The 3 PPP loan forgiveness requirements every borrower should know

9/16/2020
3 PPP loan forgiveness requirements you need to know

If you’ve taken out a PPP loan, you need to know how the new legislation and subsequent guidance might affect your PPP loan forgiveness.

The recent Paycheck Protection Program Flexibility Act of 2020 includes a variety of updates to the original legislation, covering all PPP borrowers (regardless of borrow date). The legislation and related guidance introduce changes or clarifications to three PPP loan forgiveness requirements that impact how borrowers determine their loan forgiveness amount. The new law’s most basic change is to extend the period of time over which loan forgiveness is measured from eight weeks to a default 24-week “covered period” (that ends on the earlier of 24 weeks after the loan disbursement date or Dec. 31, 2020). 

1. Use of funds (“payroll costs” versus “nonpayroll costs”)

In the original legislation, 75% of a borrower’s use of its PPP loan funds had to be applied toward payroll costs over the covered period to avoid any related reduction in loan forgiveness. However, many businesses struggle with using that much of their loan toward payroll costs while trying to maintain their fixed costs, like rent, inventory, and utilities. The new legislation lowers the required amount of loan funds used toward payroll costs to 60%. Additionally, subsequent rules have outlined how such payroll costs are determined as “incurred” or “paid” during the borrower’s covered period.

2. Maintenance of headcount (average full-time equivalent employees)

Reduction in headcount during a borrower’s covered period compared to certain other periods results in reducing a borrower’s loan forgiveness. The seasonal nature of some businesses and varied state reopening requirements could make maintaining headcount difficult for some borrowers. The original legislation included a safe harbor relating to rehiring employees before June 30, 2020. The new legislation extends the rehire safe harbor date from June 30, 2020, to Dec. 31, 2020, giving borrowers more time to rehire employees to increase average full-time equivalent employee numbers. It also adds safe harbors if borrowers can document in good faith the inability to rehire and hire employees, or the inability to return to the same level of business activity, over specific time periods in 2020.

3. No reduction beyond 25% in average wage rates of "protected" employees (those earning up to $100,000 annualized in 2019)

Guidance issued under the new legislation allows borrowers who have used up their funds before the 24-week covered period to apply for loan forgiveness early. However, that guidance makes clear that if a borrower has reduced wages of protected employees beyond the 25% threshold, the resulting reduction in loan forgiveness is calculated based on the entire 24-week covered period, regardless of early application.

There are a few other notable changes that came out of the legislation, including:

  • Permitting borrowers with loans before June 5 to keep the eight-week covered period
  • Extending the two-year loan term to a five-year minimum term for new loans
  • Amending the deferred payment/interest start date to the date the Small Business Administration remits the amount of loan forgiveness to the lender (10 months after the last day of the borrower’s covered period if the borrower does not apply for forgiveness)
  • Permitting employers to defer the deposit of the employer share of Social Security tax regardless of loan forgiveness
The Crowe PPP Tool for Borrowers helps you manage your PPP loan application from start to finish.

Contact us

While the purpose of this legislation is to make the PPP loan forgiveness process easier on borrowers, there still are many questions about interpretations of the terms. If you’re looking for help maximizing your PPP loan forgiveness, our payroll consulting team has extensive experience working with businesses to understand the PPP loan forgiveness requirements and can create a forgiveness plan tailored to your specific situation.
Veena Murthy
Veena Murthy
Principal, Washington National Tax