This post was last updated with new details about the second round of the PPP loan on February 3, 2021.
As a business owner, you may remember when the Paycheck Protection Program (PPP) was first introduced. There were many uncertainties about who could qualify and funds ran out quickly as applications piled up.
The good news is that the federal government has recently approved another $284 billion for a second round of PPP funding. The announcement comes at a time when many small businesses continue to struggle and are in need of assistance to weather the new shutdowns and restrictions.
Many business owners are especially concerned about what the second round of PPP loans means for loan forgiveness. If you’re wondering whether your business will still qualify for loan forgiveness, you’re not alone. Thankfully, information is more readily available this time around and guidelines are clearer than ever before.
Take a look at this guide on SBA loan forgiveness to learn whether your business will qualify and how to apply.
The Guidelines for Obtaining PPP Loan Forgiveness
PPP loans are designed to ensure business owners have the resources they need to minimize layoffs and keep the American economy strong. To achieve this, PPP loan amounts are calculated based on total payroll costs for the duration of 2.5 months—up to $100K for every employee. You can also try using an SBA PPP loan calculator to learn more about your allotted funding.
In order to qualify for loan forgiveness, businesses must abide by certain restrictions as far as the funds they receive. To obtain full forgiveness, all the money must go towards qualifying expenses.
During the first round of PPP funding, businesses had to spend at least 75% of all their funds on payroll expenses, leaving only 25% for other qualifying expenses. While the specific expenses that could be forgiven were somewhat confusing, the PPP Flexibility Act later added some much-needed clarity.
This time around, businesses have to spend at least 60% on payroll expenses and are allowed to spend as much 40% on other qualifying expenses.
This list of these expenses has also been expanded to include interest payments on mortgage, rent, utilities, costs of property damage, supplier costs, personal protection equipment, and certain operational expenses.
PPP borrowers have up to 24 weeks to spend the funds they receive on qualifying expenses and still be eligible for loan forgiveness.
As more information has become widely available, loan forgiveness guidelines are much clearer now than they were when the first rounds of funds were introduced. However, the situation is still evolving. Make sure to keep in contact with your tax advisor or accountant to stay ahead of the curve.
Updates to the SBA Loan Forgiveness Program
The latest PPP package includes new updates about qualifying for SBA loan forgiveness.
One thing that remains the same is that small businesses will need to follow the outlined guidelines and also file an application to receive forgiveness.
Keep in mind that while PPP loans qualify for forgiveness, other SBA products don’t fall under this category.
PPP Loan Forgiveness Application
Business owners must complete the SBA loan forgiveness application (SBA form 3508 or their lender’s equivalent) to receive any leniency. The application contains four parts, including one optional section:
- PPP Loan Forgiveness Application
- Schedule A
- Schedule A Worksheet
- Demographic Information Survey (optional)
The application itself will require basic information about your business, as well as a few other important numbers:
- SBA PPP Loan Number
- Lender PPP Loan Number
- PPP Loan Amount
- PPP Loan Disbursement Date
- Employees at Time of Loan Application
- EIDL Advance Amount
- EIDL Application
Whether you’re applying to receive full or partial forgiveness, you must complete this application.
The SBA also released a shorter PPP loan forgiveness application, SBA form 3508EZ. This is a simplified forgiveness application for businesses that meet the following criteria:
- Workers who are self-employed, and have no employees
- Business owners who kept salaries and wages consistent with pre-COVID earnings or reduced them by less than 25%, and didn’t reduce employee hours
- Business owners who lost business due directly to health directives, and didn’t reduce salaries or wages of employees by more than 25%
As mentioned above, business owners have up to 24 weeks to spend their funds on qualifying expenses and still apply for loan forgiveness. While the first round required businesses to spend at least 75% of their PPP funds on payroll and the other 25% on qualifying expenses, this has been changed. Businesses now have to spend at least 60% on payroll and the other 40% on qualifying expenses to achieve full forgiveness.
One aspect that hasn’t changed is the salary limit of $100k per employee.
The Rules for Which Expenses Can Be Forgiven, And Which Won’t
The application also contains more precise information about which expenses are forgivable. These forgivable expenses have recently been expanded to include:
- Payroll costs
- Business mortgage interest payments
- Business rent or lease payments
- Utility payments
- Property damage expenses that insurance won’t cover
- Supplier costs
- Protection equipment
- Certain operational expenses
This SBA loan forgiveness program is open to businesses that allocate at least 60% of the funds toward payroll during the 24 week covered period.
However, the SBA has put some measures in place to accommodate businesses with a regimented payroll schedule. Payroll costs incurred—but not yet paid—may also be eligible for forgiveness. If your payroll plan doesn’t align with the 24 week covered period that begins when you receive your SBA PPP loan, then you may be able to file for an alternative payroll covered period.
As the SBA established earlier, PPP loans allow for only $100K per employee. This amount includes both salary or wages and paid leave costs.
However, other employee-related cash expenses, such as health insurance, retirement plans, and state/local taxes, are not included in this $100K per employee allowance.
For small business owners, self-employed individuals, and independent contractors, compensation is also capped at $100K annually. You would calculate your loan amount based on your 2019 payroll divided by 12, or your monthly “average” payroll. This figure times 2.5 equals your PPP loan amount. If you still need help navigating this calculation, be sure to reach out to your financial advisor or lawyer.
To meet the SBA loan forgiveness program requirements, this funding can only be put toward business mortgage obligation interest payments—not to prepayment or payment on principal.
Maximizing Your Chances for Full Forgiveness
As previously mentioned, all business owners that receive a PPP loan can apply for forgiveness. However, depending on how business owners spend this money, they may receive anything from partial to complete forgiveness.
The extent to which your PPP loan is forgiven depends largely on how you spend this money. Because of this, the best way to receive full forgiveness is by thoroughly documenting your expenses.
To prove you spent the bulk of your money on payroll, you may have to (or be requested to) provide one or more of the following documents:
- IRS form 941 (which provides details about employee tax withholdings)
- Payroll provider reports detailing employee salaries/wages
- Income, payroll, unemployment and insurance filings from the state
- Any documents that might prove retirement and health insurance contributions
For other non-payroll expenses approved under the PPP loan, you may be asked to provide other proof. This can include canceled checks, payment receipts and account statements.
Who Oversees the Forgiveness Process?
While the PPP loan program was conceived, designed and administered by the SBA, loans were provided through private lenders. This means that lenders ultimately receive payments from those who receive partial forgiveness, and make decisions regarding who’s forgiven.
As a result, there’s not general process for how exactly PPP loans are forgiven.
After you apply for PPP loan forgiveness, lenders are obligated to make a decision within 60 days. You should receive a notice informing you whether your loan is fully or partially forgiven.
The loan forgiveness guidelines are firmly in place, but using funds outside these parameters isn’t necessarily illegal. If you decide to put your extra cash toward other expenses, you may decrease the percentage of the loan that’s forgiven, but doing so is entirely legal.
While the loan forgiveness guidelines are firmly in place, using funds outside these parameters isn’t necessarily illegal. If you decide that having extra cash on hand for other expenses is a priority, then you have the freedom to spend your money accordingly.
The CARES Act and Partial Loan Forgiveness: What You Need to Know
Just because you don’t meet every requirement doesn’t mean you’re liable to pay back the full amount. Instead of full forgiveness, you may still qualify for partial SBA loan forgiveness.
The CARES Act stipulates that forgiveness will be reduced for businesses that reduce their full time staff. However, businesses that provide a written offer to rehire staff after the pandemic ends may be excluded. It also mentions that, for businesses that retain staff but cut wages by more than 25%, the forgiveness amount may be reduced.
Businesses may also qualify for partial loan forgiveness if less than 60% of their PPP funds are spent on payroll expenses.
Find All The Information You Need About Business Financing, Growth, the PPP Loan & More
If you’re looking for a reliable source of information about how to navigate your business in uncertain times, you’ve come to the right place. At National, we take pride in helping small business owners make educated and informed decisions. Check back here to learn about the latest updates to the PPP program, and learn more about growing your business.
For guidance on how your small business should go about obtaining PPP loan forgiveness, be sure to contact your financial advisor or accountant.