South State was pleased to assist over 10,000 businesses with the Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”). The information below is intended to provide an overview of the forgiveness process to assist you in requesting loan forgiveness. We expect the SBA will issue additional guidance on loan forgiveness, which may change or further clarify the information provided herein. In addition to the details below, we encourage you to consult with your financial and legal professionals.
SBA Paycheck Protection Program Forgiveness Guidance
PPP loans are subject to the limited loan forgiveness provisions of Section 1106 of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act (Public Law 116-136), the SBA Interim Final Rules, and any additional guidance issued by the SBA. In general, the following rules apply with respect to loan forgiveness:
- The amount of loan forgiveness cannot exceed the principal balance of the PPP loan and is determined by and is subject to the sole approval of the SBA.
- At least 75% of the loan proceeds must be used to pay for payroll costs. The remaining 25% of the loan proceeds may be used to pay eligible expenses such as mortgage interest, rent, and utilities.
- In order to qualify for forgiveness, amounts must be spent during the eight-week period commencing upon the date the loan proceeds are disbursed (the “Covered Period”). For administrative convenience, borrowers who pay employees at least as often as biweekly may elect to calculate eligible payroll costs using the eight-week period that begins on the first day of their first pay period following the loan disbursement date (the “Alternative Payroll Covered Period”). This alternative eight-week period only applies to payroll costs and not to other qualifying expenses.
- The amount of loan forgiveness may be reduced if Borrower reduces the number of employees (layoffs) or reduces total salary or wages of any employee in excess of 25% of total salary or wages as compared to the last quarter that the employee was employed.
- When applying for loan forgiveness, the Borrower must make certain certifications including: that the requested forgiveness amount was used for eligible expenses, takes into account all applicable reductions due to decreases in headcount, salary, or hourly wages, and does not include nonpayroll costs in excess of 25%; that the Borrower has verified the payments; and that the Borrower understands that knowingly using loan funds for unauthorized purposes subjects Borrower to civil and criminal fraud charges.
SBA Paycheck Protection Program Loan Forgiveness Preparedness
On Friday May 15, 2020, the SBA released the PPP Loan Forgiveness Application (the “Application”) together with instructions on how to complete the Application. We are waiting for final guidance to determine next steps, but in the meantime, you may read the SBA’s press release and Application to better understand what will be required at the SBA’s website found here. Please do not fill out this Application and submit it to us at this time. We are finalizing our process for accepting and submitting forgiveness and will provide you with further instructions on how to submit your Application and supporting documentation.
In preparation for forgiveness, it is recommended that you review and follow these steps:
STEP 1 – Track total eligible costs incurred and paid during the eight-week (56-day) Covered Period (or Alternative Payroll Covered Period), including:
Covered Payroll Costs
- Payroll costs
- Compensation to employees including items such as:
- Salary, wages, commissions or similar
- Cash tips or the equivalent
- Payment for leave
- Allowance for separation or dismissal
- Housing allowance or stipend
- Payments for group health care benefits, including group health care coverage
- Payment of any retirement benefits
- Payment of state and local taxes assessed on the compensation of employees
Payroll costs are considered paid on the day that paychecks are distributed or the Borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period). Non-cash payroll costs (employee health insurance, contributions to retirement plans and payment of state and local taxes assessed on compensation of employees) must satisfy both requirements of having been incurred and paid within the relevant eight-week period.
Covered Nonpayroll Costs
Mortgage interest on real or personal property
- payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020
Rent under a leasing agreement
- business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020
- Includes payment for expenses such as electricity, gas, water, transportation, telephone, or internet access.
- Service must have been established prior to 2/15/2020
Eligible nonpayroll costs must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the payment date is after the last day of the Covered Period.
STEP 2 – Calculate payroll costs for forgiveness floor
- 75% of eligible costs are to be used for payroll costs
- If less than 75%, loan forgiveness is reduced
STEP 3 – Calculate any % decrease in full-time equivalent employees (FTEs) from 8-week Covered Period versus the following periods:
- February 15 through June 30, 2019 or, at the borrower’s election, January 1 through February 29, 2020
- Seasonal businesses will use February 15 to June 30, 2019
Do not include any FTE reductions for positions vacated but not filled by a new employee where:
- within the Covered Period, the borrower made a good-faith, written offer to rehire any employee terminated prior to April 26, 2020 and who rejected such offer, or
- an employee was fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in hours.
STEP 4 – Calculate any reduction in payroll > 25% of prior quarter
- For any employee who did not receive, during any single pay period during 2019, wages/salary at an annualized rate of pay more than $100K.
- Did their pay during the Covered Period decrease by more than 25% from the previous full quarter (January 1 to March 31, 2020)? Reduce forgivable amount by the reduction that exceeds 25%.
STEP 5 – Determine if a Safe Harbor applies by calculating any adjustment because FTEs and salary/wages were restored by June 30
- Borrower must have reduced FTEs, salaries/wages between February 15 and April 26, 2020, and must have eliminated the reduction no later than June 30, 2020.
- If “restore” criteria are met, the decreases in loan forgiveness calculated in steps 3 and 4 are ignored.
As a reminder, the CARES ACT excludes from payroll costs:
- Annualized salaries greater than $100K
- Taxes imposed or withheld under chapter 21, 22, or 24 of the IRC of 1986 ( e.g. the employer’s share of FICA and Medicare are not included as payroll costs)
- Compensation of an employee whose principal place of residence is outside the US
- Qualified sick or family leave for which a credit is allowed under §7002 or §7004 of the FFCRA
- Payments to independent contractors
Documentation to Be Provided for Forgiveness
You will need to provide the following documentation to substantiate your request for loan forgiveness. You will be asked to submit the documentation electronically. If these documents are not in digital form, please take the time soon to scan these and get them ready for upload using an Adobe PDF, JPEG, or PNG file format. Please note that you can take a high-quality picture of the document and upload that.
These documents can be one or more of the following:
Payroll Documentation verifying the eligible cash compensation and non-cash benefit payments from the Covered Period or the Alternative Payroll Covered Period consisting of each of the following:
- bank statements or third-party payroll service provide reports documenting payroll
- tax forms or third-party payroll service reports
- payroll tax filings reported or that will be reported on IRS Form 941
- state quarterly business and individual wage reporting (state income tax withholding)
- state unemployment tax filings
- receipts, cancelled checks, or statements documenting health insurance payments
- receipts, cancelled checks, or statements documenting retirement payments
Documentation regarding Full-Time Equivalent (FTE) calculations:
- Documentation showing (at the election of the Borrower):
- the average number of FTE employees on payroll per month employed by the Borrower between February 15, 2019 and June 30, 2019;
- the average number of FTE employees on payroll per month employed by the Borrower between January 1, 2020 and February 29, 2020; or
- in the case of a seasonal employer, the average number of FTE employees on payroll per month employed by the Borrower between February 15, 2019 and June 30, 2019; between January 1, 2020 and February 29, 2020; or any consecutive twelve-week period between May 1, 2019 and September 15, 2019.
- Documents may include payroll tax filings reported or that will be reported on IRS Form 941 and state quarterly business and individual employee wage reporting and unemployment tax filings reported or that will be reported. Documents submitted may cover periods longer than specific time period.
Nonpayroll Documentation verifying eligible interest, rent, and utility payments
- For business mortgage interest, copy of lender amortization schedule and receipts or cancelled checks verifying payments made; OR lender account statements from February 2020 and the months of the covered period through one month after the end of the covered period verifying interest amounts and eligible payments
- For business rent or lease payments, copy of current lease agreement and receipts or cancelled checks verifying eligible payments from covered period; OR lessor account statements from February 2020 and the months of the covered period through one month after the end of the covered period verifying eligible payments
- For business utility payments, copy of invoices from February 2020 and covered period and receipts, cancelled checks, or account statements verifying eligible payments
You are not required to submit but must maintain documentation supporting the FTE and salary/wage reduction calculations, any job offers and refusals, firings for cause, voluntary resignations, and voluntary requests and reductions in hours as well as the safe harbor calculations.
You should maintain these documents together with all records relating to the Borrower’s PPP loan, including documentation submitted with your PPP loan application, documentation supporting your certifications as to the necessity of the loan request and its eligibility for a PPP loan, documentation necessary to support your loan forgiveness application, and documentation demonstrating material compliance with PPP requirements.
You must retain all such documentation in your files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of SBA, including representatives of its Office of Inspector General, to access such files upon request.
Process for Requesting Loan Forgiveness at South State Bank
South State is finalizing the process for accepting and submitting forgiveness applications to the SBA. We suggest you check our website often for updates regarding the application process.