However, that’s not the end of your required documentation if seeking loan forgiveness. There are important steps to take to make sure your PPP loan is fully – or partially – forgiven. Here’s a breakdown of the forgiveness process so you can get a clear picture of your loan forgiveness obligations and make a list of specific questions. A good start in answering your questions is to look at the Treasury guidance issued May 5 and then talk to your banker and your accountant.
Is PPP loan forgiveness automatic or do I have to take action?
Paycheck Protection Program loan forgiveness is not automatic. You must submit a request for loan forgiveness through the lender you applied for your PPP loan with.
The application for forgiveness is due within 90 days of the expiration of the eight-week post-funding period. The approval process is expected to be completed within 60 days of the application.
Who is eligible for PPP loan forgiveness?
If you received an SBA PPP loan during the two rounds of funding, you are eligible. Forgiveness of SBA 7(a) loans or other funding received before or during the pandemic is not part of PPP forgiveness.
What is the process for PPP loan forgiveness?
Your lender will provide a form for loan forgiveness documentation, calculations and certifications for accuracy. Forgiveness calculation is based on the eight (8) week period from date of final loan disbursement (not the approval date).
Loan forgiveness details
Employers can apply for full or partial forgiveness if they spend their loans on qualifying expenses over the eight weeks after receiving a loan. Qualifying expenses include:
- Payroll costs (Business owners must spend at least 75% of their loans on payroll costs)
- Mortgage interest (not including principal payments)
For in-depth information of qualifying expenses and calculations, review the U.S. Treasury guidelines PDF.
What documentation should I gather?
- Employee pay records for 2019 and 2020 by pay period (to assist with baseline wages before the covered period starts)
- Employee pay records for each week when the covered period starts
- FTE count for 2/15/2019 through 6/30/2019 and 1/1/2020 through 2/29/2020
- FTE count for each week when the covered period starts
- Supporting documentation for payments of non-payroll costs (invoices, checks, proof services in place prior to 2/15/2020)
Special rules for PPP loan forgiveness
- Loan proceeds are used to cover “payroll costs” (the same definition as the loan application), mortgage interest in place prior to 2/15/2020, rent paid on leases in place prior to 2/15/2020 and utility costs (generally electricity, gas, water, telephone, and internet) for services in place prior that are paid over the eight-week period that begins the date the loan is made (the “benefit period”)
- At least 75% of the loan proceeds must be used for payroll costs. The 75% spend on Payroll Costs Rule published by the SBA on April 2 directs that not more than 25% of loan forgiveness can be for non-payroll costs, hence 75% of forgiveness must be for payroll costs (likely subject to additional guidance).
- Employee headcounts maintained
- Compensation levels are maintained for employees earning $100,000 or less
What reduces PPP loan forgiveness amounts?
- If full time employees and compensation are restored, loan forgiveness reductions listed above may not be applicable according to the SBA you have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020
- Compensation for individuals earning more than $100K annually
- Employees residing outside the United States
- Qualified sick and family wages paid under the Families First Coronavirus Response Act (FFCRA) where the business may claim a credit
- There is an additional reduction calculation if you bring back workers but reduce their pay from the pre-pandemic time-period by more than 25%.
What if I’m an independent contractor or sole proprietor?
PPP forgiveness is slightly different for sole proprietors and independent contractors. The biggest difference is “owner compensation replacement” which simplifies the loan forgiveness process.
The amount of “owner compensation replacement” you’re eligible to claim is calculated by multiplying your reported net income in 2019 on your Schedule C by 8/52 (or 0.154).
For more information, visit the Bench Blog: Loan Forgiveness for Independent Contractors or Sole Props.
What happens if I don’t get full PPP loan forgiveness?
PPP loan terms are generous and offer the lowest-cost working capital around.
If you don't get a portion of your loan forgiven, you'll be responsible for paying back the loan with a 1% interest rate. PPP loan payments are deferred for six months and payable within 2 years.
What if I want to return my PPP loan?
A May 14 deadline for returning funds is provided by the SBA for companies that received PPP funds but later found that they were unable to certify in good faith that their PPP loan was necessary. One reason to return the funds is if you feel like the forgiveness guidance is too stringent.
Are there other options for impacted businesses who did not receive PPP funding?
After PPP loan funds have been exhausted, there are options for small business owners without a PPP loan.
Term loans and other financing may be tough to get in this economic environment. However, the SBA 7(a) loan program will likely continue and is a low-cost option for businesses who qualify. Visit the SmartBiz Loans website for more information on SBA 7(a) loans, known as the “gold standard” in small business funding: SBA 7(a) Loan Details.
The SmartBiz® Small Business Blog has an article outlining small business grants that can help during this time. Review our article here: COVID-19 Grants Available to Small Businesses During the Pandemic.
Getting back to business
The “new normal” is coming. Our blog has an article with suggestions and strategies to help you get up and running after business restrictions are lifted and the economy improves: How to Prepare Your Small Business to Start Up Again After the Shutdown has Lifted.
Our blog has comprehensive articles about funding, credit, marketing, employee management, and more. Visit our blog here: SmartBiz Small Business Blog.