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Paycheck Protection Program – Loan Forgiveness Information

Loans taken out under the Paycheck Protection Program (PPP) may be forgiven by the Small Business Administration (SBA) up to the full principal amount of the loan and any accrued interest. With this being said, it’s going to be critical to keep in mind that this is a new Federal program with rapidly evolving details and exceptions. For instance, the full SBA rules on the forgiveness process haven’t yet been issued. Making sure you’re aware of the below details is very important to us.

In service to your best interests, we encourage you to regularly visit the SBA’s PPP website to learn more about the program, including loan forgiveness. When doing so, please check out the following guidelines and resources:

At-a-Glance Key Requirements for Loan Forgiveness

As of 5/1/2020, below are the current, key SBA requirements to obtain loan forgiveness.

  1. You must use your loan funds within 8 weeks of the day it was disbursed to you and only for an allowable purpose. Examples of “Allowable” and “Prohibited Usages” include, but are not limited to the following:

Allowable Usages

Prohibited Usages

  • Payroll costs as defined by SBA
  • Costs associated with health benefits
  • Payment of interest on a mortgage
  • Rent
  • Utilities
  • Interest and any other debit obligations incurred before 02/15/2020
  • Refinancing an SBA Economic Injury Disaster Loan (EIDL) made between 01/31/2020 and 04/03/2020
  • Compensation of employees in excess of $100K (annualized)*
  • Payments to 1099/independent contractors
  • Payroll taxes, railroad retirement taxes, and income taxes
  • Compensation for employees outside of the U.S.
  • Sick and family leave wages for which a credit is allowed under Families First Coronavirus Response Act (FFCRA)

  1. At least 75% of the funds must be applied towards payroll costs with only 25% of the funds going toward non-payroll costs.

  2. You must maintain, retain, or quickly re-hire staff and maintain compensation levels back to the pre- 02/15/2020 levels. Any reduction in the number of employees or their compensation will reduce your loan’s chance of forgiveness.

  3. You must maintain documentation of your use of funds, the number of employees, and your compensation to those employees, according to SBA rules.

    * The $100,000 cap on payroll costs for each employee used in calculating the amount of a PPP loan under the CARES Act was widely interpreted to include cash compensation and other employee benefits. The SBA, however, clarified that only cash compensation was subject to the $100,000 cap. Other non-cash employee benefits, such as health insurance premiums and 401(k) contributions, payment of state and local taxes assessed, can be included in payroll costs without regard to the $100,000 cap. This allows borrowers to be eligible for larger loan amounts.

Tips for Preparing for Loan Forgiveness: While we await more detailed guidance, here are some tips to prepare your PPP loan for forgiveness:

#1: Only use funds for allowable usages and use funds within the 8 weeks required. If funds aren’t used accordingly, then you may run the risk of not getting your loan forgiven. Additionally, you could also become subject to SBA audit and penalties.

#2: Carefully track your use of the funds to ensure at least 75% of the funds are used on payroll costs, as defined by the SBA.

#3: Maintain a solid paper trail of the use of your loan funds. We don’t yet know specifically what documentation the SBA will require, but we suggest at minimum you maintain:

  • Documents verifying the number of full-time employees on payroll and the payroll rates for the period, including tax filings. This may include your:
    • IRS Form 941 and state quarterly wage unemployment insurance tax reporting forms

-or-

  • Equivalent payroll processor records that best corresponds with the 8 weeks that follow your loan disbursal.
  • Documents verifying payments on mortgage, rent, and utilities.

#4: Avoid intermingling PPP funds with your personal accounts.

  • Loan proceeds should be paid out of your business account.
  • To more easily track disbursals, you may wish to open a separate share account within the same business account number.
  • This can be easily done on your RCU business account.

#5: Carefully review employee compensation changes to make sure there are no reductions beyond 25% of base compensation.

#6: Carefully review your staffing levels to make sure you have returned your full-time equivalent staffing to the levels prior 2/15/2020.

#7: Consider consulting a CPA with questions on how to handle your internal accounting procedures, particularly if you may need to change your payroll period in order to meet the requirements of the loan.


What level of financial hardship is required to qualify for a PPP Loan?

The Paycheck Protection Program (PPP) was designed to provide critical financial support to small businesses suffering from the immediate financial consequences of the current COVID-19 situation. As part of applying for a loan, a business must self-certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations” of the applying business. In making this certification, a business must evaluate for itself whether they can make this certification in good faith. Lenders, including Redwood Credit Union, are unable to make this determination.

On 4/13/2020, the US Treasury department, acting on behalf of the SBA, provided more detail on this certification, cautioning all PPP borrowers to carefully review this certification, taking into account their current business activity and ability to access other sources of funds (i.e., liquidity) to support their ongoing operations in a manner not significantly detrimental to how they normally operate. Businesses that have access to such liquidity cannot complete the certification in good faith and therefore would not be eligible for a PPP loan.

If a business has already received a PPP loan and now believes, based on this guidance, it may not meet the SBA’s criteria, the business can return their PPP funds by 5/7/2020 and be considered to have been in good faith compliance.

For more information on this and other pertinent issues, please check out the SBA’s Frequently Asked Questions (FAQs). This resource is updated regularly, so we’d suggest checking it often.

Updated 5/1/2020