COVID-19: PPP & EIDL Loan Information

How to apply for forgiveness for PPP loans over $150,000

Introduction

This is a blog on how to apply for Paycheck Protection Program (PPP) loan forgiveness for loans more than $150,000 using either Form 3508 or Form 3508EZ.

For PPP loans more than $150,000 you will need to calculate your forgiveness amount based on the eligible payroll and non-payroll costs that you paid or incurred during your covered period. In addition, you will need to calculate any FTE reduction adjustments or salary and hourly rate adjustments.

This blog includes changes made to PPP by the Economic Aid Act signed into law on December 27, 2020 including forgiveness filing deadlines, changes to the deductibility of expenses for income tax purposes, the repeal of the EIDL Advance Deduction,and allowing certain small businesses the ability to apply for a Second Draw PPP Loan.

Excel Forgiveness Calculator

This post uses Excel Forgiveness Calculator for Form 3508 or Form 3508EZ, which is a Microsoft Excel workbook, to help you with calculating your Forgiveness Amount. You should input data only in grey cells with blue fonts. The other cells that contain formulas are protected. If you would like a copy of the Excel Forgiveness Calculator, please email bill.cunningham@scorevolunteer.org.

Score Restaurant Example

We will use a mock company called Score Restaurant as an example to help you better understand how to complete this application. We will also use the Excel Forgiveness Calculator to calculate the Score Restaurant forgiveness amount.

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Let’s get started! After entering the business and loan information, Score Restaurant will enters the PPP loan amount of $181,434, the loan disbursement date of April 24, 2020 and select the number of weeks they will use for their Covered Period, which will be 8 weeks. Eight weeks is how long Olivia, the owner, believes that it will take for the restaurant to use 100% of loan proceeds.

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Olivia knows that the restaurant has experienced FTE changes during the Covered Period as compared to the Reference Period, so she decides to run payroll reports for each payroll report period used by the Excel Forgiveness Calculator.

Now Olivia is ready to begin calculating her forgiveness amount that will include both payroll and non-payroll costs. She knows that she must be mindful of the sixty-forty rule, the no double dipping rule and the paid or incurred rule as she inputs her data.

(Note that an explanation of each of the above rules can be found by clicking on the blue text. The same is true for any other term in the post in blue text.)

Payroll Costs

The first step in calculating the forgiveness amount is to calculate covered payroll costs. This includes five components:

  • Employee cash compensation
  • Employer-paid employee benefits
  • Employer-paid employee retirement benefits
  • Employer-paid state/local payroll taxes
  • Owner-employees or owner replacement compensation

Eligible payroll costs consist only payroll costs paid or incurred during the Covered Period and for those employees whose principal place of residence is the United States.

Employee Cash Compensation

Olivia will start entering her payroll data into the Excel Forgiveness Calculator She’ll enter each employee total payroll cash compensation during the Covered Period along with their employee identifier (social security number).

She will enter employees, who are paid more than $100,000, in the Table 2 section and she’ll enter and owner-employees in the Owner-Employee section under the “Other Costs” tab. The Excel Forgiveness Calculator will automatically apply the employee cash compensation cap of $100,000 to all employees.

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Employer-Paid Insurance Benefits

Next, Olivia will enter the employer-paid insurance benefits that were paid or incurred during the covered period. This includes group healthcare premiums of $30,000. The restaurant is required to exclude the premiums paid on behalf of Olivia, because she is an owner-employee, as well as the portion of the insurance premiums paid by employees.

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Employer-Paid Retirement Benefits

Olivia will enter any employer-paid retirement contributions. SCORE Restaurant paid or incurred a 401K employer match of $3,275 during the Covered Period.

Employer-Paid State and Local Payroll Taxes

Next, Olivia will enter any employer-paid state and local payroll taxes. The restaurant paid state unemployment insurance taxes of $1,040 and Job Development Fund taxes of $40.

Owner-Employee Compensation

The last payroll section is owner employee compensation.

Score Restaurant is a C-Corp, so Olivia will use her 2019 W-2 wages to calculate her compensation eligible for forgiveness. She’ll enter total wages into the Excel Forgiveness Calculator and it will make the calculate for her.

She can also include employer-paid insurance benefits and employer-paid retirement contributions on her behalf because the legal entity is a C-Corp. However, her eligible retirement costs is capped based on her 2019 employer-paid insurance benefits and employer-paid retirement contributions.

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Eligible Non-Payroll Costs

Now that Olivia has entered in her eligible payroll costs, she is ready to enter her eligible non-payroll costs, including:

  • Mortgage interest
  • Rent payments
  • Utilities
  • Covered operations expenditures
  • Covered property damage costs
  • Covered supplier costs
  • Covered worker protection expenditures.

Mortgage Interest

Score Restaurant has no mortgage interest costs, so Olivia will skip to the next section.

Rent Payments

She records $8,000 for rent payments for her restaurant space paid or incurred during the Covered Period. Olivia doesn’t own the building and doesn’t sublet any of the space so she can take the full rent deduction.

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Utility Expenses

Next, Olivia will record utility payments including electricity costs of $1,600, telephone costs of $1,400 and Internet connection costs of $200 that were paid or incurred during the Covered Period. Each of these utilities were in service before February 15, 2020.

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Covered Operations Costs

Next, Olivia enters her covered operations costs including the costs of their POS system as well as the subscription fees for their accounting software.

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Covered Property Damage Costs

Olivia remembers that she incurred damages to the restaurant in June of 2020 during one of the protests, however the insurance company covered 100% of the repair costs so she realized that she cannot include any covered property damage costs.

Covered Supplier Costs

Because Score Restaurant purchases perishable goods, Olivia can deduct their purchase orders for food supplies signed before and during their Covered Period. The payments of $20,200 related to the covered supplier costs are eligible for forgiveness.

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Covered Worker Protection Costs

Olivia knows that she incurred covered worker protection costs. However those costs were paid using a RestoreRI grant so she skips this section.

Forgiveness Amount

Olivia has entered all of the restaurant’s eligible forgiveness costs which total $181,434 or $2,141 more than the PPP loan of $181,434. The Excel Forgiveness Calculator checks that payroll costs are at least 60% of the Forgiveness Amount and that the Forgiveness Amount does not exceed the amount of PPP loan. SCORE Restaurant should be able to apply for 100% forgiveness of $181,43488. However, they still have several more steps.

FTE and Salary/Hourly Rate Reduction Adjustments

Now that Olivia has calculated the Forgiveness Amount, she needs to determine:

  • Which form (3508 or 3508EZ) should she use?
  • Does she have a FTE Reduction Adjustment?
  • Does she have a Salary/Rate Reduction Adjustment?

The Excel Forgiveness Calculator can help her answer all three questions.

Which is the correct form to use?

If Olivia can check one of the two boxes in the Form 3508S Instructions, she can use 3508EZ and skip the Safe Harbor #2 and the Salary/Hourly Rate Reduction Adjustment sections. Olivia knows that she cannot check either box, so she’ll have to use Form 3508. If she is wrong, the Excel Forgiveness Calculator will indicate which is the right form to use.

FTE Reduction Exceptions

This table shows the employees changes from the Reference Period through the period when Olivia files for forgiveness and how Olivia will apply the FTE Reduction Exception rule. The first 12 employees on this table were employed during the period from February 15, 2019 and June 30, 2019 which Olivia is using for herReference Period. The FTEs during the Covered Period are initially compared to the Reference Period to determine whether there is a decrease in FTEs. During the Reference Period, Score Restaurant had 12 FTEs and during the Covered Period 7 FTEs or a 42% reduction.

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Let analyze each employee.

Hank was employed during the Reference Period but resigned on December 31, 2019. We cannot use the FTE Reduction Exception rule because Hank did not resign during the Covered Period. We’ll need to hire a replacement for Hank. Ella, who was hired on January 15, 2020 will be considered Hank’s replacement.

Sally resigned during the Covered Period. We can apply the FTE Reduction Exception rule to Sally’s FTE.

Ethan was employed during the Reference Period but was fired for cause on December 31, 2019. Just like Hank, we cannot use the FTE Reduction Exception rule because Ethan was not fired for cause during the Covered Period. We’ll also need to hire a replacement for Ethan. Colton, who was hired on May 15, 2020 will be considered Ethan’s replacement.

Mia was fired for cause during the Covered Period. Just like Sally, we can apply the FTE Reduction Exception rule to Mia’s FTE.

Jackson, Kathy, and Daniel were laid off during the Safe Harbor Period, but were rehired during the Covered Period which was great because this was the primary objective of the Paycheck Protection Program–getting employees back on the payroll.

Emma and Matthew were also laid off during the Safe Harbor Period. However for various reasons they rejected the company’s rehire offer. Just like Sally and Mia, we can apply the FTE Reduction Exception rule in this situation.

Harper’s and Stella’s hours were reduced 50% during the Safe Harbor Period. Both were offered to have their hours restored during the Covered Period. Harper accepted, but Stella declined. We can apply the FTE Reduction Exception in Stella’s situation.

Levi asked to have his hours reduced during the Covered Period and Olivia agreed. We can apply the FTE Reduction Exception rule.

Olivia is the owner of the Company and therefore is excluded from this analysis.

We have 5 FTEs that fit the FTE Reduction Exception rule. If we add those 5 FTEs to the Covered Period 7 FTEs, we have a total of 12 FTEs or no reduction in FTEs compared to the Reference Period.

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FTE Reduction Safe Harbor #1

Olivia wants to apply the FTE Reduction Safe Harbor #1 rule as an insurance policy in case a SBA auditor doesn’t accept her documentation for the FTE Reduction Exception adjustments.

SCORE Restaurant average monthly revenues in the preceding quarter were $420,000. They were $275,000 during the Covered Period. The restaurant’s average FTEs was 11 in the preceding quarter and 7 during the Covered Period. So the percent decrease in revenues was 35% and the decrease in FTEs was 34%. Those facts coupled with the Governor’s executive orders regarding restaurant closures and other limitations that caused the disruption in Score Restaurant’s business, should provide the necessary support for Olivia to use the FTE Reduction Safe Harbor #1 rule eliminating the need to calculate an FTE Reduction Adjustment.

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FTE Reduction Safe Harbor #2

Since Score Restaurant eliminated the requirement to record an FTE Reduction Adjustment, Olivia can skip this section. If she wasn’t able to use the FTE Reduction Exception rule, the FTE Reduction Safe Harbor #1, or the FTE Reduction Safe Harbor Two, the Excel Forgiveness Calculator will calculate the amount of the FTE Reduction Adjustment.

Salary/Hourly Rate Reduction Adjustment

Next, Olivia needs to calculate the Salary and Hourly Rate Reduction Adjustment, if any.

During the first quarter of 2020 Daniel’s hourly rate was $40.87. During the Covered Period his hourly rate was reduced to $28.61.

Olivia will have to complete the steps on the Excel Forgiveness Calculator only for Daniel. Daniel’s hourly rate wasn’t restored by December 31, 2020 resulting in a Salary and Hourly Rate Reduction Adjustment of $661.

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SBA Form 3508 or 3508EZ

The Excel Forgiveness Calculator will create a draft of Form 3508 or Form 3508EZ. Before Olivia submits her forgiveness application to her lender, she should collect all of the required documentation that must be submitted with the forgiveness application or maintain it in a paper or electronic file. If the lender does not have a online version of the form, Olivia will need to transfer the data from the Excel Forgiveness Application to Form 3508 or Form 3508EZ, then initial each certification, decide whether to submit the optional Demographic Information Form, and sign and date the application.

PPP Forgiveness Application Process

Follow these steps to submit your forgiveness application to your lender for SBA approval.

Step Who Description
1 Borrower Ask your lender if they use the SBA forgiveness forms or an online version of those forms. Your lender may use their own portal to process your PPP loan and forgiveness applications that requires credentials, including company identification, username and password. Keep those credentials in a secure place.
2 Borrower Complete the Excel Forgiveness Calculator or your own worksheet to calculate your Forgiveness Amount. For self-employed individuals with no employees, use your PPP loan amount.
3 Borrower Complete SBA forgiveness form, if the lender doesn't have an online form. Create an electronic or paper file of your documentation supporting the calculation of the Forgiveness Amount.
4 Borrower Sign into the bank PPP portal and complete their online form or import your signed SBA forgiveness application. Upload all documentations required by your lender. For PPP loans over $150,000, the borrower must submit the forgiveness application for a Second Draw PPP Loan after or simultaneously with the forgiveness application of the First Draw PPP Loan.
5 Borrower Download a copy of your application submission for your records if your lender uses their own online form.
6 Lender The lender will review your application for completeness. They may request additional documents or have a final approval process that requires you to sign electronically the forgiveness application. The lender has two months to send your application to the SBA, however, this process generally takes a few days to complete.
7 Lender After your forgiveness application is complete and approved by the lender, the lender will then submit your application to the SBA loan portal for approval.
8 SBA The SBA will approve or deny your forgiveness application. If the SBA approves your application, the SBA will notify your lender and transfer funds to the lender to pay down your loan equal to the forgiveness amount plus accrued interest related to the forgiveness amount. The SBA has 3 months by law to review, approve or deny your application, however, this process generally takes a few days to complete. As we mentioned before, the SBA will no longer deduct the amount of your EIDL Advance from your forgiveness amount.
9 Lender Your lender will inform you when the SBA has approved your application. If your forgiveness amount was less than your PPP loan, you will be responsible for paying your PPP loan balance in monthly installments until your loan maturity date.

REMEMBER: Even if the SBA approves your forgiveness amount and submits the payment to your bank, the SBA retains the right to audit your loan and forgiveness amounts. If you PPP loan or forgiveness application is audited, the SBA will request to copies of your documentation.

Conclusion

For some small business owners, filing for a PPP loan or forgiveness may still seem overwhelming. If you feel that way, request assistance from a SCORE Rhode Island Mentor. SCORE Rhode Island is a chapter of SCORE, a national organization and a SBA’s resource provider. SCORE Rhode Island is a volunteer organization providing free mentoring and educational services to small businesses in Rhode Island and South Coast Massachusetts.

Disclaimer

The information provided in this post does not constitute legal, tax or accounting advice, but is designed to provide a current understanding of the Paycheck Protection Program and other SBA programs. You should rely on the guidance provided by the SBA and US Treasury Department, advice from your CPA or attorney, and instructions from your bank. This content has not been approved by SCORE or the SBA.


Contact

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