How Does PPP Loan Forgiveness Work?
When the United States Federal Government announced the Paycheck Protection Program (PPP) in response to the COVID-19 pandemic, many small businesses were eager to take advantage of the various loan amounts being offered to help cover payroll costs and other business expenses including business mortgage interest, lease payments, general interest payments, utility payments and more.
By bolstering businesses’ ability to pay their employees, the U.S. government was not only able to provide support to small businesses across the United States but also their employees who rely upon the hourly wages or annual salaries they receive from these businesses. One of the highlights of this program was the ability for the borrowers, in this case small businesses, to get full forgiveness for their loan amount.
However, though the PPP program has come to be viewed as one of the more successful coronavirus response programs, from its outset one of the biggest points of confusion and misunderstanding has been the forgiveness process. Indeed, during the initial launch, the Treasury and United States Small Business Administration (SBA) had still not determined how exactly it planned to grant forgiveness, as well as what guidelines and requirements businesses would have to meet in order to be eligible for forgiveness.
Since that time, the government has made the requirements and qualifications for loan forgiveness much easier and has established the process businesses must go through in order to apply for and receive loan forgiveness.
How Does My Business Apply for PPP Loan Forgiveness?
Businesses are required to fill out an extensive application, which was recently updated by the SBA, detailing the funds they received, listing what expenses they utilized the funds for, and calculating the forgiveness amount for which they are eligible.
For many small businesses, the complexity and length of the calculations and details needed to accurately and correctly fill out the form are intimidating, especially for business owners whose time is already being allocated to dealing with the many other demands of running a successful small business.
In order to help ease the burden on small business owners across the nation’s whose financial operations are not as complex or who followed the original SBA guidelines and who, as a result, don’t need to fill out such an elaborate form in order for the Treasury and SBA to understand if they are eligible for full loan forgiveness, a shortened formed was introduced.
What is the EZ Form?
This new form, form 3508EZ, also known as the EZ form, is a shorter version of the initial PPP loan forgiveness application form.
While it still requires small businesses to provide documentation and complete a series of calculations, it is considerably less demanding. It is a great time saver for small businesses that are eligible to use the form.
Who is Eligible to Use SBA Form 3508EZ?
Based on the checklist for those eligible to use the EZ form issued by the SBA, businesses may use the EZ form if they satisfy any one of the following three statements:
- “The Borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form (SBA Form 2483).”
- “The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period (as defined below) compared to the period between January 1, 2020 and March 31, 2020 (for purposes of this statement, “employees” means only those employees that 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 The Borrower 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. (Ignore reductions that arose from an inability to rehire individuals who were employees on February 15, 2020 if the Borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020. Also ignore reductions in an employee’s hours that the Borrower offered to restore and the employee refused. See 85 FR 33004, 33007 (June 1, 2020) for more details.”
- “The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period (as defined below) compared to the period between January 1, 2020 and March 31, 2020 (for purposes of this statement, “employees” means only those employees that 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 The Borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.”
If your business satisfies any one of these three situations, then you are eligible to use the new EZ form.
Remember, the covered period, which is either 24 weeks or 8 weeks depending on when you initially applied for and received your PPP loan funds, refers to the period during which the PPP loan funds received and used are eligible for forgiveness. Any funds used outside of this coverage period will NOT be eligible for PPP loan forgiveness.
Additionally, if you have received PPP loan funds, it is important to be aware that the coverage period begins as soon as you receive the funds or, under the alternative coverage period, when your first payroll date after receiving the funds is (known as your first pay period). The coverage period does NOT begin when you first start using the funds. This is important to remember so that you can ensure you will receive total loan forgiveness for your PPP funds if that is your goal.
What Are the Differences Between the SBA EZ Form and the Regular, Full-Length Forgiveness Form?
The EZ Form is essentially a streamlined version of the traditional loan forgiveness application. The form itself is only two pages long and includes 8 different lines, as opposed to the 11 lines in the full application, for calculating your loan forgiveness amount.
Borrowers using the SBA EZ form must furnish the following information for review:
- Payroll Costs
- Mortgage Interest Payments
- Rent or Lease Payments
- Utility Payments
- Potential Forgiveness Amount
- Loan Amount
The biggest difference is that businesses using the SBA EZ form do not have to worry about calculating full-time equivalencies (FTEs), calculating FTE reductions adjustments, or calculating salary and hourly wage reductions. This can be a huge time saver and cuts down on the necessary documentation that you will need to provide.
What Businesses are Eligible for Loan Forgiveness?
As the PPP loan program has been rolled out, and as the Treasury and SBA have continued to adjust the terms and define the loan forgiveness process, the eligibility requirements for loan forgiveness has changed over time.
These changes have almost all made it easier for businesses to qualify for at least some form out loan forgiveness. At this time it would appear that the Treasury and SBA have made their final decisions as to the guidelines for what businesses will be eligible for loan forgiveness, so you should not expect the requirements to become anymore relaxed in the future.
While there are a number of stipulations involved and ways to receive partial loan forgiveness, those who are looking to receive full PPP loan forgiveness must satisfy the following requirements:
- Businesses are required to maintain their existing full-time employees on their payroll without instituting a salary/hourly wage reduction of more than 25%. Additionally, allocated PPP funds cannot be used to meet payments for employees of the company whose average annual salary totals in excess of $100,000 of cash compensation. (i.e. if you pay an employee $10,000 a month for a total annual salary of $120,000, you can only use the funds to pay for $8,333.33 of that $10,000, since $8,333.33 times 12 is $100,000)
- Businesses must use at least 60% of the loan (this was originally set at 75%, however, it was recently changed) for payroll expenses (this includes wages/salary and payroll taxes, such as employer contributions to social security and medicare).
- Businesses can use the remaining 40% of funds for mortgage obligations, business rent, lease agreement obligations, and utilities, including electricity, gas, water, transportation, and Wi-Fi (Please note that any funds used for expenses that fall outside of these categories will not be eligible for forgiveness).
- Funds eligible for forgiveness must be used during the covered period. Any funds that are used outside of this period will not be eligible for forgiveness.
As a quick note, following the signing of the PPP Flexibility Act, non-payroll funds can now be used for personal protective equipment (PPE), such as face masks for employees, in order to combat the spread of the coronavirus across the United States.
The noted requirements are the guidelines for those who are looking for full loan forgiveness. It is still possible to receive partial loan forgiveness if you fail to meet these requirements. You will use the PPP loan forgiveness forms, either the full-length or the EZ form, for calculating your potential forgiveness amount, which can be either full or partial.
How Can I Get Assistance with Filing for Loan Forgiveness?
Given the nature of the SBA PPP loan forgiveness forms, many small business owners have found themselves wondering where they might seek assistance both with filling out the forms and calculating potential forgiveness amounts. Below are a few tools which may be of use for you and your small business as you work to navigate the PPP loan forgiveness process.
Paycheck Protection Program Loan Forgiveness Estimator
One of the great online resources available to small businesses is PAYCHEX’s loan forgiveness estimator. This quick and easy to use tool can help you get a quick estimate of what amount you can expect to receive in forgiveness from the federal government.
While this number is just an estimate, and you will still need to fill out the actual forgiveness form (either the full length or EZ application) and perform the actual calculations, this can be a great tool for getting a quick idea of how much in forgiveness you are eligible for. This is especially useful for businesses who need to start calculating their expected forgiveness and factoring it into the overall long-term financial plans, estimates, and forecasts for their business.
If you have not yet applied for a PPP loan (as we’ll discuss later on, the deadline is quickly approaching), completing a quick loan forgiveness calculation can be a great way to help you decide whether or not a PPP loan is right for your business. After all, the amount you will receive in forgiveness is definitely something you should take into consideration before taking out a PPP loan.
Biz 2 Credit’s PPP Forgiveness Application Tool
Without the massive legal and finance teams and staff that large corporations benefit from, small businesses often struggle with any and all aspects of loans. The processes involved with even the simplest of loans can be lengthy and confusing.
At Biz2Credit, we are dedicated to helping out and assisting small businesses. As such, in partnership with the American Institute of Certified Public Accountants (AIPCPA), we have launched a new tool for small businesses to use in filing for PPP loan forgiveness. This online tool, which can be found at pppforgivenesstool.com, assists small businesses by automating the loan forgiveness process.
As noted on the platform, “Business owners, and their accountants, can use this tool to fill out their PPP forgiveness application online, receive an automatic forgiveness eligibility calculation and be provided with all the government-mandated forms needed to submit for lender forgiveness.”
Please note though that there are still areas that many businesses are waiting for the Treasury and United States Small Business Administration to provide guidance and clarification on. The site and tools within it will be updated as this information is provided.
Is It Still Possible to Get A PPP Loan?
As the Treasury Department and Small Business Administration (SBA) continue to solidify and clarify the remaining details of the program, many small business owners have found themselves wondering if it still possible to get a PPP loan.
While the Paycheck Protection Program Flexibility Act passed back in May set the deadline at June 30, since that time the deadline for having a PPP loan approved has again been extended. At this time, businesses have until August 8, 2020, to apply for and be approved for a PPP loan.
Indeed, as of this time there is still approximately $130 billion worth of funds available for Paycheck Protection Program loans. This money is just waiting to be lended out to small businesses in need!
Remember, your loan application must be approved by August 8, 2020, in order to receive the funds. Disbursement of the funds can take place past August 8, but the application must be approved by this date. This means you cannot submit your application on August 8 and expect to be approved. As such, if you are still considering taking out a PPP loan, you should plan to submit your application by at least August 1, 2020, but preferably earlier to be on the safe side.
Businesses are also still able to apply for Economic Injury Disaster Loans (EIDL), however, the free $10,000 EIDL grant is no longer available.
The Paycheck Protection Program (PPP) has been a huge success and is one of the better stimulus programs to have been rolled out as part of the federal government’s response to the COVID-19 pandemic. Not only has it provided a lifeline to small businesses across the nation who are in desperate need of cash flow but it has also helped maintain the income of millions of Americans who otherwise would have been furloughed or let go as a result of the pandemic.
The introduction of the EZ application has only made it easier for PPP borrowers to be approved for and receive the loan forgiveness that many so desperately need. While the process is still not a walk in the park, the EZ application has made the process much easier for thousands of small businesses across the nation.
Be sure to see if your business qualifies to use the EZ application. It can be a real time saver. And, don’t forget, if you have not yet applied for a PPP loan but are interested in getting one, there is still time left. However, the deadline is quickly approaching, so, if you are considering one, make sure to be proactive about the process.
As always, don’t forget to check back on our blog! We are dedicated to helping small businesses across the United States, particularly during these challenging times, and we continue to post new information on the PPP program, such as how a PPP loan will impact your taxes this year, and more.