PPP Forgiveness Executive Summary

November 4, 2020

12:05 AM

This executive summary is intended to give you general guidance and is not meant as expert accounting advice.

My goal in writing this short article is to encourage those that have received a Paycheck Protection Program (PPP) loan, or if your client did, to not go at this forgiveness form alone, as there are a few key trip points or “gotchas.” Do your research. The biggest gotcha is the FTE Quotient. Even if you spend one hundred percent of your loan proceeds on payroll, you could still end up with a loan balance.

As of the date of this writing (November 2, 2020), I don’t anticipate any changes to the forgiveness form or process coming soon, so we have to deal with what we have as a statute right now. The article below is a great resource to go over with your PPP clients to work through this process together.

For more information on this topic, register for my webinar, "Guide to Paycheck Protection Program (PPP) Loan Forgiveness" with Insightful Accountant on December 9 at 12:00 p.m. Eastern Time. You can register here.

PPP Forgiveness form OMB Control Number 3245-0407

The current correct form to use for PPP Forgiveness is OMB Control Number 3245-0407, which consists of five pages. The first four pages must be submitted for forgiveness and the last page is informational. Here’s a breakdown of what to look for on each page:

Page 1 is the main PPP forgiveness form. Don’t be fooled by the eleven lines. Two lines, line 5 and line 7, involve supporting schedules and calculations the other lines are simple summaries or calculations. Lines 5 and 7, therein lies the complexity in this process.

Page 2 is a signature and certification page. No one will verify all this upfront but you will be held responsible if you lie on this form. They have already audited many businesses that have falsely obtained PPP loans.

Pages 3 and 4 involve detailed calculations. If you have more than seven employees making less than $100,000 per year, or more than four employees making more than $100,000 per year, you will probably need to use a spreadsheet or other software to create supporting schedules to include with this information.

Page 5 PPP Borrower Demographic Information form (optional)

Choosing your Covered Period

Calculate your forgiveness by examining both options for the covered period. You have two choices of a covered period:

An eight-week period starting on the day after you received your loan.
A twenty-four-week period starting on the day after you received your loan and ending either before or on December 31, 2020.

Walking down the form step by step

Make sure you or your client has the records to back up what you claim on your form. As of now, they are not requiring proof when filing the form but if you get audited you will need to produce the supporting documents quickly. Why quickly? How important is sleep to you? Any kind of government audit tends to really mess up a sleep pattern so it is my advice to get help so you are not doing this alone. Just someone else to talk with in the process will be invaluable in my opinion.

Let’s go line by line down the form and I will give you some guidance. A few things apply to all cost items below:

Contracts for any cost item must have been in place before 2/15/20.
Costs to be included must have been paid during the measurement period not just accrued (if you do not understand the word accrued that is all the more reason to get a CPA’s help).

Line 1. Payroll Costs – Includes anything related to payroll with the exception of FICA and FUTA payments.

Line 2. Business Mortgage Interest Payments – A simple summary during the measurement period.

Line 3. Business Rent or Lease Payments – A simple summary during the measurement period.

Line 4. Business Utility Payments – Includes utility items like water, electricity, Internet access, telephone, gas, sewage, etc. during the covered period.

Line 5. Total Salary/Hourly Wage Reduction – If you lowered an employee's pay during the covered period more than 75% (annualized) when compared to the payroll from January 1, 2020 to March 31, 2020 (annualized), then you will not be forgiven the dollar-for-dollar amount of 75% below the January to March average. You need to calculate this number per employee and not in summary. There are many rules to help you with employees that quit or refused to work, etc. Again, therein lies the complexity of this process.

Line 6. – Simple Math – Add lines 1-4 and subtract line 5. This is where you reduce your forgiveness amount for the reduction of pay.

Line 7. FTE Reduction Quotient – If you meet a Safe Harbor (from below), then the number is 1.0 here. If not, then the calculation becomes more complex. This one can really reduce your forgiveness amount quickly so pay close attention to these Safe Harbors and FTE calculations.

Line 8. Modified Total – This is where you possibly reduce your forgiveness amount from line 6 by the FTE Reduction Quotient. If your FTE Reduction Quotient is 1.0, then there is no reduction. This now becomes one of your three possible forgiveness amounts.

Line 9. PPP Loan Amount. – Simply put your PPP loan amount here. This now becomes one of the three possible forgiveness amounts.

Line 10. Payroll Cost 60% Requirement – Simple math. Take the total of line 1. Payroll Costs and divide it by .60. This now becomes one of your three possible forgiveness amounts.

Line 11. Forgiveness Amount – The smallest of lines 8, 9, or 10. This is how they limit your forgiveness amount with the smallest of the three above.

Safe Harbors for FTE Reduction Quotient

If you meet any of these three Safe Harbors, you put a 1.0 on line 13 of PPP Schedule A and on line 7 of the main form. While any of these will satisfy the FTE Quotient, you still need to satisfy the reduction of pay test mentioned for line 5 above. If you do not satisfy one of these three Safe Harbors, then you need to fill out the PPP Schedule A Worksheet in detail.

The first Safe Harbor has no number (don’t ask why).

If you have not reduced the number of employees or the average paid hours of your employees between January 1, 2020 and the end of the Covered Period, you have met this Safe Harbor. Again, this is for no reduction in employees or average paid hours.

Safe Harbor 1 – This is the big Safe Harbor that most businesses will fall under. If you were unable to operate at the same level of business activity between February 15, 2020 and the end of the Covered Period due to compliance 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 for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19, you meet this safe harbor.

Safe Harbor 2 – If you had the same or greater number of FTEs during the covered period than your FTEs on February 15, 2020, then you meet this Safe Harbor.

In conclusion, please do not go it alone. Get some professional help and look at all your options. The government tried their best to hand money to those trying to stay in business but the forgiveness process got a bit disjointed. I certainly hope this article helps.