What if Paycheck Protection program loan forgiveness is denied

If you were approved for a Paycheck Protection Program (PPP) loan, you’re likely hoping to have the entire loan forgiven. However, this may not be possible for all businesses, and it’s vital to know the rules for PPP loan forgiveness, as well as what to expect if your loan does not qualify for total or partial forgiveness.

The Paycheck Protection Program

Part of the CARES Act, the Paycheck Protection Program is pretty much what it sounds like – a way for companies to continue making payroll costs, even during times of business shutdown during the pandemic. PPP loans were made available through the Small Business Administration (SBA), and even self-employed persons and independent contractors could qualify.

PPP loan forgiveness guidelines

If you qualified for a PPP loan, you (the borrower) have up to 24 weeks to spend the funds in an approved manner. If you meet all the following guidelines through the applicable covered period, it may be forgiven in full:

• Payroll costs
  At least 60% of your PPP loan must be used on payroll-related costs over the covered 24-week period (8 weeks if you choose a shorter coverage period).
• Operating costs
  The remaining 40% of your funds must be spent on other approved costs, including rent payments, mortgage interest, and utility bills. Rental agreements and lease agreements must have been in place prior to February 15, 2020.
  Full-time employees (FTE)
  You must maintain FTE employee levels by either rehiring former employees or by hiring new employees by December 31, 2020, or your PPP loan forgiveness amount may be reduced.
• Compensation
  You must not cut the wages of any employee making less than $33,000 a year, and you must not cut the wages of any employee making less than $100,000 a year by more than 25%. You have until December 31, 2020, to restore reduced salaries and other compensation. If you apply for loan forgiveness before employees are restored, your forgiveness amount may be reduced based on the reduced wages for the entire 24-week period.
• PPP forgiveness and taxes
  You will not need to claim your PPP loan amount in your 2020 tax filings. Forgiveness amounts are not considered as a cancellation of debt for federal tax purposes, and your expenses forgiven under PPP guidelines are not allowed as a tax deduction.

Unforgiven PPP loan funds

There are several scenarios in which you may not qualify or only qualify for partial PPP loan forgiveness.

• Failure to meet the 60/40 split
  If you fail to spend 60% of your PPP funds on payroll-related costs, your loan forgiveness amount may be reduced. You may still be able to have the amount you do spend on payroll costs plus a qualifying amount spent on other approved expenditures forgiven.
• Failure to maintain FTE employee headcount
  If you furloughed employees and did not rehire or replace them, and you can’t prove you did your best to bring your FTE headcount back up before December 31, 2020, your loan forgiveness may be reduced. You may still qualify for a portion of your loan to be forgiven for other payroll expenses.
• Failure to restore reduced compensation
  If you reduced employee wages below the allowable threshold and didn’t take steps to restore their salaries by December 31, 2020, the amount of your loan forgiveness may be reduced. The point of PPP loans is paycheck protection, so the best move is to protect your employees’ income.

How to manage unforgiven PPP loan amounts

If you applied and were approved for your loan after June 5, 2020, any unforgiven amounts automatically convert to a five-year loan at a 1% rate. Loans approved before June 5, 2020 convert to a two-year loan at a 1% rate, but you can apply for an extension to five years from your PPP lender.

Your loan payments are postponed until:

• The date that the SBA remits the approved forgiveness amount to the lender
• The SBA determines that a loan is not eligible for forgiveness
• Your time to seek forgiveness lapses (although interest will accrue)

If you do have unforgiven loan amounts from your PPP funding, you have several options.

• Repay your loan immediately
  Depending on the amount of funds that are unforgiven and how you spent them, it might be wise to pay back your loan as soon as possible. You can do this without incurring any prepayment penalties or other fees. Paying off your loan promptly enables you to avoid additional interest accruing over time.
• Take advantage of generous loan terms
  With a 1% rate, your PPP loan has even more favorable terms than standard SBA loans. It may be better for your business to carry any unforgiven loan amount for the two- or five-year period allowed. Since you didn’t have to put up collateral for the loan or have impeccable credit to qualify, this can give you some breathing room as you figure out what comes next for your business.

Just because you can use your loan as a two or five-year loan instead of a “grant” that is fully forgiven, don’t spend it on unapproved uses. You must abide by guidelines surrounding approved use of funds. PPP loans are designed to cover payroll-related costs and other select operating costs.

If your PPP loan forgiveness is denied, contact your lender. You may be able to submit extra documentation to help with the approval process. You can request the SBA review a lender’s decision denying forgiveness within 30 days of the denial.