Editorial · May 18, 2020
PPP Loan Forgiveness: What Borrowers Must Document
PPP loan forgiveness depends on records you can show a lender. On May 15, 2020, the Small Business Administration, in consultation with the Treasury, released the Paycheck Protection Program Loan Forgiveness Application, SBA Form 3508. This guide lists what the form asks for, so you can start your file now.
What the form asks you to prove
The form asks you to prove that you spent the loan on eligible costs during a set window. That window is called the Covered Period. It lasts eight weeks, or 56 days, and it starts on the day you received the loan money.
The form lists four kinds of eligible costs. They are payroll costs, interest on a business mortgage, business rent or lease payments, and business utilities. Each one needs its own paper trail.
The agencies also describe an alternative window. A borrower who pays staff every two weeks or more often may count payroll from the eight weeks that begin on the first day of the first pay period after the loan arrived. Pick one window and use it the same way on every line that asks for it.
The SBA says the lender reviews your application, and the application itself says that SBA may ask for more information. Treat every number on the form as something you may have to back up.
Sources: SBA Form 3508, PPP Loan Forgiveness Application instructions (SBA, May 2020); U.S. Treasury, "SBA and Treasury Release Paycheck Protection Program Loan Forgiveness Application," May 15, 2020.
Payroll records to keep
Payroll is the biggest part of most requests, and the form asks for proof in three layers. First, show what you paid. Bank account statements or payroll service reports can show cash pay for each employee during the window.
Second, show what you reported. The form asks for payroll tax filings sent to the IRS, which is typically Form 941. It also asks for state quarterly wage reports and unemployment insurance filings for the same periods.
Third, show benefits. If you count employer contributions to health insurance or retirement plans, keep payment receipts, cancelled checks or account statements for those payments.
Two limits matter here. Cash pay counted for any one employee cannot go past an annual salary of $100,000, scaled down to the covered period. For an owner, the form caps the amount at $15,385 per person, which is the eight-week share of $100,000, or less if that owner earned less in 2019.
Sources: SBA Form 3508, Schedule A instructions and required documentation list (SBA, May 2020).
Rent, mortgage and utility records
Non-payroll costs have a date test. The obligation must have started before February 15, 2020. A mortgage must have been taken out before that date, a lease must have been in force before it, and utility service must have begun before it.
For mortgage interest, keep the lender's amortization schedule plus receipts or cancelled checks. You can also use lender statements from February 2020 and from each month of the window. Only interest counts, and prepayments and principal do not.
For rent, keep a copy of the lease and proof of each payment. For utilities, keep invoices from February 2020 along with the invoices you paid during the window. The form counts electricity, gas, water, transportation, telephone and internet access.
These costs also have a cap. Non-payroll costs cannot be more than 25 percent of the forgiveness amount.
Sources: SBA Form 3508, instructions for non-payroll costs and required documentation (SBA, May 2020).
Headcount and pay cuts can reduce the amount
The form checks two things that can shrink forgiveness. One is a drop in full-time equivalent employees. The other is a cut in pay of more than 25 percent for an employee. The form walks you through both on Schedule A.
To compare headcount, you choose a reference period. The choices are February 15 to June 30, 2019, or January 1 to February 29, 2020. A seasonal employer has a third choice, which is any twelve-week stretch between May 1 and September 15, 2019. Keep payroll records that cover the period you pick.
The form also offers a safe harbor for headcount. Keep notes on any job offers an employee turned down, workers fired for cause, voluntary resignations and written requests by employees for fewer hours. The form says to keep that paper even though you do not send it in.
Sources: SBA Form 3508, Schedule A, FTE reduction safe harbor and records to maintain (SBA, May 2020).
The 75 percent payroll check
The form includes a line that divides your payroll costs by 0.75. This tests whether at least 75 percent of the forgiveness amount went to payroll. The final forgiveness amount is the smallest of three numbers: the modified total after reductions, the loan amount, and that payroll-based figure.
This means spending a loan mostly on rent or utilities can lower your result. Look at your mix of costs before you submit.
Sign carefully and keep everything
An authorized person must initial a list of statements and sign. The statements say the money was used for eligible costs and that the figures are true. The form warns that knowingly making a false statement is punishable under federal law.
The form also says to keep all loan records for six years after the loan is forgiven or paid in full, and to let SBA staff see them on request. A simple folder for each cost type, labeled by month, makes that easy.
A short checklist
- The date the loan money arrived, and your eight-week window.
- Bank statements or payroll reports for every pay date in the window.
- Form 941 and state wage and unemployment filings for those periods.
- Receipts for health and retirement contributions you plan to count.
- Mortgage, lease and utility papers dated before February 15, 2020, plus proof of payment.
- Headcount records for your chosen reference period.
- Notes on refused job offers, resignations and requests for fewer hours.
Sources: SBA Form 3508, certifications and record retention (SBA, May 2020). U.S. Treasury, "The CARES Act Provides Assistance to Small Businesses" (page as of May 2020).
Rules for this program are still being updated, so check with your lender before you file.