesses determining maximum loan amounts can compare the average number of FTEs per month during the eight-week period to either a) the period Feb. 15 through June 30, 2019, b) March 1-June 30, 2019, or c) any consecutive 12-week period between May 1, 2019 and Sept. 15, 2019.]

Group health care benefit cost documentation: Showing total costs paid for all health care benefits, including insurance premiums paid by the organization under a group health plan for all employees and company owners (excluding employee withholdings for their portion of contributions to the plan).

Retirement plan benefit cost documentation: Showing total costs paid by the organization for all retirement plan funding for all employees and company owners (excluding employee withholdings for their portion of contributions).

Other documentation: Canceled checks, receipts, account statements, or other documentation of payment for other eligible costs incurred and paid during the covered period such as mortgage interest, lease payments, utility payments.

How does a lender decide on PPP loan forgiveness?

A lender has 60 days from receiving the loan forgiveness application to issue a decision, according to the statute. As far as how the lender should conduct its review of the forgiveness application, the first interim final rule states that the lender doesn’t need to conduct any verification if the borrower submits documents supporting the forgiveness requests and attests it has accurately verified the payments for eligible costs. “The Administrator will hold harmless any lender that relies on such borrower documents and attestation from a borrower,” the rule says.

During a recent webinar, “An SBA Story: PPP Lessons Learned and What’s Next,” Abrigo Senior Advisor Paula King, CPA, said the lender’s review is a good faith review of the calculations. “If the lender does seem something that’s unusual or inadequate support, the lender should work with the borrower to get those resolved,” she noted. “But the borrower will be submitting all support and attestation.”

At that point, the lender can ask the SBA to purchase the forgiven portion of the loan, although that process hasn’t yet been described by SBA guidance. King said once forgiveness occurs, the loan is canceled and the SBA pays within 90 days. The lender would begin servicing the unforgiven portion of the PPP loan, which has a six-month payment deferral under the program.

Another option for lenders is to seek the SBA’s advance purchase of the expected forgiveness amount for the principal of a PPP loan or a pool of PPP loans. The SBA spelled this process out in the first interim guidance, saying lenders can do this at week seven of the eight-week covered period if they provide the SBA with:

  • SBA Form 2483 and supporting documentation submitted with the application
  • SBA Form 2484 and any supporting documentation
  • Details of assumptions used to determine the expected forgiveness amount, “the basis for those assumptions, alternative assumptions considered, and why alternative assumptions were not used,” according to the first interim final rule
  • Information obtained from the borrower since the loan date that the lender used to determine and apply for loan forgiveness (e.g., payroll tax filings, cancelled checks, other payment documentation)
  • Any other information the SBA Administrator may require “to determine whether the expected forgiveness amount is reasonable.”

If approved, the SBA will purchase the expected forgiveness amount within 15 days of receiving a complete report demonstrating that the amount is reasonable.

The SBA and Treasury are issuing new information on a near-daily basis on the Treasury website, and new guidelines for the forgiveness process and servicing expectations are expected.

About the Author

Mary Ellen Biery

Mary Ellen Biery is a Senior Writer and Content Specialist at Abrigo.

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