Updated: Jan 8
For many PPP loan borrowers that obtained a loan in the spring of this year, there is a high likelihood that the PPP loan of two and a half months (i.e. 10 weeks) of payroll dried up for you a long time ago. Even those borrowers who obtained loans near the end of the application window will find their funds whittling down in the next few weeks. Therefore, your attention has likely shifted towards the loan forgiveness process and application, if it has not been there already for the past few months.
Understand your bank’s process
As we have stated in our previous communications, the first thing borrowers will want to understand is their respective bank’s process. Many of the larger banks have created their own portals to accept the necessary data points and documentation. Therefore, in those circumstances, while preparing the SBA’s PPP forgiveness form may be helpful, borrowers will likely not be submitting that to their bank. Smaller banks may be more accommodating or even require the SBA’s forgiveness application. Additionally, certain banks are currently only accepting forgiveness applications for loans over a certain dollar threshold, which could be $150,000 or even $2 million loans. With the uncertainty around automatic and modified forgiveness, banks have been reluctant to accept forgiveness applications below those thresholds. They feel their effort could dramatically diminish if an automatic or modified forgiveness process is agreed upon within Congress. Therefore, understanding your bank’s situation is the first critical step in this journey.
Key facts about PPP loan forgiveness
Due date – While there is no defined due date to submit your PPP loan application, borrowers should understand that loan payment requirements begin 10 months following the end of the covered period. Keep in mind the Paycheck Protection Program Flexibility Act (P.L. 116-142) automatically extended the covered period of all loans to 24 weeks (with an allowable election back to 8 weeks for certain loans acquired prior to June 5, 2020). Therefore, borrowers may start their 10-month clock upon the end of a 24-week covered period, regardless of whether an 8-week covered period election is claimed.
Filing before the end of the covered period – While filing early, prior to end of a covered period, is permissible, there is a catch. Filing early limits the maximum eligible compensation for both employees and owner-employees. Such a reduction is determined by the pro-rata percentage of weeks claimed divided by the maximum number of weeks allowable for the covered period (i.e. 8 or 24) For example, if a borrower claims a 24-week covered period, but files for forgiveness after week 14, the maximum eligible compensation would be: Employee: (14 / 24) x $46,154 = $26,923 Owner-Employee: (14 / 24) x $20,833 = $12,152 In the above example, an Owner-Employee’s maximum eligible compensation when filing after 14 weeks and claiming a 24-week covered period is actually lower than the maximum available under the 8-week covered period, $15,385. Therefore, while your PPP funds may have dried up and your calculations show that you are scheduled to obtain full forgiveness, it would behoove borrowers to wait until after the conclusion of their covered period before filing their forgiveness applications to ensure their maximum eligibility is not inadvertently limited.
Salary and Wage Reduction – In addition to the above limitation to maximum eligible compensation when filing early for forgiveness, any reductions for hourly wage rates or annualized salaries are extrapolated over the entire covered period. For example, if a borrower determined that during Q1 2020 an employee’s hourly wage rate was $25/hour, but during the covered period, the company decided to reduce that wage rate to $15/hour to limit their cash burn