The keys to PPP loan forgiveness

If you received a Payroll Protection Program (“PPP”) loan under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, then you must comply with a detailed body of rules if you hope to have the Government forgive the loan.  If you fail to follow these rules, the Government will not forgive your PPP loan.

Section 1102 of the CARES Act (amending 15 U.S.C. §636(a)) allowed the Small Business Administration (“SBA”) to issue PPP loans to help American businesses impacted by the Covid-19 Pandemic.  Section 1102 of the CARES Act contained many rules that prevented many people from obtaining a PPP loan.  Many of the people and companies that received a PPP loan already know and navigated these rules.  However, following those rules does not mean the Government will discharge your PPP loan.  That is because Section 1102, by itself, only allows the SBA to issue the PPP loans.  A completely different portion of the CARES Act governs which loans will be discharged.

Section 1106 of the CARES Act (also amending 15 U.S.C. §626(a) controls which PPP loans will be discharged and which PPP loans won’t be discharged.  Many of the Section 1106 requirements are different than the Section 1102 requirements.  Worse, Section 1102 and Section 1106 give different definitions to the same terms.  For example, the term “covered period” under Section 1102 (controlling issuance of PPP loans) means the period February 15, 2020 through June 30, 2020.   However, the term “covered period” under Section 1106 (controlling which loans will be forgiven) means the 8-week period that begins on the date of the origination of the loan.  This has caused a lot of people to misunderstand the rules.  These misunderstandings will force many people who tried to follow all of the rules to repay some or all of their PPP loan.

The most important restrictions in Section 1106 governing forgiveness of PPP loans include:

1. You must use the PPP loan within the 8 week covered period that begins on the date of the origination of the loan.  This will force many employers to bifurcate their normal pay period on the date of the loan.
2. The amount that the government will discharge is reduced based on a formula that divides your current full-time employees by the number of full-time employees that you had during one of several comparison periods.  For example, if you have three full time employees, but had four during the comparison period, then the Government will discharge, at most, 75% of the PPP loan.  This can become a major issue if you let employees go or reduced employee hours (so they are no longer full time) in response to the Coronavirus pandemic.  Importantly, the CARES Act includes provisions that allow you to include re-hired employees in this formula in certain instances.    
3. The amount that the Government will discharge is also reduced based on a formula that looks to reductions in employee wages.
4. You should use at least 75% of the PPP loan for payroll as defined in Section 1102 of the CARES Act.  This means that amounts spent on expenses typically associated with payroll, such as employee income tax withholding, may not be dischargeable.

This list is intended to highlight the major rules that will impact most employers.  Numerous other special rules apply that may impact your business and govern things such as a) tips; b) sick leave; c) employee benefits; and d) employees making over $100,000 per year.  However, even if you follow all of these rules, the Government may still refuse to forgive your loan if you cannot prove that you did everything correctly.

You must prove that you comply with these and other rules if you want the Government to discharge your PPP loan.  Section 1106 of the CARES Act requires you to submit detailed financial information and documents including: a) your payroll tax returns; b) state income, payroll, and unemployment insurance filings; and c) receipts, transcripts, and account statements documenting expenses.  If you comingle your PPP loan with other business money, you will also have to comply with detailed tracing rules to show that the money you spent on payroll came from the PPP loan and not some other source.

We are experts in financial audits and have represented companies and individuals against the government for over 30 years.  We can help you understand the PPP Rules and organize your finances to help ensure the Government forgives the maximum amount of the loan.  If you are interested in our services, please put the following information together: 1) the date you received the PPP loan; 2) the amount of your PPP loan; 3) the bank account/s that you put the loan into; and 4) your 2019 and first quarter 2020 payroll tax return.  Once you have everything, please call us at (858) 481-4844 so we can discuss your options.