As we near 2021, many business owners are wondering when they should apply for Paycheck Protection Program (PPP) loan forgiveness. This is but one piece of the puzzle. The other is the loan forgiveness application process, which could be complicated for certain applicants.
To help your RIA firm achieve the greatest level of forgiveness possible, here are three pitfalls to avoid as you work through the application process.
Failure to meet the PPP employee retention requirement
A key requirement of full PPP loan forgiveness is that your staffing levels (i.e., the average number of full-time equivalent “FTE” employees on your payroll) must stay the same or higher from the date the loan is originated to the earlier of the forgiveness application date or December 31, 2020 throughout 2020. Your PPP loan will likely not be forgiven in full if your retention dropped. That said, there is an exception to this requirement: You made a good-faith, written offer to rehire or replace employees, and you were unable to accomplish either.
A note about this exception: If this happens to you, you must inform your state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer. You must also maintain certain documents to demonstrate compliance with this exception, including the written rehire offer, a written record of the offer’s rejection, (remove comma) and a written record of efforts to hire a similarly qualified employee.
There is also a safe harbor that could protect you from a reduction in loan forgiveness. To qualify for the safe harbor, you must meet the following two conditions: (Delete sentence)
- If you reduced your FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020 and
- You restored your FTE employee levels by December 31, 2020, to your FTE employee levels during your pay period that included February 15, 2020.
The bottom line here is the importance of documentation. If you haven’t already, make sure you have the right records in hand that will show your good-faith efforts in maintaining FTE employee levels.
Excessive owner compensation
The amount of compensation of owners, shareholders, and partners that is eligible for forgiveness depends on several factors. Generally, owner-employees applying under a 24-week covered period can request forgiveness for up to $20,833. The maximum forgiveness amount for employees who earned more than $100,000 on an annualized basis using a covered period of 24 weeks is $46,154. Make sure you’re requesting the correct amounts of forgiveness for each owner, shareholder, partner, and employee on your application.
Missing key paperwork
Lenders are typically requesting the following paperwork to be submitted with the loan forgiveness application:
- Payroll detail reports (by employee) for each payroll during the covered period. This amount should equal the amount of payroll costs during the covered period, less the downward adjustments for employees who made over $100,000 on an annualized basis and any owners/shareholders/partners.
- Quarterly IRS Forms 941 for the covered period.
- State unemployment filing related to your obligation during the covered period.
Also, if your firm, together with its affiliates, received a PPP loan greater than $2 million, you will be required to complete a separate “loan necessity questionnaire” and submit it to your lender.
A final note about paperwork: Borrowers must complete SBA Form 3508 to request loan forgiveness. Form 3508EZ is the shortened version; only borrowers who meet certain requirements may use it. It’s worth checking to see if you’re eligible to use Form 3508EZ, as it’s much easier to complete.
Set yourself up for PPP loan forgiveness success.
An accurate PPP loan forgiveness application is critical to achieving full forgiveness. If you’re feeling overwhelmed with the process or aren’t sure where to start, Elevate can help. Contact us today.