Requirements for forgiveness of the Paycheck Protection Program (PPP) loan

Update: This article has been updated to reflect the changes introduced in the Paycheck Protection Program Flexibility Act that became law on June 5, 2020

After much effort, patience, and stress, many businesses have received their loan from the Paycheck Protection Program. This loan includes potential debt forgiveness, but we have to meet strict requirements and document them properly.

The Treasury Department and the SBA established guidelines as a requirement for loan forgiveness. The following requirements must be met in order to qualify for full or partial forgiveness of the loan:

1. The funds must be used in “eligible expenses” in the period of twenty four (24) weeks after the loan is funded:

a. Payroll costs including wages, salaries, commissions, or other similar compensation. Remember to include:

• Payments for paid leave.
• Amounts paid for termination of employment.
• Employee Benefit Payments
• Group health insurance coverage.
• Contributions to retirement plans.
• Payment of state or local taxes.

💡 NOTE: The portion of federal taxes paid by the employer for Social Security and Medicare are not eligible as payable costs that can be forgiven.

b. Mortgage interest payments

• The Mortgage must have been in effect before February 15, 2020.
• The portion of mortgage payments that corresponds to the principal amount will not be forgiven

c. Rent Payments

• There must be a lease that was in effect before February 15, 2020.

d. Utilities

• Includes electricity, gas, water, transportation, telephone, and Internet.
• The service must have been established before February 15, 2020

2. 60% of the loan must be used to pay payroll costs.

In the event that less than 60% of the loan is used to pay payroll expenses, the forgiven amount will be adjusted by discounting the deficiency to reach 60%.

• Example: If the loan is $ 100K. The amount to be used in payroll costs to obtain the maximum forgiveness would be $ 60K ($ 100K x 60%). If payroll costs did not reach 60% and are $ 45K, the forgiveness amount would be adjusted by $ 15K ($ 60K - $ 45K). The maximum forgiveness in this example is $ 85K instead of $ 100K.

3. Maintain the number of full-time equivalent employees (FTE = Full Time Equivalent).

a. Compared to the period from February 15 to June 30, 2019 or January 1 to February 29, 2020, period of eight (8) applicable weeks:

• Example: If you had an average of 10 FTEs in the quarter, you must have 10 employees during the 8-week period after the PPP is funded in your bank account. If you have five (5) FTEs during the 8 week period, the forgiveness will be reduced by 50% of the loan.

4. Do not reduce salary levels more than 25% during the 24 week period.

💡 NOTE: In case points three (3) and four (4) are not met during the 24 week period, you can restore the FTE and salary levels before June 30 to continue to be eligible for the forgiveness.

Remember that you cannot include payments to independent contractors in the payroll payments.

Finally, it is very important that you document all of the payments that you will use to apply for forgiveness. Work with your accountant to make sure it's properly documented. We are at your service if you need help.