How Does the PPP Loan Forgiveness Work? Our Proactive Guide for Borrowers



The Paycheck Protection Program (PPP) is a loan designed for employers to keep their employees working. It has been fast-tracked through Congress and the financial system so it reaches businesses desperate for relief. Many businesses who have been accepted into the PPP are beginning to receive lender disbursements – Thus starting the 8-week period that could qualify for forgiveness. The problem is, as of mid-April, we are still waiting for Treasury to issue additional guidance on exactly how to qualify for that forgiveness.

We know that incomplete guidance can make it difficult to estimate forgiveness and track PPP spending accurately. To help you stay organized, our team has created “Proactive PPP” guidance below to help you stay in front of the forgiveness provisions in the CARES Act that we know now and be prepared to address additional provisions when they are clarified. Contact your Lurie advisor for questions on your unique business situation.

Related Resource: Download Our PPP Organizer

When does the 8-week loan forgiveness period begin?

The 8-week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower. The lender must make the first loan disbursement no later than 10 calendar days from the date of loan approval. Thus, the time is now to get your accounting systems ready. 

The PPP Loan is 100% Forgivable, But There Are Strings Attached

A key feature of the PPP is tax-free forgiveness of the loan. The catch is, about two months from now, you will need to explain to the bank and the Small Business Administration how you spent the money. And your explanation will determine how much of the loan the bank forgives.

However, if you can’t prove – via your accounting records and your documentation – that you spent the loan how it was intended, you will owe money when your loan is due.

So, what steps can take now to be in the best position when you need to have that discussion with your lender months from now? Clearly you have a lot to manage as a business owner – but we recommend you take these practical steps now.

We call them Proactive PPP Steps.

Your Proactive PPP Plan - 3 Important Steps

Proactive PPP Step 1: Create a Process in Your Business, Now.

  • Forecast payroll costs over the 8 week covered period. To be eligible for forgiveness you should plan to spend at least 75% of the PPP funds on payroll, group health benefits, and retirement benefits. Consider whether changes in the timing of your payroll or when retirement contributions are made can help you reach that all important 75% threshold.
  • Create a system of internal controls to monitor and ensure that PPP funds are used solely for allowed expenses. For example, you could establish a new bank account for PPP loan proceeds, so that these funds are not commingled with your normal operating funds. Then fund auto-payments to your third-party payroll service or utility provider directly from this account.
  • Establish account codes or sub-codes in your company’s General Ledger to track and categorize each component of covered expenses.
  • Maintain a record of FTE’s on staff during each pay period during the 8 week covered period. Consider developing a plan to re-hire any employees laid off between 2/15/2020-4/26/2020. Reducing your number of FTEs during the 8 week period may reduce the amount of forgiveness but if they are re-hired by 6/30/2020 you may avoid that reduction.

Note: If you do use PPP loan proceeds to pay for non-payroll expenses, be sure to retain documentation supporting these amounts. You will need to clearly demonstrate you have stayed below the 25% threshold.

Proactive PPP Step 2: Help Your Lender Help You.

There are a number of unanswered questions as to how the loan forgiveness process will play out, especially since part of the equation involves your lender or banker.

In order for the PPP loan amounts to be forgiven by the Small Business Administration (SBA), The PPP lender (Bank) is required to make a decision on loan forgiveness no later than 60 days after an application has been submitted. Thus, if your lender is a stakeholder in whether or not your loan will be 100%, partially or not-at-all forgiven – you want them on your side. Most banks will want your repeat business, but you need to do your part to help them, help you.

We recommend you plan to get all documentation ready and organized, so it is easy (and quick) for your lender to send back to the SBA with a clean bill of health – financially speaking. There are numerous pieces your lender will need to prepare, and the SBA may add more, including:

  • Application requesting loan forgiveness.
  • Documentation supporting payroll costs payments.
  • Documentation supporting other covered expense payments.
  • Calculation supporting at least 75% use of PPP loan funds on payroll costs.
  • Documentation supporting the calculation of average FTE’s during the 8 week covered period.
  • Documentation supporting the calculation of average FTE’s during the comparison period (either of: 1/1/2020-2/29/2020, or 2/15/2019-6/30/2019).
  • Certification from the borrower affirming the extent of requested loan forgiveness.
  • Any other documentation the SBA determines necessary.

What Documentation Could You Offer to Support Your Case?

  • Payroll registers and ACH transfers to the payroll company. If you work with a PEO you will want to save your payroll invoice supporting the payroll costs, employee benefits, and retirement benefits paid.
  • Utility bills and invoices from your electricity, gas, water, telephone, and internet providers .
  • Historical statements showing utility services were in service before 2/15/2020.
  • Rent statements and/or coupons and receipts showing rent was paid during the forgiveness period.
  • Copy of lease showing lease was in force before 2/15/2020.
  • Mortgage and/or other debt coupons or monthly statements showing mortgage interest was paid.
  • Copy of mortgage documentation showing that the mortgage is a liability of the PPP borrower, is a mortgage on real or personal property, and was incurred before 2/15/2020.
  • Cancelled checks, receipts, bank statements and any other documents proving a payment was made. 

Proactive PPP Loan Step 3: Retain

The final question (hopefully) is “how long do I need to retain this information?” While we are still waiting for Treasury to issue additional guidance on loan forgiveness terms under the Paycheck Protection Program (PPP), we recommend you retain your documents:

  • Until the SBA has resolved any audit of the PPP borrower or PPP lender in connection with the borrower’s loan application and/or the borrower’s loan forgiveness application; OR
  • Until the SBA audit period has expired.

For More Information

Our team will continually update our COVID-19 Information Hub with guidance and resources. In the meantime, please don’t hesitate to reach out to your Lurie advisor with your questions.

We are here to help. Click here to contact us. 

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