Coronavirus: How Does Payroll Protection Program Loan Forgiveness Work
For the Coronavirus relief, how do we verify how much of the loan will actually be forgiven. I’m hearing it may be as low as 25% actually forgiven based on lack of sufficient funding for the expected demand. Also, will the interest be forgiven?
Joshua Escalante Troesh, CFP | MBA
Under the CARES Act business owners can receive a forgivable loan under the Payroll Protection Program. Eligible business can borrow 2.5 x prior average monthly payroll (up to $10 million) with no loan payments due for six months - and the loans are forgivable for up to 8 weeks of payroll plus certain other expenses.
Be Wary of Reviews of the Law
Many articles (and lawyers) are reviewing the CARES Act to determine the rules of the relief. The law, however, just gives a framework for the program and places limits. Administrative interpretations/procedures define the details and are a much better source of information. In this case it is the Treasury Department which will set the actual rules. While the information changes regularly, Treasury has released a Paycheck Protection Program Information Sheet, which outlines how the program will unfold. This is a much better document to reference for the program
“May” Be Forgiven vs. “Will” Be Forgiven
The law states the loan may be forgiven, which has some business owners nervous. The may be forgiven is in there because the amount forgiven is tied to the retention of employee payroll. Reductions in payroll (employee hours or employees) will have an impact on the amount forgiven. There is a formula and it is possible for highly compensated employees to have hours reduced (to a limit) without impacting the forgiveness formula. Additionally, the forgiveness is tied to using the funds for qualifying purposes, which is qualifying payroll costs and specific other expenses.
“The loan amounts will be forgiven as long as: The loan proceeds are used to cover payroll costs, and most mortgage interest, rent, and utility costs over the 8 week period after the loan is made; and Employee and compensation levels are maintained.”
About That Only 25% Will Be Forgivent
The Treasury Department has consistently said the loans will be forgiven for the 8 weeks of payroll plus 25% of that amount for other expenses. Further, the Treasury has stated they will ask congress for more money should the funds run out. The 25% number you are hearing is likely coming from a Treasury statement that due to the high demand for the program, forgiven amounts that are not payroll are capped at 25% of the forgiven amount.
“Due to likely high subscription, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs.”
Interest on PPP Loans is Insignificant
The loan forgiveness is a calculated at a dollar amount tied to 8 weeks of qualifying payroll expenses plus an additional limited amount for qualifying other expenses. As a result the interest won’t be forgiven since the loan balance at the time of repayment (principle and interest) is over forgiven dollar amount.
All that being said, Treasury has currently taken discretion away from the lenders to set the interest rates. So while the law says the interest rate can be as high as 4%, Treasury has stated the interest rate is 1% (one percent). This 1% figure has been updated since the Treasury Dept put out it’s original fact sheet stating a 0.5% loan interest rate. In either case, interest on the loans should be negligible.
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