How to Apply for Forgiveness from the Paycheck Protection Program (PPP)

“How do I get my PPP loan forgiven?” is a commonly asked question by family child care providers who have received this forgivable loan (a loan you don't have to pay back).

If you have not yet applied for this PPP loan, it’s not too late. August 8th is the deadline. For the latest information about this program and a list of online lenders who may be able to process your application, see my article, “New Changes in the Paycheck Protection Program.”

What is the process to get forgiveness?

It starts with you contacting your lender. Your lender may ask you to fill out one of their forms, or they may ask you to fill out the Small Business Administration “PPP Loan Forgiveness Application Form 3508EZ” or both. This information will then be passed on to the SBA for final approval of your forgiveness application. It’s not exactly clear how this will work. I recommend you contact your lender once you are ready to ask for forgiveness.

See below for a description on how to fill out Form 3508EZ and an accompanying checklist.

When can you start the process to get forgiveness?

Originally, the PPP loan had to be spent over 8 weeks, but recent SBA guidance now allows it to be spent over 24 weeks. This means you can choose to ask for forgiveness any time after 8 weeks. I would recommend not waiting until the 24 weeks are up before asking for forgiveness to avoid a last-minute backlog.

What can you spend the PPP on?

You can spend it on:

• Payroll for yourself and/or your employees

• The business portion of mortgage loan interest

• Rent and

• Utilities.

Note: Once you pay yourself, you can use this money for whatever you want, business or personal expenses. For example, you can’t use the PPP money to buy a fence. But, once you pay yourself, you can use that money to buy the fence or put money aside in an emergency fund, or do anything you want with it.

How do I determine the amount of payroll for myself?

Look at your 2019 Schedule C, line 31. That represents your annual profit from 2019. Divide this by 52 weeks and the result is your average weekly profit in 2019. You can pay yourself this amount each week with the PPP money and it will be forgiven. For example, if your annual profit in 2019 was $36,000, your average weekly profit was $692 ($36,000 divided by 52 weeks). Now you can pay yourself $692 each week. It doesn’t matter how much money you are currently making or losing.

How do I pay myself payroll?

In the above example, write yourself a check each week for $692. Put “PPP payroll” in the memo line. If you only have one bank account, write yourself a check and then deposit it back into the same account. If you have more than one bank account, transfer the money from one bank account to the other.

Can I spend all of the PPP money on payroll for myself?

Yes. Let’s say you earned $36,000 profit in 2019 (Schedule C, line 31). The maximum you can receive from the PPP is $7,500, based on your average monthly profit from 2019 multiplied by 2.5 (according to the PPP rules). In other words, $36,000 divided by 12 = $3,000 average month profit x 2.5 = $7,500.

In order to spend all $7,500 on your own payroll, you must spread it over at least 11 weeks to do so. You can’t pay yourself more each week than your average weekly profit from 2019. The average weekly profit from 2019 in this example is $692 ($36,000 divided by 52 weeks). Therefore, you can’t pay yourself more than $692 per week. To spend the entire $7,500 on payroll, it would take you 10.8 weeks ($7,500 divided by $692 = 10.8 weeks).

Note: even if you choose to spend all the PPP money on payroll for yourself, I strongly recommend you still keep receipts for your mortgage loan interest, rent and utilities in case you are asked for this information later.

How do I fill out the PPP Loan Forgiveness Application Form?

There is a new Form 3508EZ form that is much easier to fill out than the original forgiveness application form.

Here’s how to fill it out:

Business Legal Name: Use the name you put on your federal tax return. Your answer should match what you put on your application form.

DBA or Tradename: If you have one, list it. You are not required to have one. Your answer should match what you put on your application form.

Business TIN: Enter the same information you put on your application form

SBA PPP Loan Number: This should appear on the paperwork you got when your loan was accepted. If you can’t find it, ask your lender.

Lender PPP Loan Number: This should come from your lender (bank or online company).

PPP Loan Amount: Enter the amount you received, even if you are going to return some of it.

PPP Loan Disbursement Date: This is the date the money was deposited in your bank account.

Employees at Time of Loan Application: Enter 1 for yourself and 1 for each employee you had when you applied for the loan.

Employees at Time of Forgiveness Application: Enter 1 for yourself and 1 for each employee you had when you applied for forgiveness.

EIDL Advance Amount: If you received the $1,000 per employee EIDL “advance,” enter the amount here. If you got the EIDL “loan,” do not enter the loan amount here.

EIDL Application Number: If you got the EIDL loan, enter the number you received when you received it.

Payroll Schedule: If you paid employees, enter the payroll period in which you paid them. If you didn’t pay employees, enter the payroll period in which you paid yourself. It doesn’t matter which method you chose to pay yourself. If you choose “weekly,” you should be able to show that you paid yourself weekly.

Covered Period: Enter the first date you received the PPP money. The last date can either be 8 or 24 weeks after the first date. The last date cannot be later than December 31, 2020.

Alternative Payroll Covered Period: Leave blank.

If Borrower received PPP loans in excess of $2 million check here: Don’t check!

Forgiveness Amount Calculation:

Note: When filling out Lines 1-4, only enter amounts you spent during your Covered Period.

Line 1: Payroll Costs: Enter the amount you spent on payroll costs for yourself or your employees. You must spend at least 60% of the amount listed above under “PPP Loan Amount.” It can be up to 100%. See above under “Can I spend all of the PPP money on payroll for myself?”

Line 2: Business Mortgage Interest Payments: Multiply your mortgage loan interest by your Time-Space Percentage for the covered period you listed above. You don’t have to enter an amount here, but I recommend that you do so. Do not include prepayments.

Line 3: Business Rent or Lease Payments: If you had this expense, multiply the amount by your Time-Space Percentage for the covered period you listed above.

Line 4: Business Utility Payments: You can count water, gas, electricity, telephone, Internet) as a utility. Multiply by your Time-Space Percentage for the covered period you listed above. You don’t have to enter an amount here, but I recommend that you do so.

Line 5: Add the amounts on lines 1,2,3, and 4: Your total can be more than the amount you received from the PPP.

Line 6: PPP Loan Amount: List the same number as you entered above under “PPP Loan Amount” near the top of the form.

Line 7: Payroll Cost 60% Requirement (divide Line 1 by 0.60): This line can cause some confusion. The purpose of this line is to determine if you have spent at least 60% of the PPP money on payroll costs. You can spend more than 60%. Let’s look at an example. Let’s say Line 1 (Payroll Costs) was $5,000. $5,000 divided by 0.60 = $8,333.

Line 8: Forgiveness Amount (enter the smallest of Lines 5,6,7): Let’s look at several examples:

Example #1

You received $7,500 from the PPP and don’t have employees. You used all the money to pay yourself payroll over 11 weeks as described above. You would enter $7,500 on Line 1. Enter zeros on lines 2, 3 and 4. Lines 5 and 6 would be $7,500. Line 7 would be $12,500 ($7,500 divided by .60). Line 8 would be $7,500 because that is lower than line 7. Result? You can get the entire $7,500 loan forgiven by spending it all on yourself.

Example #2

You received $7,500 from the PPP and don’t have employees. You spend $7,000 on payroll on line 1. You spend $1,000 on Mortgage Interest on line 2 and your Time-Space% is 30%: $1,000 x 30% = $300. You spend $2,000 on Utilities on line 4: $2,000 x 30% = $600. Line 5 is the sum of these amounts or $7,900. Line 7 is $11,667 ($7,000 divided by .60). All of your expenses are forgiven since they are less than $11,667.

Example #3

Let’s say that in Example #2, you spent $4,000 on payroll and $3,500 on other expenses. Your total expenses on line 5 would be $7,500. Line 7 would be $4,000 divided by .60, or $6,667. Line 8 would be $6,667. Since $6,667 is the smallest of line 5 ($7,500) or line 6 ($7,500), you can only get $6,667 forgiven. This is because you didn’t spend at least 60% of the total PPP loan amount ($7,500) on payroll: $4,000 payroll divided by $7,500 = 53%.

On page 2 of the Forgiveness Application Form are several representations you must make. Initial each one. They ask if you are following all the rules in applying for forgiveness. At the bottom of the page it asks you to initial at least one of two items. The first one asks if you did not reduce the number of employees or the average paid hours of employees. If you didn’t have employees, check this box. Without employees you couldn’t have reduced their number or their hours. The second item asks if your business was unable to operate after February 15, 2020 until the end of the covered period at the same level as before February 15th because of government restrictions on your business. If you had employees, then you would need to check this box.

The third page of the Forgiveness Application Form ask you to give some demographic information about yourself. This is voluntary.

In the instructions to the PPP Loan Forgiveness Application Form 3508EZ there is a Checklist at the top of the page. You must be able to check at least one of the three boxes to be eligible for forgiveness.

• If you didn’t have employees, check the first box. The language of this box is confusing. You do not count yourself as an employee for this purpose, even though you are paying yourself payroll with the PPP money.

• Check the second box if you did have employees and did not reduce their wages by more than 25 percent and did not reduce the number of your employees.

• Check the third box if you did have employees and did not reduce their wages by more than 25 percent and you were unable to operate your business because of government restrictions. Do not submit this Checklist when applying for forgiveness.

What evidence do I need to show how I spent the PPP money?

Your lender may ask you to produce records for mortgage loan interest, rent and utilities. Save copies of bank statements or cancelled checks to show payments. Your lender may ask you to show evidence that you paid yourself. Show your cancelled checks that were made out to yourself or bank transfers. If you paid employees, show payroll records.

What if I don’t spend all of the PPP money before asking forgiveness?

You can either 1) return it or 2) keep it and it will turn into a 1% interest loan payable over 5 years.

What if I got an EIDL “advance”? How will this affect PPP forgiveness?

If you got the $1,000 per employee EIDL “advance”, you must reduce the forgivable part of your PPP loan by $1,000. So, if you got $7,500 from the PPP in the examples above, only $6,500 would be forgivable. Unfortunately, the PPP Forgiveness Application Form doesn’t show this when doing the forgiveness calculation. Your lender or the SBA should take this into account in calculating your forgiveness amount.

Congress or the SBA may make future changes in the PPP program. If they do, I will update this information.

Tom Copeland – www.tomcopelandblog.com