Editor’s note: Regulations and guidance from the SBA and the U.S. Department of Treasury on the PPP are evolving rapidly. Please refer to the latest guidance from SBA and Treasury to confirm current program rules and how they apply to your particular situation.
The Paycheck Protection Program (PPP) is part of the larger government stimulus package, the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Paycheck Protection Program loans are meant to minimize the number of unemployed persons by helping small business owners make payroll. PPP loans are designed to help small business owners stay in business during this time of economic uncertainty.
The hope is that if businesses can keep employees on the payroll now, they’ll be in a better position to recover fully. And as a result, fewer people will be jobless and in need of additional federal aid. And if they meet certain criteria, borrowers can request loan forgiveness.
How to qualify for Paycheck Protection Program loan forgiveness
In general, loans may be forgivable, in whole or in part, if the funds are used as directed by the SBA, including but not limited to the following criteria:
- At least 60% of the forgiveness amount must be attributable to eligible payroll costs
- No more than 40% of the forgiveness amount may be attributable to eligible non-payroll costs
- Cash compensation for which forgiveness is sought may not exceed $100,000 annualized per employee.
- Owner compensation forgiveness is subject to limits that vary depending on the type of owner. These are laid out in SBA guidance.
- To be eligible for forgiveness, eligible costs must be paid during your covered period, or incurred during your covered period and paid by the next regular payroll date, billing date, or health insurance premium due date, as applicable. The covered period is a period running from 8 to 24 weeks from the time you receive your loan proceeds.
- Your forgiveness amount may be reduced based upon reductions in full-time equivalent (FTE) employees or reductions in employee salaries or wages since the first quarter of 2020. Such forgiveness reductions may be avoided if borrowers rehire FTEs or restore employee salary or wage reductions on or before December 31, 2020, or conduct such rehiring and restoration of wages no later than the last day of the loan’s covered period for loans made on or after December 27, 2020, as described in SBA guidance
Lenders are responsible for approving and denying loan forgiveness. To apply for loan forgiveness, you can submit an application to your lender.
Eligible payroll costs
For both first and second PPP loans, payroll costs for small businesses include compensation to employees whose principal residence is in the U.S. in the form of:
- Salary, wages, commissions, or similar compensation
- Cash tips or equivalent
- Payment for vacation, parental, family, medical, or sick leave
- Allowance for separation or dismissal
- Payments required for the provisions of employee benefits consisting of group health care or group life, disability, vision, or dental insurance including insurance premiums
- Payment of any retirement benefit
- Payment of state and local taxes assessed on compensation
For an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation, subject to SBA rules.
Payroll costs do not include employee or owner compensation over $100,000/year or compensation for persons who live outside the U.S. Payroll costs also do not include qualified sick and family leave covered by the Families First Coronavirus Response Act. Additional rules may apply to seasonal businesses, new businesses, farmers and ranchers, partnerships, and borrowers with income from self-employment.
Eligible non payroll costs
Paycheck Protection Program loans are intended primarily for payroll costs. So when it comes to whether a loan is forgivable, no more than 40% of the forgivable amount may be for eligible non-payroll costs.
Eligible non payroll costs include:
- Interest payments on any business mortgage obligation on real or personal property that was incurred before February 15, 2020 (but not any prepayment or payment of principal);
- Payments on business rent obligations on real or personal property under a lease agreement in force before February 15, 2020;
- Business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020;
- Covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures, as defined in SBA rules.
Please note that your total forgiveness amount depends on other criteria as well. For example, salary, wage or headcount reductions during the loan forgiveness covered period may reduce the forgivable amount for some borrowers.
How to apply for PPP loan forgiveness
If you’re a PPP loan recipient, you will submit a PPP loan forgiveness application to your lender or the lender servicing your PPP loan. Once you submit your complete application for forgiveness, the lender will have 60 days to accept or deny your application.
Depending on the type of application you submit, you may be required to include with your application documents verifying costs such as your payroll and non-payroll expenses and full-time employees. In general, the simplified application (Form 3508S) for borrowers with loans of $150,000 or less requires borrowers to submit no supporting documents or very few supporting documents, although borrowers are required to retain certain supporting documents for 3-4 years.
For more information about PPP loan forgiveness documentation, please refer to the forgiveness application and instructions applicable to you and the SBA’s website:
- Form 3508 Forgiveness Application
- Form 3508EZ Forgiveness Application
- Form 3508S Forgiveness Application
What is the deadline to apply for forgiveness for a first PPP loan?
The deadline to apply for forgiveness is the maturity date of your loan. If your loan was made before June 5, 2020, you have a two-year term (unless you and your lender agreed to extend the term to five years). If your loan was made on or after June 5, 2020, you have a five-year term.
Note that although your forgiveness application does not need to be filed until the maturity date of your loan, interest is accruing and you will be required to start making loan payments at the end of your Deferment Period. If you apply for forgiveness, your Deferment Period ends when the SBA remits forgiveness to your lender or notifies your lender that you are not eligible for forgiveness. If you do not file a loan forgiveness application, your Deferment Period ends approximately ten months after the conclusion of the maximum 24-week covered period, which begins on the date you receive your loan proceeds.
Documents needed to submit a loan forgiveness application
For many borrowers, your PPP loan forgiveness application must include documents that verify your payroll and non payroll costs and full-time employees. These may include:
- Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees
Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period:
- Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941)
- State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state
- Payment receipts, canceled checks, or account statements documenting the amount of any employer contributions to employee group health, life, disability, vision or dental insurance and retirement plans that you included in your forgiveness amount
- Documentation verifying the average number of full-time equivalent employees on payroll per week employed during the selected reference period
- Copy of lender amortization schedule and receipts or canceled checks verifying eligible business mortgage interest payments from the loan forgiveness covered period; 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
- Copy of current lease agreement and receipts or canceled checks verifying eligible business rent or lease payments from the loan forgiveness covered period; or lessor account statements from February 2020 and from the covered period through one month after the end of the covered period verifying eligible payments.
- Copy of invoices from February 2020 and paid during the loan forgiveness covered period for business utility payments, as well as receipts, canceled checks, or account statements verifying those eligible payments
There are different documentation requirements relevant to each individual application. For example, borrowers eligible to use the simplified application (Form 3508S) are required to submit fewer or no documents depending on their situation. All borrowers are required to retain certain supporting documents for 3-4 years. Work with your lender for a full list of documents you must retain to apply for forgiveness.
Note: For a Second Draw PPP Loan in excess of $150,000, you must submit a loan forgiveness application for your First Draw PPP Loan before or simultaneously with the loan forgiveness application for your Second Draw PPP Loan, even if the calculated amount of forgiveness on your First Draw PPP Loan is zero.
Eligibility for EZ application
Some borrowers may qualify to use the streamlined Form 3508EZ to apply for loan forgiveness, which is shorter and requires fewer calculations than the form 3508 To be eligible to use the EZ form, borrows must meet certain criteria, including:
- PPP loan amount of more than $150,000
- Did not reduce salaries or hourly wages of any employee by more than 25% during the covered period compared to the most recent full quarter before the covered period. (Only count employees who did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000),
And at least one of the following:
- Did not reduce the number of employees or the average paid hours of employees between January 1, 2020, and the end of the covered period (subject to certain exceptions)
- Was unable to operate during the covered period at the same level of business activity as before February 15, 2020, due to compliance with certain health directives related to COVID-19
Review the 3508EZ Forgiveness Application and Instructions to learn more about if you are eligible to use this application. Work with your lender to determine which loan forgiveness application is right for your situation.
Eligibility for S application
The Economic Aid Act created a further simplified PPP loan forgiveness application for loans of $150,000 or less. The PPP borrower will need to sign and submit a one-page certification, and there will be fewer or no documentation requirements. This simplified loan forgiveness process is retroactive and will apply to PPP loans of $150,000 or less, including loans from the first round of funding. Review the 3508S Forgiveness Application and Instructions to learn more about this simplified application.
What if a PPP loan isn’t forgiven in full?
You do not need to make payments until you file for forgiveness, and the SBA pays your forgiveness amount to your lender or notifies your lender that you are not eligible for forgiveness (“Deferment Period”). If you do not apply for forgiveness within 10 months from the end of the maximum 24-week forgiveness covered period your Deferment Period will end on the date that is 10 months after the last day of the maximum 24-week forgiveness covered period.
After you apply for forgiveness, the SBA will notify your lender if your application has been denied in whole or in part, and will remit your full or partial forgiveness amount to your lender; your lender would then notify you when your first payment is due. If the Deferment Period ends with an unforgiven balance on your loan, you must begin to make loan payments at that time. PPP loans have a 1% interest rate, and interest will continue to accrue during the Deferment Period.
What are the next steps?
As you prepare to apply for loan forgiveness, consider your next steps. It’s a good idea to organize your payroll, track down any documents you might need to apply, and work with your lender on your application. In the meantime, follow the loan forgiveness requirements and rehire any employees you may have laid off to improve your chances of having your PPP loan forgiven.
Regulations and guidance from the SBA and the U.S. Department of the Treasury on the PPP are evolving rapidly and the above information may be outdated. Please refer to the latest guidance from SBA and Treasury to confirm current program rules and how they apply to your particular situation. The resources described above are made available to businesses within the United States of America.
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