July 23, 2020
We received a PPP loan of about $520,000 in late April. About $200,000 of this loan came from 1099 employees, which we now know should not have been included so most likely we will not meet the 60% threshold. Do we have the option to pay back the $200,000 (1099 employee part) now, and reset the amount used in the forgiveness calculation to $320,000 so we can meet the 60% threshold? If not, do you suggest to just convert the loan to a two-year or five-year loan?
Posted by Armanino Financial Advisory Team
No, paying back the portion of the loan earmarked for unauthorized 1099 contractors will not help you meet the 60% threshold. That said, understand that forgiveness calculations apply the 60% threshold to the amount you spent, not to the amount of the loan itself. So, if you did not spend the extra $200,000 and instead only spent $320,000, your payroll costs threshold will be $192,000 (60% of $320,000). Assuming you hit this mark, all of the $320,000 would be forgivable if you had no other reductions. This would leave the unspent $200,000 as remaining principal on your loan. This would be required to be paid back within two years of your loan origination unless your bank agreed to extend the term to five years. This requires mutual agreement; you can’t simply declare a different term. Of course, there is no pre-payment penalty, so if you opted instead to simply return the remaining $200,000 after you received forgiveness, you would owe nothing. Finally, though, be aware that your loan amount eligibility may be challenged by the SBA upon review, as you erred when including 1099 contractors and so technically filed a fraudulent loan application. Should this occur, you likely will have your forgiveness amount reduced significantly.