PPP Loan Forgiveness FAQ

PLEASE NOTE: The SBA final guidelines on calculating PPP loan forgiveness are still PENDING. We have created this FAQ to serve as an initial guide based on how we currently interpret the CARES ACT. 

The Paycheck Protection Program established by the CARES Act, is implemented by the Small Business Administration with support from the Department of the Treasury. This program provides small businesses with funds to pay up to 8 weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities. The U.S Treasury Department’s website is a great source for comprehensive and up-to-date information. 

We understand you may have a lot of questions about Paycheck Protection Program loan forgiveness.  Below you will find answers to the most frequently asked questions we are hearing from small business owners.

How is the forgiveness amount calculated within your loan proceeds?

Forgiveness is based on eligible payroll or non-payroll costs incurred and payments made during the 8-week period beginning on the date of origination of the PPP loan (“8-week Covered Period”).

What constitutes PPP forgivable payroll costs?

Forgivable payroll costs include:

  • Salary, wage, commission, or similar compensation (not in excess of an annualized salary of $100,000).
  • Cash tip or equivalent.
  • Vacation, parental, family, medical, or sick leave.
  • Payment required for the provision of group health care benefits, including insurance premiums.
  • Payment of any retirement benefit.
  • Payment of state or local taxes assessed on the compensation of employees.

The total sum of payroll costs must represent 75% to 100% of the total loan forgiveness amount.  The primary purpose of the PPP program is to protect payroll and, therefore, the majority share of forgivable costs must be eligible payroll costs.

What constitute PPP forgivable non-payroll costs?

Forgivable non-payroll costs include:

  • Interest payments on any mortgage obligation incurred before 2/15/20 that is a liability of the Applicant and is a mortgage on real or personal property. Note: This does not include any prepayment or payment of principal.
  • Rent payments on real or personal property leases must be a liability of the Applicant that was obligated under a leasing agreement in force prior to 2/15/20
  • Utility payments on services started prior to February 15, 2020 and include electricity, gas, water, telephone, and internet service

Non-payroll related costs combined may be as low as 0% and as high as 25% of the total forgiveness amount of your PPP loan.

What is excluded from “Forgivable Payroll Costs”?

  • Compensation of an employee whose principal place of residence is outside the United States.
  • Compensation paid to an employee in excess of an annual salary of $100,000 (with annual salary up to $100,000 to such employee included).
  • Federal employment taxes.
  • Qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.

When does the 8-week forgiveness period start?

The 8-week Covered Period begins on the date the PPP loan funded. TMC Financing will work with its PPP borrowers to submit forms and documentation for loan forgiveness approximately 8 weeks after loan funding.

What will reduce the loan amount eligible for Debt Forgiveness?

The amount eligible for debt forgiveness will be reduced when a borrower reduces its number of employees or tipped workers or the salaries or wages of employees.  Important note: Further SBA guidance on this process is pending.

If you had to reduce the number of your employees are you still eligible for forgiveness?

Yes, however the reduction will likely result in a reduction in the loan forgiveness amount.

Do reductions in compensation affect the amount of loan forgiveness?

Yes. Any reduction during the 8-Week Covered Period in excess of 25% of total salary paid to an employee in the most recent full quarter before the covered period will result in a dollar-for-dollar reduction (for the amount in excess of 25%) in loan forgiveness.

  • A reduction in the salary of an employee who makes more than $100,000 annually will not cause a reduction in the forgiveness amount, regardless of whether such reduction is in excess of 25%.
  • Employee salaries reduced between 2/15/20 and 4/26/20 must be restored by 6/30/2020 in order to avoid a reduction in the amount eligible for forgiveness.

What if you already laid off employees?

If you reduced the number of your employees between February 15, 2020 and April 26, 2020, those reductions will not decrease the amount of loan forgiveness you receive if you rehire those employees by June 30, 2020 (the deadline set by the CARES Act). 

Some employees you need to rehire are no longer available, do you get credit for filling a position with a new employee?

Yes. There is no requirement to rehire the same employees. Hiring full-time equivalent employees is enough.

Can I defer payments on my PPP loan?

You will not have to make any payments for six months following the date of loan disbursement. However, interest will continue to accrue during this six- month deferment.

Are you responsible for interest on the forgiven loan amount?

No. You are not responsible for any accrued interest on the portion of the loan that is forgiven.

Do you have to pay fees on the loan?

No. You will not have to pay any fees on the loan.

How do you apply to get forgiveness on my PPP loan?

You must prepare and submit an application with your lender who is responsible for its review and processing. TMC Financing will work with its borrowers beginning 8 weeks after their loan is funded.

What documents do I need to apply for loan forgiveness?

You will need to provide:

  • Documentation verifying the number of employees on payroll and pay rates, including IRS payroll tax filings and State income, payroll and unemployment insurance filings.
  • Documentation verifying payments on covered mortgage obligations, lease obligations, and utilities.
  • A certification that the documentation is true and correct and that the amount that is being forgiven was used in accordance with the program’s guidelines for use.
  • Any other documentation the SBA determines necessary.

When will the debt forgiveness be applied to the loan?

The forgiveness should be applied to the loan during the initial deferral period.

When will you learn the dollar value of the loan that has been forgiven?

The lender must issue a decision regarding loan forgiveness within 60 days after receiving your application for loan forgiveness, during which time interest continues to accrue.  As a reminder, you are not responsible for interest on any amount of the loan that is forgiven.

What happens with any balance that remains after the portion is forgiven?

Any balance remaining on the loan will be amortized over what remains of the original 2-year term once the 6-month deferral period has ended.

What is the interest rate on the remaining balance, if any?

The PPP loan features a 2-year term with interest capped at 1%.

Do you have to provide collateral or a personal guarantee?

No. There are no collateral requirements. The SBA’s personal guarantee requirement is waived on PPP loans.

Can you count my own salary towards loan forgiveness if I am a sole proprietor or independent contractor?

Yes. If you are an individual who operates under a sole proprietorship or as an independent contractor, you may include wage, commissions, income, or net earnings from self-employment or similar compensation as Payroll Costs.

Can you include payments to 1099 and independent contractor workers for purposes of loan forgiveness?

No. Independent contractors can apply for a PPP loan on their own, so they do not count for purposes of a borrower’s PPP loan calculation.

What happens if you misuse the PPP loan funds?

The SBA will direct you to repay misused amounts. If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud. The SBA will also have recourse against a shareholder, member, or partner of borrower for the unauthorized use.

Are forgiven PPP dollars considered cancellation of indebtedness income for federal tax purposes?

No. Unlike normal circumstances where canceled debt is taxable, cancellation of indebtedness income will not apply to loan forgiveness in the PPP program.

Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?

No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.

Can a seasonal employer that elects to use a 12-week period between May 1, 2019 and September 15, 2019 to calculate its maximum PPP loan amount under the interim final rule issued by Treasury on April 27, 2020, make all the required certifications on the Borrower Application Form?

Yes. The Borrower Application Form requires applicants to certify that “The Applicant is eligible to receive a loan under the rules in effect at the time this application is submitted that have been issued by the Small Business Administration (SBA) implementing the Paycheck Protection Program.” On April 27, 2020, Treasury issued an interim final rule allowing seasonal borrowers to use an alternative base period for purposes of calculating the loan amount for which they are eligible under the PPP. An applicant that is otherwise in compliance with applicable SBA requirements, and that complies with Treasury’s interim final rule on seasonal workers, will be deemed eligible for a PPP loan under SBA rules. Instead of following the instructions on page 3 of the Borrower Application Form for the time period for calculating average monthly payroll for seasonal businesses, an applicant may elect to use the time period in Treasury’s interim final rule on seasonal workers.

COVID-19 Updates and Resources for Small Businesses

The CARES Act is a coronavirus relief/economic stimulus bill that provides debt forgiveness and offers two loan programs for small businesses, the Paycheck Protection Program Loan and the Economic Injury Disaster Loan (EIDL), also known as an SBA Disaster Loan.