Using your Paycheck Protection Program (PPP) Loan
Getting your Paycheck Protection Program loan is only the start. Now it’s time to make sure you use your funds correctly and take steps to meet the criteria for loan forgiveness. We're closely watching for updated guidance from SBA and the US Treasury regarding PPP loans and forgiveness. Here, we’ll cover what you need to know about your PPP loan, based on what we know so far. As always, reach out to your lender if you have any questions. We understand the importance of this loan for your business, and we’re here to help.
There are four main aspects to using your loan correctly and receiving loan forgiveness.
- Use funds for eligible uses only, within the 24 weeks following the loan disbursement date
- Maintain the number of employees
- Maintain the amount of employee payroll
- Provide documentation to your lender regarding the use of funds
The loan may be fully forgiven when funds are used correctly and criteria is met. The Paycheck Protection Program Flexibility Act brought some changes to PPP loan forgiveness. See the US Tresury and SBA joint press release for a summary of key changes.
We'll summarize some key details regarding forgiveness here. For more detailed information, see the SBA's interim final rule, revisions to the interim final rule following the Paycheck Protection Program Flexibility Act and the loan review procedures and borrower responsibilities. For the most up-to-date information, visit the SBA and US Treasury websites.
1. Use funds for eligible purposes only
First, let’s look at how you can use your funds. Using your funds for only the eligible uses will help you take advantage of loan forgiveness. If you do not use your funds according to the requirements and within the first 24 weeks, you will not be able to take advantage of the full loan forgiveness.
Eligible Payroll Costs (must account for at least 60% of total loan proceeds)
You will need to use 60% of your PPP funds for eligible payroll costs. The following are approved payroll costs:
Compensation of employees with a principal residence in the United States, up to a maximum of $100,000 on an annualized basis per employee.
- Salary, wages, commissions and tips
- Vacation and parental, family, medical, or sick leave (please note, excluded are qualified sick and family leave wages for which credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act.)
- Allowance for separation or dismissal
- Employer-funded retirement plans
- Employer-funded health care costs, including Insurance premiums
- State and local taxes assessed on employee compensation
Sole proprietorships and independent contractors can include wages, commissions, and income or net earnings from self-employment. This is also capped at $100,000 per employee on an annualized basis.
Other Eligible Expenses (maximum of 40% of total loan proceeds)
You may use up to 40% of your PPP funds on these additional eligible expenses.
- Interest payments on debts incurred prior to 2/15/2020, including mortgage interest
- Rent on leases dated prior to 2/15/2020
- Utility payments, if service began prior to 2/15/2020
- Repayment of an Economic Injury Disaster Loan (EIDL) that was received between January 31 and April 3, 2020
Using your funds in the correct ratio of payroll to other eligible expenses is an important part of your loan forgiveness. Also keep in mind, no other expenses are eligible for forgiveness, aside from those listed above.
2. Maintain required number of employees
PPP loans should be used to maintain or quickly rehire employees. You’ll need to keep the same amount of full-time equivalent employees (FTEs) to obtain the maximum loan forgiveness.
To determine if you meet the employee count requirement for maximum forgiveness, you will need to compare your FTE count during the covered period. In general this is February 15, 2020 to the end of the 24th week following your loan funding, though SBA does offer some options for alternative covered periods in their guidance. To obtain the maximum forgiveness, that number must not decline when comparing FTEs for those two dates. Guidance from the SBA does offer some allowances for instances where you tried to rehire an employee but they declined. Visit the SBA’s interim final rules for more information.
In general, a reduction in FTE employees during the covered period or the alternative payroll covered period reduces the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees.
3. Maintain employee payroll
In addition to maintaining employee count, Payroll Protection Program loans also have a salary level requirement for maximum loan forgiveness. Your total payroll costs cannot be reduced by more than 25%. Your loan forgiveness will be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 in 2019.
In general, you will need to compare your payroll from February 15, 2020 to the end of the 24th week following your loan funding. Again, SBA guidance offers some alternate schedules. To make the calculation, determine your average weekly totally payroll costs, remembering to exclude compensation paid to any employee that exceeds $100,000 annually. Then multiply by 24. Next, calculate total payroll costs for the 24 weeks following the date of funding. When comparing the two, you will want the second calculation to be 75% of the first.
To ensure that borrowers are not doubly penalized, the salary/wage reduction in forgiveness applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction. Learn more from the SBA's initial interim final rules.
4. Provide documentation to your lender
To request loan forgiveness, you’ll need to provide documentation to your lender. Documentation should verify the number of employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. We will soon have available a portal that allows borrowers to submit their documentation and forgiveness application electronically. Watch your email for updates on the portal and keep your records in the meantime.
How to repay your loan
Payments are deferred until the date on which the amount of loan forgiveness is remitted to the lender. Keep in mind, interest will continue to accrue over this period. You may not have a payment due after the deferral period if you meet the full loan forgiveness requirements. For PPP loans originated June 5th or later, the maturity will be five years at 1% interest and there are no penalties for early payment.
We’re here to help
We want to help you obtain as much loan forgiveness as possible. At The Bank of Missouri, our relationship with you extends far beyond signing the paperwork for your loan. We’re here for you throughout the lifetime of your PPP loan. Please reach out to your lender if you have any questions about using your funds correctly or obtaining loan forgiveness. You can also see helpful program information and FAQs at the US Treasury website.