While the Paycheck Protection Program is currently closed (as of August 8th, 2020), many businesses that took out the loan are still eligible for forgiveness, provided they have met the criteria. There is a specific form that you need to fill out in order to qualify for forgiveness.
There are many nuances to PPP loan forgiveness calculation, depending on when you applied and how much you spent in the forgiveness period on employment-related tasks. For borrowers that received their loans before June 5th, the maximum compensation is $15,385.
So you would add up all payroll and non-payroll expenses in the 8 (or 24) week period to see what amount you would be entitled to. Technically, there is no deadline for forgiveness, according to the SBA. The official SBA document states that:
“Borrowers may submit a loan forgiveness application any time before the maturity date of the loan, which is either two or five years from loan origination. However, if a borrower does not apply for loan forgiveness within 10 months after the last day of the borrower’s loan forgiveness covered period, loan payments are no longer deferred and the borrower must begin making payments on the loan. For example, a borrower whose covered period ends on October 30, 2020, has until August 30, 2021, to apply for forgiveness before loan repayment begins.”
But don’t start tallying up your compensation just yet. First, you have to see if you are eligible, by understanding the PPP loan forgiveness rules.
Table of Contents
- PPP Loan Forgiveness Rules
- Recordkeeping Requirements for PPP Forgiveness
- How to Apply for PPP Forgiveness
- PPP Forgiveness for Self Employed
- The PPP and the EIDL Program
- PPP Forgiveness per Entity Type
- What Are the Primary Resources in Terms of PPP Forgiveness?
- A PPP Loan Forgiveness Checklist
- PPP Loan Forgiveness – Steps to Take
PPP Loan Forgiveness Rules
Not everybody can qualify for PPP loan forgiveness. A lot of businesses took out the loan without using it for the intended purpose. This was to be expected amidst the COVID panic. As a broad rule of thumb, if you used your PPP loan for staffing and payroll expenses, then you are eligible for forgiveness. But more iron-clad details are given below on PPP loan forgiveness.
24 Week Rule
Only expenses incurred in the given 24 week period are eligible for forgiveness. You will be using either an 8 week or 24 weeks reporting period for forgiveness. If you received a loan before June 5th, then you have a choice of using either period.
The main factors determining whether you should use an 8 or 24 week period at whether you are self-employed (more on this below) and whether you have enough eligible expenses to gain forgiveness on.
Keep in mind that December 31, 2020, is the final cutoff date for eligible expenses. For loans being disbursed July 16 and later, this means that you will not be able to take full advantage of the 24 weeks.
To claim eligibility for PPP loan forgiveness, 60% of the loan must be used for payroll costs. This is the most critical point of the PPP program and one that many fail to take into account. Independent contracts are not employees and do not form part of regular payroll.
Otherwise, business owners could get extra work done from contractors and claim the PPP on it. The total amount you can be forgiven will rise depending on how much payroll-related expenses you have undertaken, up to the total loan amount ($15,385 for the 8 week period).
This step is a little more involved than the others. First, you will need to identify whether you are using the 8 or 24 week period. Next, determine the average number of full-time employees you maintained for two time periods:
- February 15th, 2019 to June 30th, 2019, (B1)
- January 1st, 2020 to February 29th, 2020. (B2)
Divide the average number of employees by B1. Then divide the average number of employees by B2. Take the larger number. If it is larger than 1, then you qualify for (full) loan forgiveness. If the figure is lower than 1, then your total forgiveness amount will be reduced proportionately. For instance, if the figure is 0.8, then you will be entitled to 80% of the payroll expenses.
If an employee refuses to come back to work and you cannot find similar talent to fill the role, you will also be eligible to claim forgiveness, even though you did not pay the wages. To qualify:
- You must have made an offer in writing to rehire
- You must have offered to rehire for the same wage and hours before the contract termination/hold
- You must have documentation of the employee’s rejection
You can also claim an exemption if the employee was fired for a reasonable cause or resigned voluntarily.
You must pay your employees up to 75% of their normal wage to qualify for full forgiveness. Loan forgiveness for employers will be reduced by the difference between the pay of the last quarter and 75% of the typical pay. If you put workers on reduced pay, you can pay them the full amount and claim forgiveness on it. The wage requirement will be individually assessed for every employee that earned less than $100,000 in annual pay during 2019.
Recordkeeping Requirements for PPP Forgiveness
The SBA and lenders they work with are not going to take you at your word. Unless you document everything you are doing, then you will not qualify for PPP forgiveness, which makes sense. The most relevant documentation you need to be mindful of while applying for PPP forgiveness includes:
- Payroll reports from your payroll provider
- Payroll tax filings (Namely Form 941)
- Income, payroll, and unemployment insurance filings from your state
- Documents verifying any retirement and health insurance contributions
- Documents verifying that your eligible interest, rent, and utility payments were active in February 2020
- Documents verifying your eligible interest, rent, and utility payments (canceled checks, payment receipts, account statements)
Ideally, you will want to have a strong payroll and accounting software that can easily generate reports for a given time period. Tax returns need to be neat, organized, and easily accessible, and a high-quality payroll provider is a must in the modern era. Even aside from loans and forgiveness programs, the SBA and IRS can conduct an audit whenever they like. If the books are not in order, you will be on the hook for a fine.
Needless to say, record-keeping is imperative for all kinds of loans as well as this PPP loan forgiveness application. You will need to closely document all expenses and wages over the 8 or 24 week period so that your total compensation can be accessed. The forgiveness processor might also demand additional documentation. While the application is being processed, the interest will accrue at 1% for the duration of the 5 year loan period. As you might have gathered from reading this far, PPP loan forgiveness is not automatic – not by a long shot.
How to Apply for PPP Forgiveness
Applying for PPP forgiveness is a little tricky. The most problematic part is the calculation of the total forgiveness amount, which is step 2, below. Thankfully, after this hurdle is passed, all you have to do is supply the documentation and you are good to go.
#1 – Determine Eligibility
The first step is to determine whether or not you are eligible by paying attention to the rules stated above. There is no point in wasting time if you do not meet the minimum requirements for forgiveness.
#2 – Download and Fill The Form
The next step is in COVID forgiveness would be to download the form. There is a specific forgiveness form to be filled out. Take a look at some of the fields to get an idea of the information required, including:
- SBA PPP Loan Number
- PPP Loan Amount
- Employees at Time of Loan Application
- EIDL Advance Amount
- Payroll Schedule
- Lender PPP Loan Number: PPP Loan Disbursement Dat:
- Employees at Time of Forgiveness Application: EIDL Application Number
- Alternative Payroll Covered Period, if applicable
- Forgiveness Amount Calculation
To fill out this form correctly, you will need to identify what your payroll period is (8 or 12 weeks) and whether or not you are eligible. Note that this is by far the most burdensome step. The SBA Form 2508 is not the most straightforward to fill out, and there are different ways to do it depending on your industry, type of business, and loan amount.
All business owners will start by filling out part A, stipulating minimum headcount requirements. If you maintain less than the minimum headcount, your total forgiveness amount will be reduced proportionately.
#3 – Submit Forms
When you have filled out the form details, then you must send these on to your lender (the one who facilitated the PPP loan). All borrowers must submit part 1 (PPP Loan Forgiveness Calculation Form) and 2 (PPP Schedule A). The lender could easily want additional documentation and details from you, so it is best to have these at hand. Supplementary documentation is going to be needed to back up your claims.
#4 – Continue to Communicate
As mentioned in the previous step, applying for COVID PPP forgiveness is not a one-off step that you can easily complete. Your lender is going to want additional documentation. You will have to maintain constant contact.
Notably, as long as a business submits a loan forgiveness application within 10 months of their loan being used, they are not required to make any payments on the loan.
So while the loan application and forgiveness might seem to be a lot of work, it will ultimately mean more funds to run your business. And, as the point of running a business is to created funds, it is a win-win situation for those who are organized in their affairs.
PPP Forgiveness for Self Employed
Initially, there was much worry about the financial safety net provided for Sole Proprietorships, freelancers, and independent contractors amidst the COVID-19 pandemic. But these classes are provided for as easily as other classes, once they following the typical rules and requirements. In fact, PPP forgiveness for the self-employed is much more straightforward in comparison, given that they do not have any employees (though there are many that do have employees).
Generally, the PPP loan amount that businesses qualify for is based on their average payroll expenses. But since Sole Proprietorships and Independent Contractors usually don’t have payroll, their loan is based on 2019 net profit divided by Twelve, to get a monthly average net profit. This number times Two and a Half equals your PPP loan amount.
This means your PPP loan is loosely equal to ten weeks’ worth of net profit. This calculation is a lot more streamlined as compared to business owners with 50 employees. Of course, if you are a self-employed person with employees, then your process will have the most complexities. The method of calculation is similar to that of a small business owner. Both categories will file on their Form 1040 Schedule C.
There are 3 major forms you can submit when filling out a loan forgiveness application. These are:
- SBA 3508
- SBA 3508 EZ
- SBA 3508 S
The SBA 3508 EZ and SBA 3508 S are the most straightforward to fill out but are harder to meet. You can only use the 3508 S if you have taken out a PPP loan of less than $50,000. You can only use the SBA 3508 EZ if you do not maintain any employees.
The PPP and the EIDL Program
Economic Injury Disaster Loans (‘EIDL’) are also eligible for forgiveness. These EIDL loans were an alternative to the PPP given the situation. As such, it was determined that the EIDL program would also be subject to forgiveness for suitable applicants.
The EIDL advance is forgiven automatically up to $10,000. Like the PPP, the EIDL disaster recovery is governed by the CARES Act. While both of these loans benefit business owners, their approaches differ in terms of total amounts, how the funds are sent, and what expenses they can cover. As of April 2020, applicants could receive up to $1,000 to pay for immediate costs for small businesses as part of a grant program.
However, funding for the so-called EIDL Advance dried up on July 11, after issuing more than $20 billion in emergency funding to nearly 6 million small businesses. The PPP took precedence as the main tool to assist small US-based businesses. However, while PPP forgiveness is complex and arduous, EIDL Advance forgiveness is automatic and easier, though available to a lesser number of applicants.
Commercial lenders that work with the SBA disburse PPP loans. PPP loans, which closed on August 8, 2020, are also forgivable for small business owners under certain circumstances. The maximum loan amount available to borrow through the PPP is equal to 2.5 times the business’s average monthly payroll costs or $10 million, whichever amount is lower.
PPP Forgiveness per Entity Type
There are different forms and requirements for the various legal entity types. This table should be a major help so that you can quickly identify what forms are necessary, what the rules are, and how to satisfy them. If your total loan amount is less than $50,000, you can use SBA 3508S, which is a simplified version. If you have no employees, you can use the SBA 3508 EZ.
|Entity Type||Max Forgiveness Amount||Relevant Tax Forms||Relevant Submission Forms|
|Self-Employed (SP, freelancer, or contractor) without employees||$15,385.||Form 1040, Schedule C||SBA 3508, SBA 3508 EZ, SBA 3508S|
|Self-Employed with employees||$15,385.||Form 1040, Schedule C||SBA 3508|
|Self-Employed with more than one PPP loan for multiple businesses||$20,833||Form 1040, Schedule C||SBA 3508|
|Partnership||$20,833||Form 1065, Schedule K-1||SBA 3508|
|Corporation||$20,833||Form 1120||SBA 3508|
|LLC||$20,833||Form 1040, Schedule C (Single Member LLC ) OR Form 1065, Schedule K (Multi-Member)||SBA 3508|
What Are the Primary Resources in Terms of PPP Forgiveness?
The main authorities over the PPP loan and forgiveness program are:
- The SBA – The US Small Business Administration is the chief source of business affairs in the USA. They are a Federal arm responsible for many loans, such as the popular SBA (7)(a) and many other research studies and financial opportunities. The SBA has primary authority over the PPP and other Federal loans. They issue the rules and guidelines. Many other financial institutions work with the SBA to process loans.
- US Treasury Department – The US Treasury Department supports the SBA in its implementation of the PPP program. All PPPloans larger than $2 Million are automatically audited by the US Treasury Department.
- Coronavirus Aid, Relief, and Economic Security (CARES) Act – The PPP initially came about as a result of the CARES Act, a financial package that aimed to stimulate the economy during the COVID-19 pandemic. This is the primary piece of legislation that enabled the SBA to push forward the PPP loan program under the Trump administration. Simply put, the CARES act enabled the PPP to allow small business owners to retain employees and stay open for business as much as possible.
These are the 2 primary organizations and the core piece of legislation that governs PPP loans and the corresponding forgiveness. The US Chamber of Commerce is also worth mentioning. This is a powerful lobbying group established in 1912 that has much authority in fighting for US business interests.
A host of financial providers are responsible for the processing and facilitation of PPP loans and forgiveness applications, but they are not integral to the creation and maintenance – just the applications and management on an intermediary level. The PPP program ran out of funding a mere 2 weeks after first instigated on April 3rd. However, the funds were soon replenished and multiple programs were made available.
A PPP Loan Forgiveness Checklist
For PPP loan forgiveness, you need to use the funds on payroll, rent, mortgage, and utilities to qualify. If you do this, you will need to maintain full employment at full salary to maintain the maximum forgiveness amount. That is all that is required.
However, this checklist should make it easier for you to submit the correct application to the lending institution so you can get your funds without delay. This is what business is all about. Make sure you have:
- PPP Loan Forgiveness Application Form 3508 (standard)
- PPP Loan Forgiveness Form 3508 S (for loans less than $50,000)
- PPP Loan Forgiveness Application Form 3508 EZ (for businesses without employees)
- Payroll reports from your payroll provider
- Payroll reports, federal payroll tax filings (Form 941, Form 1040, Form 1065 Schedule C, Schedule A, Schedule K1, etc), proof of benefits contributions for employees, state tax filings, payroll, unemployment insurance forms, etc
- Proof of rent or mortgage interest payments, along with copies of your lease or mortgage agreements
- Documents verifying your eligible interest, rent, and utility payments before and after loan application
If you can answer your legal entity type, total PPP loan amount, and whether or not you maintain employees in your business, you can drill down an awful lot in terms of what documentation you required. Check out the entity table above to see which documents are relevant for your loan.
PPP Loan Forgiveness – Steps to Take
The checklist above represents a sum total of all the forms and filings you might need to fulfill the application. But equally important is the list of steps to take in order for your application to work. The sequential order of things you need to in order to qualify are:
- Choose covered period (8 or 24 weeks)
- Select the right submission forms for business type and loan amount
- Determine total forgiveness amount
- Subtract deductions
- Submit forms and documentation
- Keep in contact with the lender for notifications and updates.
The rules and requirements for PPP forgiveness are quite straightforward, all things considered. Just make sure you have all of your documentation handy. This is why having a good payroll, accountancy, and document storage system is so important – it makes all manner of financial activities a lot easier to account for.
Once you understand what you are doing in a little more depth, it really is just a matter of selecting the forms, doing the calculations, and submitting the documentation. With all of the confusion, you should be able to apply for PPP forgiveness within a day.
How to Apply for PPP Loan Forgiveness?
You can apply for PPP loan forgiveness using the simple steps above. First, you will need to determine your eligibility in terms of wages, staffing, payroll, and exemptions. Next, you need to identify your reporting period (8 or 24 weeks). You will then have to download the form and fill it out. This is the most complex step, and you will have to do a number of calculations to deduct what you are legitimately entitled to. You will want documents and software at hand to assist in these calculations. Following this, you can simply send your document and the necessary supplementary documentation to the lender that facilitated the loan, whether that is OnDeck, Kabbage, or PayPal LoanBuilder. Many online financial institutions processed PPP loans, in tandem with SBA requirements.
When to Apply for PPP Loan Forgiveness?
You will pay the interest rate of 1% unless you qualify for PPP loan forgiveness. As mentioned at the start of the document, there is no deadline for PPP forgiveness. Borrowers may submit a loan forgiveness application any time before the maturity date of the loan, which is either two or five years from loan origination. However, if a borrower does not apply for loan forgiveness within 10 months after the last day of the borrower’s loan forgiveness covered period, loan payments are no longer deferred and the borrower must begin making payments on the loan. So you can submit a forgiveness application at any time before the loan is paid off.
What Is the Deadline for PPP Loan Forgiveness?
There is no deadline for PPP loan forgiveness. You can submit at any stage. There is only a deadline for PPP applications, a period which has passed a long time ago. Obviously, you will want to attain forgiveness on the loan as soon as possible. Because you will be paying off the loan principal coupled with an interest in the meantime. And the longer you leave it, the more complex it will be. You will have to reach back further in your software and file storage systems to get the right figures. Like many financial affairs the sooner you get it tackled, the better. However, when you have an application submitted, you do not need to make payments until a decision has been made.
How to Calculate PPP Loan Forgiveness?
The calculation of PPP loan forgiveness is not a straightforward process. There are online calculators that can make this easier to handle, but you will first need to identify the loan period (9 or 24 weeks), how much you spend on payroll, whether or not you paid your employees more than 75% of their typical salary, and the total PPP loan amount (if this is less than $50,000, you can use the simplified form for application). You will also need to ensure you maintained an average number of employees above 1.0 for the period. To complete the calculations, you would need to total all payroll costs, along with mortgage, rent, and utility. Next, make adjustments for full-time equivalency (wage reduction and the average number of employees). Essentially, your total forgiveness amount is equal to payroll + rent + mortgage + utilities, once the same staffing levels were maintained during the COVID 19 pandemic.
When Do I Need to Start Repaying My loan?
You aren’t required to start making loan repayments until your forgiveness decision is determined. When repayment does begin, any loan amount that is not forgiven will need to be repaid, along with a 1% fixed annual interest rate on the amount which is not forgiven. You’ll repay through monthly payments automatically debited from your account. If you don’t apply for forgiveness, you will have to start repaying its loan within about 16 months of receiving the funds.
What Are the Major PPP Forgiveness Rules?
The major stipulations for getting forgiveness on PPP are that you used the PPP for payroll, utilities, rent, and mortgage. This is because these expenses are related to essential business functioning. The other rules are that you did not reduce salaries by more than 75% and that you maintained the same level of employees. However, if you did this then your forgiveness total will merely be reduced. But if you used the PPP loan for purposes other than the 4 items mentioned above, then you will not be entitled to any forgiveness at all. Obviously, if you do not fill out the form and apply for forgiveness, then you will not qualify.
How Long Does the PPP Loan Forgiveness Application Take?
Once you have submitted all of the documentation to your lender of choice, they are legally obliged to send you a response within 60 days. What happens is that the lender must make a decision within 60 days and submit documentation to the SBA. The SBA will then release funds within 90 days. The lender will give you notice of the total forgiveness amount that is submitted to the SBA. While the total time is 150 days (~5 months), borrowers can expect to receive funds closer to around 90 days on average.
Who Processes the PPP Forgiveness Application?
Technically, it is a financial institution of some kind that processes the PPP applications. The SBA issues the rules and regulations, which are then undertaken by financial institutions, which are now mostly online. The borrower does the calculations and submits the documentation to the online financial institutions (i.e. the lenders). The lender then processes the applications and checks that everything is correct. Once everything is checked, the application decision is sent to the SBA, which then releases funds to the financial institutions, which sends it to the application/borrower.
What About Forgiveness for Partnerships?
As a general partner in a partnership, your eligible compensation is based on your partnership 2019 net earnings. The maximum partner compensation is capped at the 2019 Schedule K-1 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties), multiplied by .9235.
What Happens If I’m Not Approved for Forgiveness?
Your lender may allow you to provide additional documentation so they can reevaluate your request. But your outstanding balance will continue to accrue interest at 1%, for the remainder of the loan period (2 or 5 years) There are no prepayment penalties with this loan. This simply means that you can pay off the outstanding balance at any time with no additional fees.