The SBA released the PPP Loan Forgiveness Application late Friday. If you have been following along with my updates, there are no real surprises. There are a few clarifications I want to make for you:
What is a “Covered Period?”
Until now the Covered Period for payroll costs was to begin on the day loan funds were received. However, for administrative convenience, the SBA added an Alternative Payroll Covered Period. This period allows borrowers to calculate eligible payroll costs beginning on the first day of the pay period following receipt of funds.
Incurred vs Paid Costs
A borrower can count for the forgiveness calculation eligible costs paid during the period regardless of when they were incurred and costs incurred during the so long as they are paid by a standard payment date defined for each cost type. Basically this provision eliminates the need to schedule a special payroll to be paid on day 56 of the applicable covered period. Rather, a portion of the first payroll paid after the end of the 56-day period will still count towards debt forgiveness. Other eligible non-payroll costs must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.
It has been understood that to qualify for forgiveness, employers who reduced their workforce during the Covered Period would be penalized. However, there are two exceptions. Borrowers may escape penalty if an employee refuses to return to work or borrower if they reduced their workforce between February 15, 2020 and April 26, 20200 and then later restored their workforce back to the February 15 level by June 30, 2020.
A warning for sole-proprietors, self-employed and gig workers
As I mentioned in previous updates, there was a disconnect between the calculations used by banks to determine loan amounts and what would qualify for forgiveness of loans issued to self-employed individuals and sole proprietors. Banks calculated loan amounts based on what was reported as net income on the 2018 or 2019 tax returns. The SBA later came out to say that only 8/52 of net would qualify for forgiveness based on the 8 week covered period. Please keep this in mind as you pay yourselves and spend money on other qualified expenses.
Considering the future
PPP loan forgiveness was never guaranteed and it is likely that the entire amount received will qualify. Any portion that is not forgiven will be converted to a loan with 1% interest over 24 months. Payments are being deferred for 6 months; however, interest begins accruing immediately. These are great terms but monthly payments could be rather large if your loan is significant. Keep this in mind as you decide whether to keep excess funds or return them. Run a cash flow statement using the best projections you can over the next year. I know it is tempting to keep the excess and worry about the ramifications later but you don’t want to prolong the financial stress you are currently experiencing any longer than necessary.
I hope these highlights help you in preparing your application for forgiveness. If you would like assistance, please let me know.
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