June 30, 2020

CARES Act: Loan Forgiveness

The Paycheck Protection Program (PPP) has made an incredible impact on the nonprofit world. As a quick refresher, this program, part of the overall CARES Act, is designed to keep people working. It is administered through the Small Business Administration (SBA) and its network of local banks by providing loans that can be forgiven if all employees are kept on an organization’s payroll. This includes funds that can be used for payroll and expenses for rent, mortgage interest, or utilities that will help to keep employees employed.

Here are a few things to know about your PPP loan and how to apply to get it forgiven. 

Keep Up to Date:

Before completing your loan forgiveness application or making any major decisions that impact your PPP loan, it is recommended to check the PPP section of the SBA’s website for the most current information in case there have been any changes or clarifications posted. 

Recent Changes You Should Know About:

There have been some changes since the PPP was first implemented. Recently, a bill called the Paycheck Protection Flexibility Act of 2020 was passed that made some significant adjustments to the forgiveness of PPP loans that you should know about as a nonprofit leader.

Here are the five major adjustments to know about from this recently passed bill:

  1. The maturity, or payment due, date has been extended from two years to five years
  2. Coverage has been extended from eight weeks to a maximum of 24 weeks
  3. The timeline has also been extended to rehire employees, along with good-faith exemptions 
  4. Mandatory payroll spending has been reduced from 75% to 60%
  5. The loan deferral period has been extended to 10 months

Listing of Potential Allowable Expenses:

The program goes beyond covering only payroll expenses and helps with related expenses. For an expense to be allowable to be covered using PPP loan funds, it must be included on the list found in the 2019 Form 1040, Schedule 990:

  • Electricity costs in all business buildings including storefront, office space, warehouses
  • Gas used for driving business owned vehicle
  • Natural gas in all business buildings
  • Telephones including landlines and cell phones
  • Internet access
  • Water bills
  • Maintenance services including trash pickup and building cleaning
  • Business equipment leases
  • Interest on an auto loan for a business vehicle

Required Documents:

To prepare for your PPP loan forgiveness application, here is the checklist of documents that you’ll want to have ready.

  • Payroll: Documentation verifying the eligible cash compensation and non-cash benefit payments from the Covered or Alternate Payroll Period.
  • Full-time employee (FTE) documentation showing the following:
    • Average number of employees on payroll per month employed by the borrower between 2/15/19 and 6/30/19
    • Average number of FTE employees on payroll per month employed by the borrower between 1/1/20 and 2/29/20, or In the case of a seasonal employer, adjusted FTE payrolls for specified dates (see PPP  Schedule A)
  • Non-Payroll: Documentation verifying the existence of the obligations/services before 2/15/20 and eligible payments from the covered period.
  • Required documents must be kept for at six years after the loan is forgiven/paid in full.

The  Loan Forgiveness Form has Three Parts:

The loan forgiveness process includes completing the loan forgiveness form and submitting it to the bank you received your loan from. It is recommended that you contact your bank for additional guidance. 

The Forgiveness Application Form works like a booklet that is referenced in a back-and-forth mode with three parts: the form instructions, a worksheet, and two tables that work together to help you complete the form.

You may find it helpful to print off these materials and complete the worksheet on paper, then return to your computer to complete and submit the form electronically. 

EZ Form Option:

You can use a simpler and easy-to-use form called the 3508EZ if one of the following three conditions is met:

  1. Condition One: The borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form (SBA Form 2483).
  2. Condition Two: The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or the Alternative Payroll  Covered Period compared to the period between January 1, 2020, and March  31, 2020 (for purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000); AND the Borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020, and the end of the Covered Period. You can ignore reductions that arose from an inability to rehire individuals who were employees on February 15, 2020, if the Borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020. Also, ignore reductions in an employee’s hours that the Borrower offered to restore and that the employee refused. See 85 FR 33004, 33007 (June 1, 2020) for more details.
  3. Condition Three: The Borrower did not reduce annual salary or hourly wages of any  employee by more than 25 percent during the Covered Period or the  Alternative Payroll Covered Period compared to the period between January 1, 2020 and March 31, 2020 (for purposes of this statement, “employees” means only those employees that did not receive, during any single period  during 2019, wages or salary at an annualized rate of pay in an amount more  than $100,000); AND the Borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and  December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance    standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

What Happens After You Apply: 

The bank you have been working with for your loan has 60 days to process and verify information after you submit. Here are the steps they will be following:

  1. The lender confirms and will review your loan forgiveness form submission
    • Application and documentation to verify payroll and non-payroll costs
    • Confirm the Borrower’s calculations
  2. Good faith review in a reasonable time
  3. Lender will work with the borrower to remedy any calculation errors or supporting documentation questions
  4. The lender doesn’t need to independently verify the Borrower’s reported information if  there are supporting documents
  5. The lender issues one of three decisions to the SBA within 60 days:
    • Approval
    • Denial with a documented reason
    • Denial without prejudice pending SBA review
  6. The lender requests payment from the SBA if approval is granted
  7. The lender notifies the borrower of the SBA’s loan forgiveness decision
  8. A reconsideration process is available at each level of review 

Keep in mind that if anything doesn’t make sense, you can always contact the bank you’re working with or the SBA directly. Also, if you have something that is an expectation that you believe needs clarification, because of the size of this loan program, more than enough documentation is better than not enough. Include a simple narrative and any documentation that you need to explain your organization’s situation to help get a quicker approval of your loan forgiveness application.

Learn more about this process by viewing our recent webinar with Eric Giltner of the SBA here.