CWG Publication: The SBA released the application to have your PPP loan forgiven. Here's a breakdown of the long and complicated requirements.

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Business Insider Publication 

Written by Julie Peck, published 5/23/2020

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Last week, the Small Business Administration (SBA) and the Treasury released the Loan Forgiveness Application for the Paycheck Protection Program (PPP). Small business owners across the country who received funding from the SBA through the PPP were anxiously awaiting this documentation to get confirmation on important details surrounding loan forgiveness, especially borrowers who were funded in the first weeks of the program back in early April.

The forgiveness application and its accompanying instructions came with quite a few unexpected developments for small business owners. The whole process is nothing less than a "ticking time bomb," according to Parker Conrad, CEO of payroll provider Rippling. 

"We had a tremendous amount of interest in the PPP loans, companies that were downloading the reports, that were applying for the PPP loans on Rippling," Conrad told Business Insider. "They were told there was a way to get this loan forgiven, and we'll get you some guidance later. And then the guidance comes out and says that in order to get the loan forgiven, you have to have already spent it, and I think a lot of people are saying that it's just not fair."

Uncertainty still surrounds PPP forgiveness following the release of documentation

Conrad said that due to the amount of uncertainty surrounding the process, many of his customers are uncomfortable spending their PPP funds without further and more specific guidance. Yet the application is clear that without having spent the capital, borrowers will be ineligible for forgiveness on at least a portion of the loan.

Additionally, the length of the forgiveness application is likely to be a stumbling block for many small business owners, in Conrad's view.

"The application is like a tax return. It's very long and complicated — it's not like the 1040EZ, it's like the 1040 long and hard," Conrad said. "For us, we're doing a lot of this for our clients, so it's a business opportunity for us, but at one point this was presented as a very simple loan application, and now it's become very complicated."

Adding to that complication are a host of issues for which no answers exist as of yet. One example Conrad cites is the fact that the government expects borrowers to submit IRS Form 941, the Employer's Quarterly Federal Tax Return, as part of the forgiveness application, which many businesses will not have in their hands due to timing issues.

"For most businesses, their 941 forms aren't available until after the end of the quarter, so the government is encouraging them to submit draft 941s," Conrad said. "But for any business that is doing this through a payroll company, there's no such thing as a draft 941 — the payroll company submits it electronically to the government after the end of the quarter and provides them an as-filed copy." 

In a press release that accompanied the release of the forgiveness documentation and instructions, the SBA noted that it will provide further regulations and guidance to assist borrowers "soon," but did not indicate a more precise timeline. 

So, with the loan forgiveness application in hand, what do PPP recipients know, and what's still left up in the air? Here's what legal and financial experts told Business Insider. 

One clear improvement: Flexibility is introduced

For businesses that are starting to reach the end of the eight-week timeline for spending the proceeds from their PPP funds, or for businesses just beginning to allocate loan monies, the release of the forgiveness documentation did provide a bit of welcome flexibility on timing. 

In the original language of the PPP, borrowers had eight weeks beginning from the day they received funding — what the forgiveness application refers to as the "Covered Period" — to spend the money they received, whether or not this timeline was in compliance with their pay periods. Now, the program's "Alternative Payroll Covered Period" allows companies on a biweekly or more frequent payroll schedule to begin their Covered Period on the first day of their first pay period following receipt of the loan.

Limits regarding workforce and pay decreases appear to have been set aside

In the original terms of the CARES Act, borrowers were required to meet guidelines regarding rehiring a certain percentage of their workforce by June 30 and, separately, not reducing pay by more than 25%. 

"This application changed that," Johnny Wang, a St. Louis partner at the law firm Stinson LLP, told Business Insider. "Let's say that you let everyone go on February 15, you got your PPP loan and hired back half of your employees, and then the payroll period before June 30, you hired back the rest of your employees. Normally, that would have reduced your amount of loan forgiveness. This application seems to say that loan forgiveness reduction based on the FTE levels wouldn't occur." 

Wang said that the application sets out the same basic premises for pay reductions: As long as employees' pay is brought back up during the covered period, borrowers are not subject to loan forgiveness reduction. 

"Some of these changes could be as a result of nonessential businesses getting this PPP loan money and not then being able to spend the money because they weren't able to operate,"  Wang said. "Because of that, their expenses would be occurring toward the end of the eight-week period, and it would reduce their loan forgiveness amount without these accommodations." 

Owners must report payments made to themselves

Owners are required on the forgiveness application to identify the total amount they've received from PPP funds. This stipulation was not previously alluded to in the program documentation, and Wang said he believes this is designed to control the potential misuse of funds. 

Owners who max out their compensation from PPP funds, taking the full $15,384 available (what $100,000 breaks down to for an eight-week period) will attract an audit and possibly other attention if they didn't receive compensation in 2019 or claimed significantly less in compensation last year than what they've assigned themselves.

"This instruction is likely intended by SBA to relate to the certification of need by owners to ensure employee retention — not lining their own pockets," Wang said.

When all else fails, create a paper trail

With a great deal still left to be decided, and SBA guidance forthcoming that could change even that which has been determined to date, keeping plenty of accurate documentation of each dollar of PPP funds spent is the best strategy to maximize forgiveness, Nick Kolbenschlag, the cofounder and managing partner of the financial-services firm Crown Wealth Group in Charlotte, North Carolina, told Business Insider.

"If you have a separate bank account, when you make a contribution to a 401(k) plan, move that exact amount over so that you have that perfect flow. Then, print out the transaction from the bank account, print out the transaction from your retirement plan provider. Capture each of those steps as they are cleared," he said. "It might be overkill, but it might also make it really easy on you when the time comes."