Top 9 Questions Entrepreneurs Have On PPP Forgiveness

An increasing number of entrepreneurs have received loans from the Small Business Administration’s Payroll Protection Program (PPP). The PPP was designed to give working capital to entrepreneurs so they can keep paying their employees during the lockdown. The loan will be forgiven if it is spent on authorized uses.

The purpose of this article is to give you guidance on how to spend PPP loans to maximize the forgivable amount. I’ll address the most common questions about PPP spending below.

1. How can I spend PPP money?

PPP funds can be used for payroll costs, rent, utilities and mortgage interest.

The 75 / 25 Rule

In order to be forgiven, at least 75 percent of the PPP must be used for payroll costs, and 25 percent or less may be used for other authorized purposes.

Payroll costs include:

• Salary, wages, commissions, or tips (capped at $100,000 on an annualized basis for each employee);
• State and local taxes assessed on compensation;
• Costs related to the continuation of group health care benefits during periods of paid sick, medical or family leave, and insurance premiums.

Other authorized expenses include:

• Payments of interest (but not payments of principal) on any mortgage obligation;
• Rent (including rent under a lease agreement);
• Utilities; or
• Interest (but not principle) on any other debt incurred before February 15, 2020.

2. How long do I have to spend PPP money?

According to the Treasury Department, you must spend PPP funding within eight weeks from the date the funding hit your bank account. Ensure that your payroll dates allow for the funds to be deployed within that timeframe. If not, shift your payroll dates to accommodate this.

3. Are payroll costs calculated on net or gross?

According to the Treasury Department, payroll costs are calculated on a gross basis, not including subtractions or additions based on federal taxes such as the employee’s and employer’s share of Federal Insurance Contributions Act (FICA) and income taxes required to be withheld from employees. But payroll costs do not include the employer’s share of payroll tax. For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs.

4. Are payments to independent contractors forgivable under PPP?

Payments to independent contractors will not be forgiven under the PPP. Only payments to employees are considered eligible payroll costs. When you applied for PPP, you were not allowed to include payments to contractors in your calculation so this shouldn’t throw off your math.

5. Can I switch my independent contractors to employees in order to pay them with PPP money?

There does not seem to be a restriction on transitioning independent contractors to employees. However, you will want to consider the long-term implication of this choice. First, employees are more expensive and they have more obligations for your company. Second, if you intend to bring them on as employees now only to transition them back to independent contractors after the eight-week period, you’ll need to consider your states guidelines around classification of each worker. It’s very likely that your state’s department of labor would prevail on a misclassification claim.

6. Do I need to maintain a certain number of employees to ensure that PPP is forgiven?

When you applied, you submitted an average number of employees. You want to maintain or increase that number of employees during the relevant eight-week period. If you do not maintain an average number of full-time equivalent employee positions during the eight weeks following the origination of the loan, then the amount of principal forgiven will be reduced based on how many people you let go. Note that you can choose to compare the eight-week period to your average number of full-time equivalent employees during either: February 15, 2019–July 30, 2019 or January 1, 2020–February 29, 2020.

7. How should I track my PPP spending?

When you apply for forgiveness, you’ll need to prove the number of full-time employees and an accounting of how the PPP money was spent. So you’ll likely need:

• Payroll documentation for those eight weeks;
• Proof of mortgage payments;
• Proof of rent payments; and
• Proof of utility payment.

Some entrepreneurs are setting up a separate account to hold PPP funding and pay only authorized expenses out of that account. This is a smart step, but likely unnecessary if you have good bookkeeping otherwise.

8. What is the application process for PPP forgiveness?

In order to process the forgiveness, you must submit a request to your bank, including documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease and utility obligations. You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent and utility payments. The bank must make a decision on the forgiveness within 60 days.

However, neither the SBA nor the banks have given specific guidance on the application yet. According to a spokesperson for the American Banking Association, “We are still waiting for guidance on the forgiveness process and it’s a concern of ours because … businesses are not sure what they should do.”

9. What happens if my PPP loan is not forgiven?

Remember, the PPP is a loan. The terms are 1 percent interest and must be paid back in two years. These are great terms for a business loan. There may be an amount that is not forgivable. In that case you have may repay immediately or within the two year term.