The Paycheck Protection Program (PPP) loan forgiveness process just became easier for borrowers with loans of $50,000 or less. On October 8, 2020, the Small Business Administration (SBA) and Treasury announced a new “simpler” loan forgiveness application. The new forgiveness application (SBA Form 3508S) is designed to make the process easier through fewer calculation and documentation requirements. In addition, eligible borrowers are now exempt from reductions in loan forgiveness arising from reductions in full-time equivalent (FTE) employees or due to salary and wages. To help clients, prospects, and others, Hanson & Co has provided a summary of key details below.
Calculating Payroll Expenses
Similar to the process required on other forgiveness applications, the borrower is required to calculate the eligible payroll expenses. This includes the total of cash compensation, employee benefits, and owner compensation.
- Cash Compensation – This includes total gross salary, wages, tips, commissions, paid leave, and allowances for dismissal or separation during the Covered Period. It is important to note that the total amount of cash compensation eligible for forgiveness cannot exceed an annual salary of $100,000, prorated for the Covered Period. For those using the 8-week Covered Period the limit would be $15,385 and for the 24-week Covered Period the limit would be $46,154.
- Employee Benefits – This includes the total amount paid by the borrower for employer contributions to employee health insurance, contributions to retirement plans (excluding any pre-tax or after-tax contributions made by an employee), and employer state and local taxes paid by the borrower and assessed on employee compensation.
- Owner Compensation – Any amount paid to owners (self-employed, owner-employees or general partners) limited to the 2.5-month equivalent of $100,000 per year, or the 2.5-month equivalent of their applicable 2019 compensation, whichever is lower.
It is important to note that payroll costs are considered paid on the day the checks are distributed to employees or when the Borrower initiates electronic payment. Payroll costs are incurred on the day an employee’s pay is earned. Any payroll costs incurred but not paid during the last pay period of the Covered Period are eligible for forgiveness if paid on or before the next regular payroll date.
Calculating Non-Payroll Expenses
To calculate the eligible non-payroll expenses incurred during the Covered Period, the borrower must total qualifying mortgage, rent and utility expenses.
- Covered Mortgage Obligations – This includes payments of interest on real and personal property loans incurred on debt established prior to February 15, 2020.
- Rent Expenses – Business rent or lease payments on lease agreements for real or personal property in force between February 15, 2020.
- Utility Payments – Business payments for utility services including electricity, gas, water, telephone, transportation, or internet access for which service was started prior to February 15, 2020.
Eligible nonpayroll costs must be paid during the Covered Period or incurred during the Covered Period and paid before the next billing date (even if it occurs after the end of the Covered Period). Nonpayroll costs are not permitted to exceed 40% of the total forgiveness amount.
There are several documents that must be submitted with the application to support the forgiveness amount. This includes copies of bank statements, third party payroll provider reports, tax forms including federal and state filings, payment receipts, canceled checks, and account statements documenting the employer contributions to retirement plans or health insurance.
Document Retention Requirements
Borrowers are required to retain, but not submit, all records relating to the loan including copies of documentation submitted with the original loan application, information supporting all certifications, details related to the forgiveness application, and any other information that demonstrates compliance with PPPC requirements. The SBA requires these documents to be retained for six years after the date of loan forgiveness.
The new forgiveness application is welcome news for Denver business owners with a loan amount of less than $50,000. The exemption from forgiveness reductions due to FTE or salary reductions is an added bonus. While the process is much easier now, it is important to consult with a qualified advisor who can walk you through the forgiveness process and calculation requirements. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Hanson & Co can help. For additional information call us at 303-388-1010 or click here to contact us. We look forward to speaking with you soon.