Compliance with PPP Rules for Use of Proceeds and Forgiveness
Have you recently received a loan pursuant to the CARES Act's Paycheck Protection Program (PPP)? At this point, you've already executed all pertinent loan closing documents and have received the loan proceeds. But now what? Below please find helpful resources regarding the compliance with PPP rules for use of proceeds and forgiveness. For more detailed information, please click here to access the SBA's website directly.
The topics covered in this section are as follows:
What do I do next? | What expenses qualify for loan forgiveness? | What is considered a "payroll cost"? | Is there anything that is not covered under payroll costs? | How should I use my loan proceeds? | What documentation do I need to apply for loan forgiveness? | How much of my loan will be forgiven? | Why might my total loan forgiveness be reduced? | Are there any exceptions to reductions in forgiveness?
The Small Business Administration (SBA) has stated that June 30, 2020 is the last date on which the SBA will approve a Paycheck Protection Program (PPP) loan application, or sooner if funding runs out.
What do I do next?
Now that you have the PPP loan proceeds in your possession, it is essential that your company complies with the terms of the CARES Act as revised by the PPP Flexibility Act of 2020 ("Flexibility Act"), and all applicable rules.
What expenses qualify for loan forgiveness?
Loan proceeds may be used from February 15, 2020 through to December 31, 2020 during the borrower's 8 or 24-week forgiveness period, pursuant to the Flexibility Act, for any of the following:
- Payroll costs;
- Costs related to the continuation of group health care benefits during periods of paid sick, medical or family leave, and insurance premiums;
- Employee salaries, commissions or similar compensations;
- Payment of interest on any mortgage obligation (excluding prepayment and payment of principal);
- Rent (including rent under a lease agreement);
- Interest on any other debt obligations that were incurred before February 15, 2020 are permissible uses of PPP loan proceeds, but do not count toward forgiveness; and
- Refinancing an SBA Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020.
What is considered a "payroll cost"?
"Payroll Costs" means the sum of payments of any compensation with respect to employees that is a:
- Salary, wage, commission, or similar compensation;
- Payment of cash tip or equivalent;
- Payment for vacation, parental, family, medical or sick leave;
- Allowance for dismissal or separation;
- Payment required for the provisions of group health care benefits, including insurance premiums;
- Payment of any retirement benefits; or
- Payment of State or local tax assessed on the compensation of employees.
Is there anything that is not covered under payroll costs?
Expressly excluded from Payroll Costs are:
- Compensation of an employee whose principal place of residence is outside of the United States;
- Compensation in excess of $100,000 of annualized pay per employee, prorated;
- Federal employment taxes imposed or withheld between February 15, 2020 and December 31, 2020, including the employee's and employer’s share of Federal Insurance Contributions Act (FICA) and Railroad Retirement Act taxes, and income taxes required to be withheld from employees;
- Qualified sick and family leave wages for which a credit is allowed under Section 7001 and 7003 of the Families First Coronavirus Response Act.
How should I use my loan proceeds?
Pursuant to the Flexibility Act, at least 60% of PPP loan proceeds are to be used on “Payroll Costs”. The payroll costs associated with your employees, regardless of whether or not they were actively working during this time period, count toward the PPP loan recipient’s authorized use of proceeds and loan forgiveness calculation.
What documentation do I need to apply for loan forgiveness?
Following PPP loan closing, it will be required that your business retain specific documentation in order to satisfy Peoples Security Bank’s and the SBA Administrator’s requirements for forgiveness in accordance with the CARES Act. The CARES Act requires the following documents for establishing loan forgiveness during the designated forgiveness period following loan origination:
- Documentation verifying the number of full-time equivalent employees on payroll and pay rates for this time period, including:
- Payroll tax filings reported to the IRS; and
- State income, payroll, and unemployment insurance filings;
- Documentation, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments;
- A certification from a representative of the eligible recipient authorized to make such certifications that:
- The documentation presented is true and correct; and
- The amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments; and
- There may be other documentation the Administrator of the loan program determines to be necessary, so please be diligent about saving any documentation that may be relevant to any of the categories above.
It is the responsibility of the PPP loan recipient to ensure that it uses PPP loan proceeds in accordance with the CARES Act and Interim Final Rules. It is also the responsibility of the PPP loan recipient to maintain necessary and appropriate records to establish forgiveness for both Peoples Security Bank and the SBA Administrator to ensure full compliance and maximum loan forgiveness. For more detailed information, please click here to access the SBA’s website directly.
How much of my loan will be forgiven?
The actual amount of forgiveness to which you will be entitled will depend, in part, on the total amount spent over the forgiveness period (24 weeks from loan origination, or loan origination through December 31, 2020 – whichever is earlier; or at the election of a borrower who received a loan prior to June 5, 2020, 8 weeks from loan origination) on the following:
- Payroll costs including salary, wages, and tips, up to $100,000 of annualized pay per employee over the forgiveness period (a maximum of approximately $1,923 per week per individual), as well as covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer;
- For borrowers utilizing the 8-week period, owner compensation is limited to 8 weeks’ worth of 2019 compensation or $15,385 per individual, whichever is less, in total across all businesses, while for all other borrowers, owner compensation is capped at 2.5 months’ worth of 2019 compensation, or $20,833 per individual, whichever is less, in total across all businesses; but excluding any qualified sick leave equivalent for which a credit is claimed under section 7002 of the FFCRA or qualified family leave for which a credit is claimed under section 7004 of the FFCRA;
- Payments of interest on mortgage obligations on real or personal property, as well as rent payments on lease agreements and utility payments under service agreements, dated before February 15, 2020 to the extent they are deductible on Form 1040 Schedule C;
Why might my total loan forgiveness be reduced?
- Loan forgiveness will be proportionally reduced to the average number of Full Time Equivalent (“FTE&”) employees employed during the applicable forgiveness period, as compared to the selected control period (February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020) (for examples, see the SBA’s original and revised interim final rules on forgiveness);
- Loan forgiveness will also be reduced by any reduction in employee’s salary/wages during the forgiveness period that is greater than 25% of the employee’s salary in the last full quarter of employment (January 1, 2020 through March 31, 2020) (for examples, see the SBA’s original and revised interim final rules on forgiveness);
- The salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction.
Are there any exceptions to reductions in forgiveness?
Subject to the CARES Act, Flexibility Act and applicable rules, there will be no reduction in forgiveness if:
- For employees terminated/furloughed and salaries reduced during February 15, 2020 and April 26, 2020, jobs are restored and salaries are restored to within 25% of the employee’s salary in the last full quarter of employment by December 31, 2020;
- Employers can, in good faith, document their inability to rehire employees who were employees on February 15, 2020 at the same wage/hours, and their inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020;
- Employers can, in good faith, document their inability to return to the same level of business activity as the business was operating on February 15, 2020 due to compliance with certain federal guidelines related to sanitization, social distancing, or other safety requirements related to COVID-19;
- Employees were fired for cause, voluntarily resigned or voluntarily requested and received a reduction in hours.
Applying for PPP Loan Forgiveness
The Small Business Administration has recently provided guidance to Peoples Security Bank & Trust Company on how to process the PPP Borrower forgiveness applications (Forms 3508 and 3508EZ). The PSBT online portal is now available for submission, and you should have received an email directly from us with the details and a link to apply. Please contact us if you did not receive this email. A guide on online portal usage and a webinar with helpful information is also provided below. We encourage all PSBT PPP Borrowers to use the online portal for submission of their forgiveness application, as it is the easiest and most efficient way for processing your forgiveness application.
Download Checklist View Guidance Webinar
Please remember that Peoples Security Bank & Trust is an administrator of the loan and cannot provide legal advice regarding forgiveness. Should you have questions regarding qualifying for forgiveness of some or all of your PPP loan, or generally about the CARES Act, or SBA interim final rules or guidance, you should seek qualified legal counsel.
For more detailed information, please click here to access the SBA’s website directly.