How to Qualify for PPP Forgiveness: 11 Expert Answers to Small Business Owner Questions
Wednesday, May 20, 2020
As more money flows from the Paycheck Protection Program, small business owners and lenders are eager to better understand how to ensure loans can qualify for forgiveness.
The U.S. Small Business Administration, charged with overseeing the nearly $700 billion coronavirus relief program, released some additional information for borrowers and lenders over the weekend. More guidance is expected to be coming soon.
Yet a month-and-a-half into the program, small business owners have a lot of unanswered questions. Syracuse.com has been posting regular updates and hosting Q&As with experts on the PPP. We’ve received dozens of responses and follow-up questions, especially as it relates to forgiveness of the loans.
We talked to Mark Schmidt, CEO of Syracuse-based Fund-Ex Solutions Group, a non-bank SBA lender and subsidiary of Bankers Healthcare Group. Schmidt previously worked for seven years as a managing director at Promontory Financial Group and served for 33 years with the Federal Deposit Insurance Corporation.
Schmidt reviewed reader-submitted questions and topics related to PPP loan forgiveness. He also helped interpret the latest information from the U.S. Small Business Administration.
Here are the answers he gave to 11 commonly asked questions from borrowers:
Do I really have to spend all the money in eight weeks?
Yes, Schmidt said — unless the law is changed.
The PPP was created by the Coronavirus Aid, Relief and Economic Security, passed by Congress and signed by the president. Apart from the funding allocation, the law also laid down some restrictions for the program.
The eight-week period to spend the money is one of those provisions, Schmidt said.
It might not make sense for all businesses, especially seasonal businesses or businesses that have had to remain closed due to the coronavirus shutdown. Schmidt said there is a lot of discussion among lawmakers to adapt or add to the program. He said businesses that are struggling to spend the money in the eight-week period might get some relief through further legislation.
“Those businesses really need to watch for news and changes in the law,” he said.
Can I use the loan to pay myself?
Sole proprietors and independent contractors were required to prove their annual income to their lenders during the loan application, likely by providing their most recent Schedule C (IRS Form 1040).
That form was used to calculate the amount of the PPP loan -- and can be used to calculate how much you can pay yourself as a business owner.
“I strongly suggest writing yourself a check,” Schmidt said. While people who are self-employed use different accounting practices and take income from their businesses at different points in the year, Schmidt is recommending they pay themselves with a check to cover their income over the coronavirus shutdown.
Write the check now, “just to be safe,” Schmidt says, and have a clear paper trail of how the PPP money was used.
Can I use the loan to pay officers or principals of my business or non-profit?
Yes, to an extent.
Just like the PPP allows sole proprietors to collect wages, it also allows you to pay partners, principals and officers.
But the program has restrictions so that no single employee can use the PPP to make the equivalent of $100,000 per year.
Schmidt did the math, and the cap works out to a maximum of $15,385, under the most recent regulations.
Schmidt noted again that the amount of your PPP loan is based on payroll costs that you could prove to your lender. That have should included partner, officer and principal pay, which is documented either through W-2s or the Schedule C net income form.
Schmidt said business owners should contact their lenders if they have any questions about who and how much can be paid through the PPP.
Can I use the PPP money to pay employees retroactively? For hazard pay or bonuses?
Yes, as long as it’s “within reason,” Schmidt says.
A lot of business owners are currently trying to figure out how to spend their loans before their eight-week periods expire. Some wrote to syracuse.com asking if they could pay employees for work during the shutdown retroactively. Others asked about hazard pay or bonuses.
Schmidt said that while the rules aren’t explicitly clear on this yet, he thought using the PPP funds to boost employee pay would be a good use of the money that falls within the spirit of the law.
The CARES Act and the PPP were really designed to keep people whole and get money into people’s hands during the coronavirus pandemic and subsequent economic crisis.
So, using the money to help out employees is just what this program was meant for. That means issuing checks now to pay employees retroactively if they took reduced wages during the initial shutdown.
Hazard pay, or increasing wages during a crisis, is an established area of the law, that Schmidt said he thought would also be a good use of the money.
Schmidt said it bonuses might be a way for business owners to spend the money in the allotted time frame and still qualify for forgiveness.
He urged business owners to use common sense when doling out bonuses: Don’t show favoritism or nepotism toward family members or certain workers, or you’ll have a different set of problems on your hands.
Do I have to use the money on payroll even if I don’t have work for my employees?
Yes, if you want to qualify for forgiveness, you must use 75% of the loan amount on payroll expenses.
Schmidt notes this has been one of the most hotly-contested parts of the program. Unlike the eight-week window provision, the percentages were not written into the law. Those were regulations promulgated by the U.S. Treasury and SBA.
Right now, 75% must be spent on payroll expenses, and 25% can be used for rent, utilities or mortgage interest payments.
Schmidt said he thought if any changes were made to the program, it might be to allow other eligible expenses, like personal protective equipment.
For now, business owners should do their best to stick to the spending percentage requirements if they want to qualify for forgiveness.
Is there any reason I can’t use all of the money on payroll?
No, there is nothing stopping business owners from spending more than 75% and even the full amount of the loan on payroll. Go for it, if you can. Schmidt said that’s a great way to ensure you’ll qualify for forgiveness.
Do I need to hire back all of my employees?
Yes, but there are exceptions, Schmidt notes.
Another forgiveness requirement is that small businesses must rehire or retain pre-pandemic levels of full-time employees.
There is some flexibility and there are exceptions, Schmidt said.
First, the PPP allows for business owners to calculate the number of employees they have to rehire based on one of two comparison windows: either a 4.5-month period in 2019 or the two-month period immediately preceding this crisis.
Schmidt says it’s a good idea to run the numbers for both periods and choose the one that works best for your business. If you’ve already applied, you’ve already chosen; the loan amount is based on payroll expenses from one of these periods.
If you are still applying, keep in mind that while the loan amount might be higher for one period, that’s also the number of employees you’ll be held accountable for having on the payroll.
Another exception will be made for small business owners to attempt to rehire employees, but they refuse to work. Employers will be required to document the refusal, but they won’t be penalized in terms of forgiveness if they take that step. So remember to get any refusals in writing.
Do I have to rehire all the same people to qualify for forgiveness?
The forgiveness will be based on the number of employees you’ve been able to rehire or retain. It is not based on who those employees are.
Do part-time employees count?
Yes. “Everyone counts,” Schmidt said.
He said one benefit of the information and application released by the SBA over the weekend is that the application and instructions include worksheets to help you calculate your number of employees.
Part-time employees count. It’s really based on the number of hours worked, Schmidt said. All employee weekly hours can be added up and divided by 40 to calculate the “full-time equivalency,” he said.
How long can I wait to rehire employees?
Technically, you have until June 30 to get your staffing levels back up.
But Schmidt notes there are pitfalls with waiting to the last minute to rehire employees.
“If you’re waiting on rehiring, it’s going to be very difficult to qualify for full forgiveness,” Schmidt said.
Remember, you have eight weeks to spend all the money, and 75% must be on payroll if you want to qualify for forgiveness. It would be impossible to do that and wait until June 29 to rehire everyone.
“Nothing here is real simple,” Schmidt said. "The devil is in the details.”
So why isn’t the program more flexible?
There are really only a handful of expenses that qualify for forgiveness under the PPP. And as the coronavirus pandemic and stay-at-home directives stretch on, eight weeks doesn’t seem like enough time to get businesses back up and running to bring in revenue.
So why not more flexibility in this program?
Schmidt points to a few things: One, the program is limited by the legislation that created it. Two, it’s also limited by the federal agencies overseeing it. Third, both the legislature and the agencies were primarily concerned with getting money into people’s pockets when this program was rolled out.
It makes sense that the program is so focused on payroll then, Schmidt said.
But it’s becoming increasingly clear that it’s not going to be enough to save many small businesses that are hurting because of the pandemic.
Schmidt is closely watching the U.S. Treasury and SBA, to see if they will adapt the regulations to make them more small business-friendly. He’s also looking at what’s happening in Washington, D.C. with additional relief proposals. He notes bill recently passed by the Democratic House of Representatives would make several tweaks to the program to give small business owners more freedom with the loans.
The SBA hinted it would be releasing more guidance soon. Schmidt is predicting that will come along sometime this week.
“Keep an eye on the news," he said.