Paycheck Protection Program written on a surgical mask

10 Things You Need to Know About PPP Loan Forgiveness

The PPP loan forgiveness process is happening now! Speak to your lender. I just applied through our bank, and honestly the process was fairly seamless. But it can get really complicated if you are unprepared or unaware of the rules and restrictions.

The last thing any of us need right now is more confusion. So let’s simplify the process a bit. Below are 10 things you need to know to help you get through your loan forgiveness application as quickly and easily as possible.

#1. Figure out which forgiveness application is best for you

There are three PPP loan forgiveness applications and therefore three sets of instructions.

Use the SBA Form 3508S if you borrowed $50,000 or less. Use the SBA Form 3508EZ if you are a self-employed individual, independent contractor or sole proprietor who had no employees. There are other special cases who qualify to use this application.  For all other cases, use the long form SBA Form 3508.

#2. Know when your “covered period” ends

The covered period starts the day your lender disbursed the first PPP loan funds and extends for either  8 weeks (if you received a PPP loan before June 5, 2020) or 24 weeks.

If you elected to use the alternative covered period, your covered period does not extend beyond December 31, 2020.

3. Know the timeline for submission

You can submit a loan forgiveness application at any time before maturity – including before the end of the covered period.

Many lenders may not accept loan forgiveness applications before the end of your covered period. But if you do not apply for loan forgiveness within 10 months after the last day of the covered period, you will be notified by the SBA to start repaying principal and interest.

#4. Know which payroll costs are eligible for forgiveness

Payroll costs paid (paycheck distributed or ACH transaction made) OR incurred (employee earned it) during the covered period or alternative covered period are eligible for forgiveness.

The SBA changed the rules mid year and stated that at least 60% of your PPP loan funds must be used on payroll costs for employees that are residents of the United States. That means that if you received a loan of $100,000, at least $60,000 should have been spent on payroll costs.

If you have no employees, PPP loan funds can be used to replace your business owner’s income calculated based on your 2019 Form 1040 Schedule C line 31 net profit amount (up to $100,000 annualized).

 The cap on owner’s compensation varies depending on the type of business entity you have (sole proprietor, S corp, C corp, etc) and the covered period (8 weeks or 24 weeks) you elect, so seek specific guidance from a trusted advisor.  

If you have employees, PPP loan funds can be used on the following payroll costs:

§ Cash compensation paid in the form or salary, tips, commissions, wages up to $100,000 gross annual pay per employee (whose principal place of residence is in the U.S.)

§ Costs for employee vacation, parental, family, medical, and sick leave except qualified sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act

§ Covered benefits for employees (including health insurance and retirement contributions)

§ State and local taxes on employee compensation paid by employer (e.g. SUTA)

#5. Payroll service providers can help

If you have employees and spent PPP funds on payroll costs, then you will have to report if there were any changes in the number of FTE (full time equivalent) employees and the salary/wages for each employee.

Most payroll service companies have reports with the calculations and data you will need to report on the application. If it’s not currently available, contact your payroll service right away to create the report or help you with the numbers.

#6. Some costs are NOT eligible for forgiveness

This includes certain business mortgage interest, business rent or lease payments and business utility costs. These costs are eligible for forgiveness and must be paid OR incurred during the covered period.

But, if you lease/sublease a portion of a space, share rented space or only deduct certain home office expenses, only the PPP funds spent on YOUR portion of the business mortgage interest, rent/lease and utility costs will be eligible for forgiveness.

#7. Proper documentation is critical

Have all necessary supporting documents prepared to submit before starting the application process. Once the application is submitted, you don’t usually get another chance to make changes or add any documents.

The SBA also recommends that all documentation you use throughout any part of this process including the original loan application, tax returns, payroll reports, etc. should be kept for at least 6 years.

#8. Things change

Expect the SBA to issue additional regulations and guidance throughout the process since there are still open questions.

Be flexible and stay informed. Read the FAQs on PPP Loan Forgiveness provided by the SBA. There is a lot of information and news out there.

If it all seems too overwhelming or you have specific questions, refer to your lender for help in completing the application. If they are not available, refer to #9.

#9. Contact a trusted advisor

Lean on accounting or finance professionals for guidance. Most should be aware of the changes and should be able to explain them to you fully or find answers to your questions. If your trusted advisors are unsure or unavailable, contact the Small Business Development Center (SBDC) in your neighborhood. SBDCs are under the SBA and provide free business counseling and free or low-cost training to startups and small business owners.

Given their direct link to the SBA, they readily have updates and webinars full of information on the Paycheck Protection Program (PPP) and the loan forgiveness application process. As a last word of caution, you are responsible for the numbers you calculate and put on the application. So be sure to work with someone on all calculations.

#10. It can take a while before you receive a final determination

Once you have submitted the PPP loan forgiveness application and all supporting documents through your lender, your lender has 60 days to review and submit their forgiveness decision to the SBA.

Once the SBA receives it, they have an additional 90 days to review the lender’s decision, make a final determination on loan forgiveness and report back to your lender.

Final thoughts

Here is another idea. You may want to wait to file for PPP Loan Forgiveness! As much as we just want to be done with this whole saga, there may be some benefits to delaying it, like the potential for a more relaxed and advantageous forgiveness rules.

Remember, things can change by the week, by the day or by the minute. Connect with me here for updates.