NOTE: This was written on May 14, 2020. The laws around PPP have been extraordinarily fluid, and there may have been updates that render part of this post no longer accurate. That being said, we encourage you to reach out to the author of this post, Steve Johnson of Bank Cherokee, who is staying up to date on PPP information.
Steve Johnson, SBA Lending Manager, BankCherokee
The CARES Act was signed into law on March 27, 2020. The act authorizes general parameters of the PPP program but delegates many of the details to the SBA. As I write this piece, the SBA has not yet issued the loan forgiveness application or exact documentation requirements. Additionally, the SBA has required that 75% of loan proceeds be spent on payroll within eight weeks of loan funding in order to obtain full forgiveness of all principal and interest. That requirement was not in the CARES legislation and there is mounting pressure from borrowers, lenders and congress to overturn it. Borrowers who might benefit from a change in the 75% rule should wait until the final requirements are known.
Assuming that it stands, do not be lulled by the 75% rule. I point out to borrowers that their loan was based on 2.5 months of payroll (nearly 11 weeks) so the requirement that you spend 75% of the funds over an eight-week period requires that you maintain roughly the same pace of payroll before and after the start of the Covid-19 crisis. In addition to the 75% rule, there is a requirement that your business must retain or rehire the same number of FTE employees by June 30. FTEs are typically calculated at 30 hours per week.
It will be up to the borrower to calculate the forgivable amount on your application and to certify that it is correct. Documentation will be required to support your calculation. Your lender will then have the responsibility of checking your work. Loan forgiveness will be provided for the sum of documented payroll costs, mortgage interest payments, rent payments, utilities, and other business related interest payments. All of the covered loan and lease payments must be for contracts that were incurred prior to February 15, 2020. If you received an EIDL advance, the amount of the advance will be deducted from the forgiveness proceeds.
The amount of loan forgiveness will also depend on you retaining, or rehiring, an equivalent number of FTEs by June 30. You will need to support the number of FTEs that were on the payroll before and after receiving the loan. The comparable before period is the average number of FTEs employed from either 02/15/19 to 06/30/19, or alternatively from 01/01/20 to 02/29/20. The SBA has ruled that a borrower will be given credit for any employee who was given a written offer to return to work but declined.
Sole proprietors who have received PPP loans are also bound by the 75% rule. However, the amount spent on personal payroll is also limited to a maximum of 75%. The SBA uses the term “income replacement” to refer to the 75% of loan proceeds that the proprietor must use to pay herself. That is the easy part. The remaining 25% of loan proceeds can be used for interest and rent payments as well as business utilities, but only if those items were expensed on the borrower’s 2019 schedule C. If a proprietor cannot use 25% of loan funds on eligible non-payroll expenses, it appears that portion of the loan will not be forgiven.
Below is a list of items that can be assembled in anticipation of the release of the loan forgiveness application:
- 941 payroll reports from your payroll provider
- Unemployment insurance filings
- Evidence of any group health insurance or retirement benefit payments paid
- Billing statements or loan histories for covered loans. These should provide a principal and interest breakdown because only the interest portion can be included.
- Copies of utility bills
- Copies of leases
- A bank statement showing the amount of any EIDL advance received
- For any employees who declined to return to work, retain a copy of your written offer to rehire along with written evidence of their decline
In all cases, I advise that you make eligible payments from a checking account that is in the name of the PPP borrower. Retain bank statements and copies of cancelled checks in case they are required. If you should have any additional questions, please feel free to call me at 651-291-6246.