The 3 Things You'll Need To Get PPP Forgiveness
If you received a Paycheck Protection Program (PPP) loan you are going to, at some point, apply for forgiveness.
Unfortunately, the original PPP forgiveness calculations have morphed into a complex, bureaucratic maze of rules and requirements. To figure out what forgiveness application to use and what specific calculations will be required for your business, my advice is that you should get help from your accountant and spend some time on the Treasury Department's website which has all the rules you'll need to know.
Depending on the size of your loan and the nature of your business, obtaining forgiveness may be as simple as filling out a form and submitting it -- without submitting any supporting documentation. Regardless, you’ll still need to make sure you have the documentation available just in case there are any questions or issues. You’ll certainly need to have your bank account statements, a photo ID (e.g. driver’s license, passport) and your Small Business Administration (SBA) loan number available, which can be found on your loan documentation from your bank.
And whether you’re required to submit proof or just have it on hand, you’ll still need to make sure you’ve got these three key things ready for forgiveness:
1. Payroll Expense Documents
You may be required to justify the actual payroll expense of your employees. To do this, make sure you have these documents readily available:
- Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
- Tax forms (or equivalent third-party payroll service provider reports) for the applicable periods:
- Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941);
-State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state; - Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the Borrower included in the forgiveness amount
- Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941);
As an owner of a business you can also submit your compensation for forgiveness (up to $100,000).However, it’s kind of tough to do this because many business owners don’t take salaries or they take money out of the business through a combination of salaries and distributions.So the calculation will need to be based on the best information available.To prove owner compensation replacement payments, you’ll need to provide:
- A 2019 Schedule C (or January to February 2020) for sole proprietors;
- 2019 1099-MISC forms (or January to February 2020) for independent contractors;
- A 2019 Schedule K-1 (or January to February 2020) for partnerships;
- Check images, OR annotated bank statement.
2. Headcount Records
You may have to justify that you've restored your employee headcount from a period before the pandemic to the end of your forgiveness period. Make sure you have these readily available:
- Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941);
- State quarterly business and individual employee wage reporting;
- Unemployment insurance tax filings reported, or that will be reported, to the relevant state.
You will need to figure out Full Time Equivalent employees (FTEs). Two options for calculating the number of FTEs are (1) calculating based on actual hours worked or (2) simplified approach of using an FTE of 1.0 for employees working 40 hours or more and 0.5 for employees working less than 40 hours in a week. You can elect the option that is more favorable to you and that option must be used to calculate all FTEs for all reference periods.
Once that’s done, make sure your documentation will support these baselines:
- Average number of FTE employees on payroll per month employed by you between February 15, 2019 and June 30, 2019 or January 1, 2020 and February 29, 2020.
- If you’re a seasonal business then you can use the average number of FTE employees on payroll per month you employed between February 15, 2019 and June 30, 2019 or January 1, 2020 and February 29, 2020 or any consecutive 12-week period between May 1, 2019 and September 15, 2019.
3. Non-Payroll Expenses Support
You may have to justify the expenses you're submitting that are non-payroll related, such as mortgage interest, rents and utilities. Make sure you have these readily available:
- Business mortgage interest payments:
A copy of your lender amortization schedule and receipts or cancelled checks verifying eligible payments or lender account statements from February 2020 and the months of the forgiveness period (depends on if you chose 8 or 24 weeks) through one month after the end of the forgiveness period verifying interest amounts and eligible payments. - Business rent or lease payments:
- Copy of current lease agreement and receipts or cancelled checks verifying eligible payments from the forgiveness period; or lessor account statements from February 2020 and from the forgiveness period through one month after the end of the forgiveness period verifying eligible payments.
- Business utility payments:
Copy of invoices from February 2020 and those paid during the forgiveness period and receipts, cancelled checks, or account statements verifying those eligible payments.
Got all that? Fall asleep yet? Well…don’t. Pour a cup of coffee, grab your accountant and make sure you’ve got all this stuff available. Your application requirements will depend on the size of your loan and the nature of your business. But even if you're not required to submit documentation supporting your expenses you're still required to have that documentation available in case there are questions. The above documentation will apply in all cases. So get your books in order!