The Path to Payroll Protection Program Forgiveness

Ankit Chudgar is asking for forgiveness.

The owner of Primo’s Pizzeria in Louisville, Kentucky, Chudgar was one of thousands of restaurant owners to secure a Paycheck Protection Program (PPP) loan in 2020 from the federal government’s Coronavirus Aid, Relief and Economic Security Act.

As the COVID-19 pandemic hammered the American economy last spring, the U.S. government dispensed PPP loans to help small businesses retain employees and stabilize an anxious economy. Chudgar applied in April and received about $40,000 to help cover expenses at his one-year-old pizzeria.

Provided a business owner hits specific criteria, namely directing most of the PPP funding to employee compensation over a defined time period, the PPP loan would be forgiven, the legislation said. Chudgar and thousands more like him are now seeking absolution.

“I want to know the steps I need to take,” says Chudgar, who has remained in regular contact with his bank to understand the forgiveness process. “That’s a lot of money hanging over us and it changes our day-to-day decisions.”

As is commonplace with federal legislation, PPP funding arrives with its share of caveats and fine print. With the help of Brian Smith, director of compliance for Restaurants Solutions, Inc., a Colorado-based restaurant management firm, as well as information from the U.S. Small Business Administration (SBA) and state restaurant associations, Pizza Today addresses key PPP-related questions.

To earn forgiveness, how – and when – do I need to spend my PPP money?

While PPP recipients like Chudgar were initially required to spend at least 75 percent of their loan amount on employee compensation within eight weeks, the PPP Flexibility Act passed in the summer extended that time frame to 24 weeks. The Flexibility Act also reduced the employee compensation amount to 60 percent, thereby enabling business owners to spend up to 40 percent of PPP funding on expenses such as rent or utilities.

Though restaurants could devote PPP funds to non-payroll expenses, and likely with sound reason for doing so, Smith says those who devoted every PPP penny to payroll costs should  have “more streamlined reporting … when it comes to meeting the loan’s reporting requirements.”

Are only salaries or wages covered by loan forgiveness or do tips and other bonuses count as well?

According to the SBA, payroll costs include all forms of cash compensation paid to employees, though that compensation is limited to $100,000 per employee on an annualized basis.

What’s the deal with the full-time equivalent (FTE) employee exemption?

Part of the forgiveness process includes a calculation to determine if business owners have reduced staff. If so, the forgiveness amount could decrease.

However, exemptions exist if a borrower can document good-faith efforts to rehire previous employees, such as furloughed staff, or bring similarly qualified individuals into vacant positions. To capture that exemption, borrowers must provide written records showing offers to rehire past employees and their rejection of such offers as well as reasonable efforts to hire new staff.

In addition, borrowers unable to return to pre-pandemic business levels due to compliance with public health orders, including mandated restaurant closures, have a safe harbor from reductions in forgiveness due to FTE employee counts.

And what about owner’s compensation? Can I use PPP funding to pay myself?

Yes, though it is limited. According to the SBA, “the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at $20,833 per individual in total across all businesses in which he or she has an ownership stake.” (A caveat: if borrowers received their PPP loan before June 5, 2020 and elected to use an eight-week covered period, the cap drops to $15,385.) In contrast, employee compensation is capped at $46,154 over a 24-week covered period.

“Congress issued PPP funding to keep employees employed, not owners paid,” Smith says.

I received an EIDL grant, too. Does that affect PPP forgiveness?

In COVID-19’s early days, many small businesses received an Economic Injury Disaster Loan (EIDL) in advance of their PPP loan. An existing government program, EIDL pushed money into the economy as PPP got up and running.

If a business received an EIDL advance in addition to a PPP loan, the SBA will deduct the amount of EIDL funds from the PPP forgiveness amount.

“Quite simply, you can’t have both,” Smith says.

When can I apply for forgiveness?

Last fall, many banks began suggesting that small business owners who received PPP funding begin applying for forgiveness as soon as possible. Borrowers need not feel such urgency. In fact, a loan forgiveness application may be filed any time before the maturity date of the loan, which is either two or five years from loan origination.

But here’s the nitty-gritty from the SBA: “If a borrower does not apply for loan forgiveness within 10 months after the last day of the borrower’s loan forgiveness covered period, [then] loan payments are no longer deferred and the borrower must begin making payments on the loan.”

Got it? PPP recipients have a 10-month window from the end of their coverage period to apply for forgiveness.

“After 10 months, you can still ask for forgiveness, but you also need to start making payments,” Smith says.

Given how fluid things are with COVID-19, where can I access the most up-to-date, relevant information on PPP loans and forgiveness?

Yes, things are fluid. Very fluid. Into late 2020, for instance, there were lingering – and critically important – questions about the deductibility of expenses covered with PPP funding left unanswered.

In conjunction with the National Restaurant Association, state restaurant associations have been monitoring developments out of Washington, D.C. alongside any relevant local or state matters that might come into play. In addition, the banks that issued PPP loans should be actively following legislation and guidance out of Washington as well to support restaurant owners.

How long should I keep my PPP records?

Records for all PPP loans must be kept for up to six years in the event of an audit.

“And I do think there will be audits here, so good documentation will be important,” Smith adds.

Daniel P. Smith  Chicago-based writer has covered business issues and best practices for a variety of trade publications, newspapers, and magazines.