When the Coronavirus Aid, Relief, and Economic Security Act (also known as the CARES Act) was passed in late March, one element of the legislation particularly stood out to small businesses—and that’s the Paycheck Protection Program.
The Paycheck Protection Program is an emergency lending program administered by the Small Business Association (SBA) that is overseeing approximately $350 billion in loans for small businesses impacted by the current health and economic crisis. The biggest draw of PPP loans? When used for approved business costs, unlike traditional SBA loans or Economic Injury Disaster Loans (more commonly known as EIDL loans), up to 100 percent of a Paycheck Protection Program loan is forgivable.
But just because the loan is eligible for loan forgiveness doesn’t mean all small businesses will end up with a forgivable loan; there are strict regulations on what qualifies for loan forgiveness—and as a small business owner, it’s important to understand those restrictions and how to make sure that, when all is said and done, you qualify for loan forgiveness.
Let’s take a look into how to get a PPP loan forgiven—so you and your small business aren’t taking on more debt in the midst of these challenging times:
What are the basics of the Paycheck Protection Program?
First things first—before we jump into how to get a PPP loan forgiven, let’s first cover the basics of the Paycheck Protection Program.
The Paycheck Protection Program oversees federally insured loans for small businesses with 500 or fewer employees, including eligible non-profits, tribal businesses, Veterans organizations, sole proprietors, independent contractors, and self-employed individuals. (Some industries have a higher SBA size standard, so in certain cases, businesses with more than 500 employees may be eligible for a PPP loan). In order to qualify for a Paycheck Protection Program loan, the business must have been operational on February 15, 2020.
Eligible small businesses can borrow up to 2.5 times their average monthly payroll costs to help cover short-term payroll costs and approved operating expenses. PPP loans max out at $10 million dollars.
What’s considered forgivable under the Paycheck Protection Program?
Under the current Paycheck Protection Plan guidelines, there are four expense categories that qualify for loan forgiveness:
- Payroll costs, including wages, salaries, commissions, group healthcare benefits, insurance premiums, retirement contributions, paid vacation, paid sick leave, and payroll taxes
- Mortgage interest
As mentioned, up to 100% of PPP loans are eligible for forgiveness. But just because an expense falls within one of these categories doesn’t mean it automatically qualifies for loan forgiveness.
So, what steps do small businesses need to take to get their PPP loan forgiven?
How do you get a PPP loan forgiven?
If you want to get your PPP loan forgiven, here are a few things to keep in mind:
Get your application in ASAP.
Technically, small businesses have until June 30 to apply for a Paycheck Protection Loan. But if you want to secure a loan, it’s important to get your loan application in ASAP.
According to data from the American Bankers Association, as of April 12, approximately $205 billion of the $350 billion has already been claimed. And how to get your PPP loan forgiven is a bit of a moot point if you don’t secure a loan to begin with.
Finish your application and submit it to an approved lender as soon as possible; the sooner you submit your application, the faster it can be processed—and the higher the likelihood you’ll get in before funds are no longer available. (If you need assistance finding a lender, you can search eligible lenders on the SBA’s website.)
Maintain employee headcount, wages, and salaries.
The main goal of PPP loans is to get small businesses the capital they need to keep their employees on payroll. As such, in order to qualify for loan forgiveness, you need to not only use your loan to cover payroll costs, but you also have to maintain employee headcount and salary levels consistent with your business structure prior to the coronavirus crisis.
If you reduce your employee headcount, your forgiveness amount will be reduced in proportion to the loss of employees. If you reduce your salary levels or wages by more than 25 percent for employees making $100,000 or less, your forgiveness amount will also be reduced.
So, if you want to qualify for loan forgiveness, make sure you keep your employees on board—and use your PPP loan to get them paid.
If you’ve had to layoff employees, make sure to rehire by June 30.
Many companies have been forced to lay off workers prior to receiving a loan. If that’s the case for your business, you have until June 30 to rehire laid-off or furloughed employees and get your employee headcount to pre-pandemic levels without suffering a penalty or having your forgiveness amount impacted.
Use your loan proceeds in the eight-week period following loan origination.
Only costs incurred during the eight-week period following loan origination are eligible for loan forgiveness. So if you want the entirety of your loan to qualify, you’ll need to spend the balance on forgivable expenses over that eight-week period; any expenses after that eight-week period are ineligible for loan forgiveness.
This is especially important if you have semi-monthly or monthly payroll periods. You want to make sure that your upcoming payroll dates fall within that eight-week window; otherwise, you could find yourself with a good portion of payroll expenses that aren’t eligible for loan forgiveness.
Use your loan proceeds in the right proportion.
Under the current PPP loan terms, in order to qualify for forgiveness, 75 percent of the loan must be used for payroll costs. That means no more than 25 percent can be used on other approved non-payroll costs, like mortgage interest payments or utility bills.
Don’t include independent contractors when calculating loan amount
While there was some question around this topic when the Paycheck Protection Program was rolled out, it’s now been confirmed that business owners can not include independent contractors when calculating their payroll costs for PPP loans. So, if you have 1099s on your payroll, make sure to exclude them when calculating your monthly payroll expenses and applying for a PPP loan; if you don’t, those costs won’t be eligible for loan forgiveness.
If you have questions, talk to your lender
The situation around the PPP loan program is continuing to evolve. If you have additional questions on how to qualify for loan forgiveness, talk to your lender. They can give you more specific insights into the process, including how to qualify for loan forgiveness.