Many of our Southern Maine payroll clients are thinking about applying for forgiveness of their second PPP Loan. If you fall into this category, this blog will give you some tips on filing for loan forgiveness. Please feel free to contact us, whether you are a client of Local Economy Payroll or not. We’ll be happy to discuss the process of applying for PPP Loan forgiveness with you.
WHAT FORM SHOULD YOU USE TO HAVE YOUR LOAN FORGIVEN?
There are three forms available to use when you apply for forgiveness. The one you will use depends on several factors.
- For loans of $150,000 or less, use Form 3508S; BUT, if your company and its affiliate companies received PPP loans in excess of $2 million, you can’t use this form. (The IRS can’t do anything without a “BUT”. You know that!)
- If your PPP loan was more than $150,000, you can use Form 3508EZ, another simplified version of Form 3508, if one of the following apply to you:
- You were self-employed with no employees at the time of your application, OR
- You had employees, but you didn’t decrease their compensation by more than 25% during the PPP coverage period as compared to the period from January 1 through March 31, 2020, and you did not reduce the number of employees or the hours they were paid from January 1, 2020 through the end of the PPP forgiveness coverage period, OR
- You didn’t decrease employee’s salary or wages by more than 25% during the PPP coverage period as compared to the period from January 1 through March 31, 2020, and you were unable to operate during the PPP Coverage Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.
- All others must use the more complicated Form 3508 for loan forgiveness.
WHAT IS YOUR FORGIVENESS PERIOD?
The Economic Aid Act revised the loan forgiveness covered period such that now the PPP borrower is allowed to decide the length of its covered period, so long as it is between eight weeks and 24 weeks. The length of your PPP Loan Forgiveness Period will be especially important if you think you may qualify for the Employee Retention Tax Credit (ERTC), because payroll amounts used for PPP Loan Forgiveness aren’t available for the ERTC, therefore, you’ll want to make your Forgiveness Period as short as possible.
How do you decide what your coverage period should be? The key factor is payroll expense, which has to make up at least 60% of your forgiven loan amount. Payroll costs include:
- Wages
- State and Local Taxes
- Group Health Insurance Benefits
- Retirement Benefits
To determine the length of your forgiveness period, calculate 60% of your loan amount and determine how many weeks it takes for your eligible payroll costs to equal 60%. The shortest allowable forgiveness period is the lesser of this amount, or 8 weeks. If you’re a client of Local Economy Payroll, please feel free to contact us. We can provide you with documents to support your salary and wage costs, as well as the cost of state and local taxes. We won’t be able to provide the health insurance and retirement benefit portion, however.
The remaining 40% of the forgiven loan amount can be made up of other operating costs including:
- Interest paid on a mortgage payment
- Rent paid on your facilities
- Utility payments
- Payment for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records, and expenses.
- Payments made for the supply of goods that (A) are essential to the operations of the borrower at the time at which the expenditure is made; and (B) is made pursuant to a contract, order, or purchase order (i) in effect at any time before the Covered Period with respect to the applicable covered loan; or (ii) with respect to perishable goods, in effect before or at any time during the Covered Period with respect to the applicable covered loan.
- Business expenses specifically related to protecting employees and customers against Covid-19.
If the operating costs listed above equal or exceed 40% of the loan amount during the loan forgiveness period, you are all set. If the non-payroll costs don’t add up to 40%, you will need to extend the covered period and allow your payroll costs to be more than 60% of the total loan forgiveness amount.
If you qualify to use Form 3508S, you won’t need to submit documentation with your application for loan forgiveness; but you’ll need to have documentation on hand, and keep it for four years in case you’re audited. If you used form 3508EZ or Form 3508, you’ll need to submit documentation with your application to support the payroll and non-payroll expenses that you report. Non-payroll expenses can be supported with copies of invoices or copies of checks written to pay the expenses.
HINT: To facilitate the processing of your loan forgiveness request, arrange all your documents in a booklet. Start with a summary of your payroll expenses (Example 1), followed by the documentation to support your covered payroll costs. Follow it with an itemized summary of non-payroll expenses (Example 2), and the documents to support those expense claims. Arrange the supporting documents in the same order that they are reported on the summary page, and reference each document to a line item in the summary.
Anything you can do to make it easier for your lender to process your application will facilitate the process!
REMEMBER: You do not have to submit evidence of payroll and non-payroll expenses to your lender if you are using Form 3509S. You will, however, need to have evidence of the expenses, similar to that outline below, in case you are audited.
Example 1 – PAYROLL COST SUMMARY
GROSS PAYROLL
Payroll Costs for the Covered Period, March 7 through May 1, 2021 (8 weeks)
- Bi-weekly Payroll, paid on March 12: $ 5,800 (attach payroll report and highlight this total)
- Bi-weekly Payroll, paid on March 26: $ 6,300 (attach payroll report and highlight this total)
- Bi-weekly Payroll, paid on April 9: $ 6,050 (attach payroll report and highlight this total)
- Bi-weekly Payroll, paid on April 23: $ 5,850 (attach payroll report and highlight this total)
STATE UNEMPLOYMENT TAX
- Bi-weekly Payroll, paid on March 12: $ 145 (attach payroll report and highlight this total)
- Bi-weekly Payroll, paid on March 26: $ 157 (attach payroll report and highlight this total)
- Bi-weekly Payroll, paid on April 9: $ 121 (attach payroll report and highlight this total)
- Bi-weekly Payroll, paid on April 23: $ 146 (attach payroll report and highlight this total)
MEDICAL INSURANCE PREMIUMS
- March, 2021 $ 1,200 (attach medical insurance invoice)
- April, 2021 $ 1,200 (attach medical insurance invoice)
DENTAL INSURANCE PREMIUMS
- March, 2021 $ 300 (attach dental insurance invoice)
- April, 2021 $ 300 (attach dental insurance invoice)
TOTAL PAYROLL COSTS $ 27,569
PPP LOAN AMOUNT $ 45,000
Payroll Percentage 61%
Example 2 – OTHER COSTS SUMMARY
- Rent, March – $6,000 (attach cancelled check)
- Rent, April – $6,000 (attach cancelled check)
- Utilities, March – $1,050 (attach invoices)
- Utilities, April – $1,300 (attach invoices)
- Software License Fees – March $1,200 (attach invoices)
- Software License Fees – April $1,200 (attach invoices)
- Essential Supplies – March $1,550 (attach invoices)
- Essential Supplies – April $ 975 (attach invoices)
TOTAL OTHER COSTS $19,275
TOTAL PPP LOAN FOGIVENESS EXPENSES
$46,844