The Latest on PPP Loan Forgiveness: What Financial Executives Need to Know

by Pete Isberg

5 key considerations that businesses should understand to ensure that their loan qualifies for forgiveness.

©lakshmiprasad S/iStock/Getty Images Plus

In the face of the COVID-19 global health event, governments all over the world have enacted fiscal and monetary stimulus measures to counteract the recent uncertainty and economic downturn. Here in the U.S., policymakers took quick action and fast tracked a number of relief packages designed to help individuals, businesses, and hard-hit industries through this period. Likely the most widely recognizable is the Paycheck Protection Program, or PPP, originally passed in late March; extended in April and updated in early June with the passing of the Paycheck Protection Program Flexibility Act (PPPFA); and most recently extended by legislation enacted in July.

PPP was designed to help small businesses maintain staffing and wages as they navigate the uncertainty of the pandemic. Legislators enacted updates because many businesses were not able to spend PPP funds on payroll while closed for business. In turn, the PPPFA extended the time for businesses to spend their funds and introduced additional changes that have increased the flexibility of the program. With the loan application period now closed as of August 8, the more than 5 million businesses that received PPP loans need to pay close attention to forgiveness guidance. There are key considerations that businesses should understand to ensure that their loan qualifies for forgiveness:

Spend at Least 60 Percent of the Loan on Payroll

Under the original PPP, borrowers had to spend at least 75 percent of funds on payroll costs to qualify for total loan forgiveness. As meeting that amount has been difficult with many mandated business closures, the latest update requires only 60 percent be put toward payroll, enabling them to spend up to 40 percent on overhead and fixed costs such as rent, mortgage interest and utilities.

Businesses should keep a close account of how they spend the loan money to get as much of the loan forgiven as possible. Many business owners have opened separate accounts with their lender to ensure that they can account for every dollar of their loan. A separate account is not required, but the point is to be able to easily demonstrate that the full loan was spent on covered expenses.

If for some reason businesses are unable to put all 60 percent toward payroll, the rules have been clarified that they will owe a proportionally reduced amount of the loan and not the full loan amount.

Know the “Covered Period” Options

If you received your PPP loan prior to June 5, you could choose either the original 8-week covered period, or you could have opted for a 24-week period. If you received your loan after June 5, the covered period is 24 weeks. This significantly expanded timeframe gives businesses more time to spend the full amount.

However, remember that no matter how long a business chose for its covered period, full forgiveness requires that they maintain wage and employment at levels equivalent to February 2020. If they are not able to reach pre-COVID levels at the end of their covered period, they do have a fallback option: Holding the loan open through the end of 2020 and restoring employment and wages by December 31 (previously this was June 30). No matter which option a business chooses, they should be sure to plan their staffing carefully to be able to maintain staffing and wage levels through the end of their covered period, or to restore those levels by December 31.

Document Employment and Impacts to the Business

The latest updates clarify that loan forgiveness will not be reduced based on employment and wage decreases in certain cases; e.g., an inability to rehire employees, rejections of offers to rehire former employees, employees departing under certain circumstances, or if official health guidance preventing a business from resuming normal operations. However, in each case, businesses need to keep strong documentation.

For employees who were part of the company prior to February 15, businesses should keep on file any written offers to rehire them and be able to show they were unable to hire similarly qualified employees for unfilled positions by the end of this year. For former employees, these need to be written offers at the same salary or wage levels and for the same number of hours. If they reject a rehire offer, the business also needs to notify the applicable state unemployment insurance office of the employee’s rejection within 30 days.

Loan forgiveness will also not be reduced for employees who are terminated for cause, voluntarily resign, voluntarily request and receive a reduction of hours, or for a business’ failure to maintain employment levels if they can document an inability to return to the same level of business activity they had prior to February 15. For the latter, they need to be able to show that the reduction in business was due to their compliance with official federal health guidance for sanitation, social distancing, or worker and customer safety requirements; i.e., from the CDC, OSHA, or applicable state or local health agency.

New Exemption from Forgiveness Reductions for PPP Loans under $50,000

On October 8, 2020, the Treasury Department and Small Business Administration released a simplified Payroll Protection Program (PPP) forgiveness application (Form 3508S) and instructions for loans of $50,000 or less, as well as an Interim Final Rule (IFR). Generally, the IFR explains the adoption of a de minimis exemption from reductions in loan forgiveness (i.e., penalty) for failure to maintain the number of full-time equivalent employees (FTEs), as well as wage level maintenance requirements, for PPP loans of $50,000 or less.

Borrowers with affiliates that collectively received PPP loans of $2 million or more cannot use the new form or new exemptions.

To Defer or Not to Defer Social Security Payroll Taxes

The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows businesses to defer paying the 6.2 percent Employer share of the Social Security payroll tax through the end of the year. Under the original PPP, borrowers were required to stop Social Security tax deferrals once any portion of their loan was forgiven. However, the PPPFA eliminated that constraint, and they now have the option to continue to defer Social Security tax payments through the end of the year regardless of whether their loan is forgiven.

Whether a business chooses to defer or not will not affect their loan forgiveness, and deferring can certainly increase their cash flow. Amounts deferred are due in two installments, at the end of 2021 and 2022. However, plan carefully since this deferral can be a significant amount. For example, an employer with just over 20 employees earning an average of $50,000 annually could defer and accumulate a tax debt equal to a full-year’s wages for one employee. Federal employment taxes are also not extinguished in bankruptcy proceedings. Businesses should carefully consider whether it makes sense to defer those amounts, or if they should keep them current.

The PPPFA and subsequent guidance changed a number of program components to make it easier for businesses to better utilize PPP loans and keep Americans employed. These are some of the most important considerations, but businesses should read the rules closely, employ guides and tools, and work with their tax and accounting partners to stay on track for full forgiveness. With continued economic uncertainty and businesses still closed or limited in some areas of the country, be sure to watch for additional stimulus efforts, changes and more guidance in the future. Further changes and new programs seem likely over the coming months.

Pete Isberg is Vice President of Government Relations at ADP.