How to Estimate PPP Loan Forgiveness
For businesses that received a Paycheck Protection Program (PPP) loan through the U.S. Small Business Administration (SBA), estimating the loan forgiveness amount is based on many factors.
The first step is to determine whether to use the Covered or the Alternative Covered Period.
- The Covered and the Alternative Covered Periods are both 24 weeks (168 days), unless the business is eligible to choose the original eight-week (56-day) period. Only borrowers who received their PPP loan before June 5, 2020, may choose the eight-week period.
- The Covered Period begins on the date the loan proceeds were received. The Alternative Covered Period begins on the first day of the first pay period following the receipt of the funds. Only borrowers with a biweekly (or more frequent) payroll schedule may choose to use an Alternative Covered Period.
- In no event will a covered period extend beyond Dec. 31, 2020.
Next, the eligible costs during the covered period need to be calculated. This includes payroll costs and non-payroll costs (mortgage interest, rent and utilities) and the number of full-time equivalent (FTE) employees.
Loan forgiveness could be reduced if a company uses less than 60 percent of the forgiveness amount for payroll costs. Applying less to payroll costs may result in needing to pay money back.
Loan forgiveness may be further reduced based on the difference between FTEs and wages-paid levels during the covered period and the number of FTEs and wages paid during a look-back period. Fewer FTEs and/or wages reduced by more than 25 percent during the covered period will reduce the amount of the loan that can be forgiven.
Applying for Forgiveness
To apply for PPP loan forgiveness, the PPP Loan Forgiveness Application (LFA) or the PPP Loan Forgiveness Application Form 380 EZ (PPP EZ Form) needs to be completed and submitted to the lender that issued or is servicing the loan.
The PPP EZ Form can be used on any size loan that fits in one of the following three categories:
- 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
- Borrowers who did not reduce salaries or wages of employees by more than 25 percent and did not reduce the number or average paid hours of employees (with some exceptions)
- Borrowers who did not reduce salaries or wages of employees by more than 25 percent and experienced reductions in business activity as a result of COVID-19-related health directives
If the business does not fall within one of these three categories, the full PPP Loan Forgiveness Application must be used.
The SBA also issued SBA Form 3508S in October. Any qualified borrower of a PPP loan of $50,000 or less may use SBA Form 3508S to apply for loan forgiveness and be exempted from any reductions in their loan forgiveness amount based on reductions in FTEs or reductions in employee salary or wages. Note that a borrower that, together with its affiliates, received loans totaling $2 million or greater cannot use form 3508S.
Borrowers may submit a loan forgiveness application any time before the maturity date of the loan, which is either two or five years from loan origination. However, if a borrower does not apply for loan forgiveness within 10 months after the last day of the borrower’s loan forgiveness covered period, loan payments are no longer deferred, and the borrower must begin making payments on the loan.
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This article appeared in the January/February 2021 issue of New Jersey CPA magazine. Read the full issue.