Paycheck Protection Program Loan: Overview of Forgiveness Requirements

Recipients of loans under the Paycheck Protection Program (PPP) need to ensure they use the loan proceeds for the purposes specified in the CARES Act in order to qualify for loan forgiveness. Unfortunately, the rules on loan forgiveness are evolving, and both the U.S. Treasury Department and the Small Business Administration are continually issuing new or revised guidelines. However, the information below is based on the latest guidance:

PPP loans: the basics 

PPP loans are a forgivable loan for small businesses to help them retain their employees, although self-employed persons and independent contractors can also qualify for PPP funds. Loan proceeds must be used to cover payroll costs, mortgage interest, rent, and utility costs over the eight-week period after the loan is funded.

Use PPP loan proceeds appropriately over the eight-week period 

• At least 75% of loan proceeds must be used for payroll costs and the remaining 25% of loan proceeds can be used for certain other purposes (i.e., mortgage interest, rent, utility costs).
• Payroll costs consist of compensation to employees (whose principal place of residence is in the U.S.) in the form of
  • salary, wages, commissions, or similar compensation;
  • cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips);
  • payment for vacation, parental, family, medical, or sick leave;
  • allowance for separation or dismissal;
  • payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees;
  • payment of state and local taxes assessed on compensation of employees; and
• For an independent contractor or sole proprietor, wage, commissions, income, or net earnings from self-employment or similar compensation.

Maintain your full-time employees 

There are certain situations in which the amount of PPP loan forgiveness must be reduced. If the average number of full-time employees per month during the eight-week period is lower than the average monthly full-time employees during the period February 15, 2019 to June 30, 2019, or the average number of full-time employees per month during the period from January 1, 2020 to February 29, 2020, then the loan forgiveness amount will be reduced by the ratio of full-time employees during the eight-week period to the number of full-time employees during the 2019 or 2020 comparison periods. You can choose either time period to calculate the average.

Maintain salaries and wages paid to specific employees 

Loan forgiveness will also be reduced if the reduction of wages paid to any employee during the eight-week period is greater than 25% of the wages paid during the most recent full quarter during which the employee was employed before the 8-week period. Employees who during any single pay period in 2019 received wages at an annualized rate exceeding $100,000 can be excluded from this reduction calculation.

Again, the guidelines on use of PPP loan funds and forgiveness are evolving. You can find more information on the SBA website (www.sba.gov) or the U.S. Treasury website (home.treasury.gov).  You can also contact Mark Spitz at Spitz Legal Counsel at 720-575-0440 or mark@spitzlegalcounsel.com.