PPP Loan “Forgiveness” Process

PPP Loan “Forgiveness” Process

PPP Loan “Forgiveness” Process

(April 27, 2020)


CLEVELAND, TN: Many churches are just now making application or receiving their Small Business Administration (SBA) guaranteed loans under the Paycheck Protection Program, a part of the stimulus package known as the CARES Act. One of the main components of the PPP loan program is the ability of some, if not all, of the loan to be forgiven if certain criteria is met.


It is important to realize that the SBA has currently issued very limited guidance concerning the “forgiveness” portion of the PPP loan program. Most of their information has been geared around who is eligible and what information is required to obtain a loan. However, it is expected that within the next few days, additional guidance will be issued to cover the forgiveness portion of the loans.


Without guidance from the SBA, there is a lot of information that is not known at this point. Therefore, the following “frequently asked questions” are based upon information known, or reasonably believed, as of this date. All answers are subject to change as additional guidance is provided by the SBA and the U.S. Treasury Department.


Frequently Asked Questions


When can a church apply for forgiveness under the PPP program?

Since the payroll data for the eight weeks immediately following the date that the PPP loan is funded is going to be reviewed for forgiveness purposes, it seems logical that forgiveness cannot be requested any sooner than eight weeks after the loan is originated.


Will an application have to be filed to seek forgiveness?

It is expected that the SBA will make available a loan forgiveness application. Such an application has not been developed or released at this point.


Will the church make an application for forgiveness through our lender or directly to the SBA?

Just as receiving the loan, it is expected that the forgiveness application will have to go through your lender, and then be approved by the SBA. One potential complication is that a PPE loan may be sold by your local lender into the secondary market. If that occurs, there is no guidance on who will handle the forgiveness application – the lender who made the loan or the new owner of the loan.


How much of the PPP loan can be forgiven?

Up to 100% of a PPP loan may be forgiven.


Once our church seeks “forgiveness,” how long will it be before we get a response?

The legislation seems to provide the lender up to 60 days to process your forgiveness application. It is expected that it will take at least that long, since everyone getting the loans were approved within a short period of time and everyone seeking forgiveness will be submitting their forgiveness request and applications within the same short period of time.


What is the “covered period” for determining forgiveness under the PPP process?

Based upon the legislation and the initial guidance, it is the eight-week period that commences on the date that the lender makes the first disbursement of funds, including the date of disbursement. This is the period in which you must track your “qualifying expenses.“


What are “qualified expenses” for PPP loan forgiveness purposes?

  • Payroll costs

  • Mortgage interest

  • Rent

  • Utilities

For forgiveness purposes, what are qualifying “payroll costs?”

  • Salary, wages, ministerial housing allowance, commissions, or similar compensation paid to employees whose principal place of residence is in the U.S. (cannot include amounts in excess of $100,000 per employee annualized)

  • Payments for vacation, parental, family, medical, or sick leave

  • Severance payments

  • Employer payments for group health care benefits, including insurance premiums

  • Employer contributions to retirement plans, and

  • Payments of state and local taxes assessed on employee compensation

For forgiveness purposes, what is qualifying “mortgage interest?”

Mortgage interest includes obligations that were in existence on or before February 15, 2020. This includes obligations with respect to both real property (such as your church building) and personal property (such as church-owned vehicles). Additional guidance is expected on this issue.


For forgiveness purposes, what is included in “rent?”

Additional guidance is expected here as well, but “rent” seems to include any lease agreement that was in place on or before February 15, 2020, and includes both real property (your church building) and other tangible personal property (company car or copier lease).


For forgiveness purposes, what is included in “utilities?”

  • Electricity

  • Gas

  • Water

  • Telephone (it seems to include both landlines and cell phones)

  • Internet access

  • Transportation (this seems to cover a church-owned van or bus that is operated for that entity. However, there is no guidance at this point)

Service must have been in place for all these different utilities before February 15, 2020 to be included.


What time period for expenses is covered?

The CARES Act states that for forgiveness to occur, the borrower must have “incurred and paid” the qualifying expenses during the eight weeks following receipt of the loan proceeds. This statement will require much clarification. For example, what if you received your loan proceeds on April 27 and your electric bill on April 30. Can those funds be used to pay that utility bill although it was obviously for service way before April 27? That question remains unanswered until further guidance.


Should I have a separate bank account or a separate fund from which we pay all “eligible expenses?”

It seems that having a separate bank account allows the church to pay for all eligible expenses out of the one account and does not commingle the PPP funds with other church funds. Most CPAs are suggesting a separate account just for better record keeping purposes.


What kind of receipts are going to be needed when the church files its application for loan forgiveness?

You will certainly need extensive payroll records and information for the eight-week period of time following the date you receive the loan. In addition, you will need to provide cancel checks, payment coupons, and receipts for any mortgage interest, rent, and utilities that are paid from the PPP loan funds. Providing these documents are mandatory under the law.


Do I have to spend a certain portion of the funds solely on payroll?

Yes, the rules require that at least 75% of the PPP loan proceeds must be used for payroll costs.


If we do not spend 75% on payroll, is the loan not forgivable?

If your church fails to meet the 75% threshold, then you will be required to repay that portion of the loan that caused you to not meet the threshold. See the following example provided by the accounting firm CapinCrouse:

Example: Assume your PPP loan amount is $100,000. This means that you will need to expend at least $75,000 on payroll costs to receive 100% loan forgiveness. If you only spend $70,000 on payroll costs, then you will need to figure out the amount which, when multiplied by 75%, gives you $70,000. This is determined by dividing your actual payroll costs by 75%.

So in this example, $70,000 ÷ 75% is $93,333.33. This means your loan forgiveness amount will be reduced by $6,666.67 ($100,000 – $93,333.33 = $6,666.67) and you will have an outstanding loan balance equal to this amount ($6,666.67).


What if our church has a daycare or preschool and it is no longer operational during the eight-week calculation period?

There is an extensive computation process to determine the average number of full-time equivalent employees (FTE). That process is beyond the scope of this FAQ.


If my church’s PPP loan is forgiven, is the amount forgiven subject to unrelated business income tax (UBIT)?

No. The CARES Act explicitly states that the forgiven amount is not included in gross income for unrelated business income tax (UBIT) purposes, notwithstanding the fact that the forgiven amount is treated as the cancellation of an indebtedness.


When must I start making payments on my PPP loan?

Payments are automatically deferred for the first six months after receipt of the loan.


When I start making payments, how long do I have to pay off my PPP loan if it is not forgiven?

As just noted, the first six months are deferred. The loan will then be payable at 1% interest for the remainder of the two-year term. So, technically, you will have a year and a half to pay off the amount that is not forgiven once payments start.


When should we expect additional guidance to be issued by the Small Business Administration concerning the “forgiveness” portion of the PPP loan program?

The PPP loans were first made available on April 3. The earliest that anyone could request forgiveness would occur around the first of June 2020. We expect guidance well in advance of that date.