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Maximizing Paycheck Protection Program Loan Forgiveness

Congratulations! Your business successfully applied and received funding through the Paycheck Protection Program (PPP). Whether you originated your loan through Jefferson Bank or another lender, understanding the requirements of the program is essential to maximize your loan forgiveness benefit.

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While this information reflects current understanding of the program, the Small Business Administration has not provided final guidance on loan forgiveness.  Proceed cautiously, and engage professional advisors as needed to navigate the intricacies of the PPP.

Loan amount and forgiveness

There are some variations in the rules regarding maximum PPP loan amount, but for most existing businesses, the maximum loan amount is 2.5 times the average total monthly payments for payroll costs incurred during the one-year period before the date on which the loan was made.  As a practical expedient, many businesses used average monthly payroll costs for calendar year 2019 (times 2.5).  

Since the primary objective of the PPP is to help small businesses keep employees on the payroll during the COVID-19 pandemic, forgiveness criteria are expected to be closely-tied to that goal.  A borrower will be eligible for up to 100% loan forgiveness if 1) all loan proceeds are used for allowable expenses, and 2) both employee and compensation levels are maintained.


Breaking down the two forgiveness criteria 

When applying for forgiveness, a borrower will document the actual payments made over the eight-week period following the date of the initial disbursement of the loan. Allowable expenses are expected to include: 

1) Payroll costs, including benefits;  

2) Interest on mortgage obligations, incurred before February 15, 2020; 

3) Rent, under lease agreements in force before February 15, 2020; and 

4) Utilities, for which service began before February 15, 2020. 

Again, the primary PPP goal is to help businesses maintain payroll, therefore the program requires at least 75% of the forgiveness amount be attributed to payroll costs.  Not more than 25% of the loan forgiveness amount may be attributable to non-payroll costs.  

Loan forgiveness is also expected to depend on maintaining your staff and payroll.  Specific criteria to keep in mind, includes:

• Number of staff – Your loan forgiveness may be reduced if you decrease your full-time employee headcount. 

• Level of payroll – Your loan forgiveness may also be reduced if you decrease salaries and wages by more than 25% for any employee who made less than $100,000 annualized in 2019. 

• Re-hiring - You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.

For the current guidance that provides more detail regarding eligible expenses and employment and compensation levels, please visit the Treasury website for this program: 

https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses 


Applying for PPP forgiveness 

You may apply for loan forgiveness following the eight-week period that begins with the initial loan disbursement.  You will submit a request to the lender that includes documents that verify the number of full-time equivalent employees and pay rates, as well as 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. To the extent the provided, documentation complies with the forgiveness requirements of the program. Within 60 days of receipt, the lender will request that the SBA purchase the expected forgiveness amount of a PPP loan.

If the SBA does not forgive any amount of the PPP loan, the remaining balance will remain an obligation for the business to repay the bank.  You will have six months of payment deferral from the loan origination date, so your first payment on any unforgiven portion will be due in month seven.  The non-forgiven balance will be amortized in full over 18 months for a total loan term of two years at a fixed interest rate of 1%.  The business can repay the loan at any time within the two-year term with no prepayment penalties.

The SBA recently published its initial application for forgiveness and it is now available for your review here. This program has been changing rapidly, so this is intended to assist with some debt forgiveness guidance.

Here is a May 22, 2020 update to answer most asked questions about the program. 

Interim Final Rule on Loan Forgiveness

Interim Final Rule on SBA Review Procedures and Related Borrower and Lender Responsibilities

Central Bank is currently evaluating the best method in which to work with our customers when the forgiveness applications become due. Please check this regularly as the program may change.

 

Disclaimer – This information is valid as of 4/17/2020 and will likely change as additional guidance is released. The information provided in this article is intended for informational purposes only. This information is only applicable to small businesses that became eligible for PPP funding on 4/3/2020 and not for individuals with self-employment income who file a Form 1040, Schedule C. It is not to be construed as the opinion of Central Bancompany, Inc., and/or its affiliates and does not imply endorsement or support of any of the mentioned information, products, services, or providers. All information presented is without any representation, guaranty, or warranty regarding the accuracy, relevance, or completeness of the information.

The information provided in these articles is intended for informational purposes only. It is not to be construed as the opinion of Central Bancompany, Inc., and/or its affiliates and does not imply endorsement or support of any of the mentioned information, products, services, or providers. All information presented is without any representation, guaranty, or warranty regarding the accuracy, relevance, or completeness of the information.