What you need to know about PPP (Paycheck Protection Program) loan forgiveness

The Paycheck Protection Program (PPP) is an SBA loan designed to help small businesses and provide them with an incentive to keep their workers on the payroll.

If you are a small business owner, and contracted a loan, now you may be eligible for loan forgiveness! If the funds you took were used for eligible costs such as payroll, business mortgage interest, rent or utilities you may get up to 100% of your PPP Loan forgiven.

How does PPP (Paycheck Protection Program) work?

You can get your PPP loan forgiven if:

  • Employee and payroll has been consistent with Pre-COVID earnings

  • After the loan is disbursed, the proceeds are used to cover costs such as payroll, rent, utility or mortgage interest over the 24-week period;

How much of your PPP loan will be forgiven

Depending on how much you spend on the 24 weeks disbursement period towards eligible expenses, the amount of the PPP loan forgiveness is equal to that.  

Eligible expenses can be payroll costs, interest on mortgage obligations in place before February 15, 2020 or rent on a leasing agreement in place before the same time period.

What you need to know about forgiven amounts

There is something you need to take into careful consideration: the forgiven amounts will not be considered a COD (cancellation of debt). Meaning, if you are a business owner you cannot claim a PPP for tax purposes.

Likewise, if you have expenses forgiven under the PPP, that doesn’t mean you can apply tax deduction on them, too.

Forgiven amounts don’t mean cancellation of debt for federal tax purposes!

What you need to know about forgiven amounts

If you have some funds or all your funds remain unforgiven, the amounts will transform into a two-year loan. Or even five year if the loan in some cases.

The interest rate will be 1% and if you want to prepay, there won’t be any penalties or fees.

After the loan is disbursed, the payments get deferred for the first six months.

Period of Coverage and the last day you can apply for one

The covered period is 24 weeks and the counting starts on the date your PPP loan is disbursed. Funds will continue to be dispersed on a rolling basis until they run out.

How to apply for a PPP loan forgiveness

In order to apply for a PPP loan forgiveness, you must submit an application through the lender that provides the service and supply the following:

  • Documentation attesting the number of employees you have on payroll and pay rates. That includes IRL payroll tax filings and state income, payroll and unemployment insurance filings;

  • Documentation regarding payments on covered mortgage and/or lease obligations, utilities;

  • Certification to attest that the documentation you’re submitting is true and correct and that the amount you want forgiven was used in accordance to the program’s guidelines for use.

Eligibility Requirements for Loan Forgiveness

What expenses are included in payroll costs?

The payroll costs that are covered for a business with employees (including furloughed ones) are the following:

  • Salary, wages, bonuses, commissions or similar compensation up to the amount of $100,000;

  • Cash tips payment or equivalent;

  • Leave: vacation, parental, family, medical or sick;

  • Separation or dismissal allowance;

  • Group healthcare benefits (that includes insurance premiums);

  • Retirement benefits;

  • Local or state tax assessed on employees’ compensation. Amount is capped at $100,000.

If you are self-employed or independent contractors, payroll costs that are covered are the following:

  • Self-employment income;

  • Pre-tax contributions which were deducted from employee’s gross pay for health insurance or other benefits. Amount is capped at $100,000;

  • Insurance and healthcare benefits (but not including dependent care).

What expenses are excluded from payroll costs?

Costs that aren’t included in payroll costs are the following:

  • Allowed sick leave wages under section 7001 and 7002 of the FFCRA (Families First Coronavirus Response ACT);

  • Allowed family leave wages under sections 7003 and 7004 of the FFCRA

  • Taxes which were imposed or withheld under the IRC (Internal Revenue Code), chapters 21, 22 and 24, during the lending period;

  • Compensations offered to employees outside US;

  • Any individual employees with annual wages of $100,000.

What forms do you need to verify payroll costs?

In order to verify the payroll costs, you will need to provide documentation to verify the eligible cash and non-cash compensation or benefit payments during the covered period. That means the following documentation:

  • Bank account statements or documentation reports from third party payroll-service provider on your employee compensation;

  • Tax forms for the periods overlapping with the Covered Period or Alternative Covered Period;

  • Payment receipts, canceled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the borrower included in the forgiveness amount (PPP Schedule A, lines (6) and (7));

  • For independent contractors, sole proprietors or other self-employed individuals that have no employees, the 2019 1040 Schedule C Form will be used in order to verify their business’ profit or loss.

Information regarding employees eligibility for forgiveness loan

If you’re wondering who counts as an employee for the forgiveness loan, you need to know that any employee who is fulltime, part-time, furloughed or on a paid internship will be considered eligible. You can even count yourself, as long as you have received the W-2 with the amounts that were withheld for taxes.

However, the following category is not eligible: employees who live outside US, unpaid interns, unpaid volunteers, freelancers or independent contractors.

In case you find yourself in a special situation where you let go an employee but afterwards you offered to rehire them on the same position, salary, wage and number of hours, you may still qualify for the loan forgiveness for the full amount. Even if they reject your rehiring offer.

However, you must have the interactions between you and your employee very well documented.

Frequently Asked Questions about PPP (Paycheck Protection Program) loan forgiveness

  • What is the interest rate?

  • Loans taken through PPP have a fixed interest rate of 1%.

  • When is the loan due?

  • The loan is due in 2 years (24 months) in most cases.

  • For both cases there’s the possibility of repaying the loan earlier with no prepayment penalties or fees.

  • When do you need to start paying interest on your loan?

  • Payments are deferred until you receive a decision regarding your application. That includes all payments. However, the interest will continue to accrue over the period.