When the U.S. Small Business Administration (SBA) launched the Paycheck Protection Program, the emergency lending initiative was a lifeline for business owners trying to navigate COVID and all the coronavirus-related changes (like social distancing) that were (and are) negatively impacting their small businesses.
Not only did PPP loans get businesses the funds they needed to keep their businesses moving forward during the pandemic, but if borrowers used the loan proceeds on eligible expenses during the 24-week covered period (the covered period was originally only eight weeks, covered, but the Paycheck Protection Program Flexibility Act, which was signed into law in early June, extended the covered period to 24 weeks), up to 100 percent of their PPP loan amount would be eligible for loan forgiveness.
As 2020 draws to a close, many businesses are nearing the end of the covered period. But not all PPP loans are automatically forgiven; in order to qualify for forgiveness, business owners will need to submit a PPP loan forgiveness application.
But with three different applications available—SBA Form 3508, SBA Form 3508EZ, and SBA Form 3508S—the question is, which forgiveness application form is the correct form for your business?
PPP loan forgiveness requirements
Before we jump into loan forgiveness application forms (and how to determine which form is right for your business), let’s quickly review the requirements for PPP loan forgiveness.
Eligibility requirements for PPP loan forgiveness include:
- The PPP loan amount was used to cover approved expenses. Forgivable expenses include eligible payroll costs (including employee salaries/employee wages, sick leave, employer contributions to retirement plans, and employee health insurance) and approved nonpayroll costs (including utility payments, lease payments, and business mortgage interest payments).
- The loan proceeds were used to cover expenses during the covered period. Again, only expenses that businesses incur during the 24-week period after loan origination are eligible for forgiveness. (Businesses that have irregular payroll schedules, like businesses with seasonal employees, may qualify for an Alternative Payroll Covered Period, which would begin the first payroll date following PPP loan disbursement.)
- At least 60 percent of loan funds were used for payroll costs. In order to qualify for the full loan forgiveness amount, businesses must use at least 60 percent of the total PPP loan to cover eligible payroll costs (the other 40 percent can be used to cover eligible nonpayroll costs).
In addition, in order to qualify for the full loan forgiveness amount, businesses must maintain their workforce, which includes:
- Maintain their number of full-time equivalent employees (FTEs); and
- Maintain employee compensation for their workers that is consistent with pre-COVID compensation levels
Businesses that reduced their number of employees or employee compensation will have their amount of loan forgiveness reduced proportionately.
There are exemptions for certain businesses that have had to lower employee headcount; for example, under the FTE Reduction Safe Harbor, businesses have until December 31, 2020 to restore their workforce before facing reduced loan forgiveness—and additional FTE exemptions passed with the Paycheck Protection Program Flexibility Act allow employers to qualify for full loan forgiveness if they can document in good faith that they’re unable to return to their standard level of business activity due to COVID-19 safety protocols or they’re unable to rehire former employees and is unable to find qualified workers to fill open positions—even if the business is unable to restore their workforce by the December deadline.
PPP loan forgiveness applications—and determining which application is the right fit for your business
Now that you understand how to qualify for PPP loan forgiveness, let’s cover the actual forgiveness process—and, more specifically, the different loan forgiveness applications.
There are three different forms PPP borrowers can use to apply for loan forgiveness: SBA Form 3580S, SBA Form 3508EZ, and SBA Form 3508.
SBA Form 3580S
In early October, SBA Form 3580S was released specifically for borrowers with PPP loans of $50,000 or less. Under the new interim final rule, borrowers who received $50,000 or less in PPP loan funds are exempt from loan forgiveness reductions due to a reduction in FTEs or employee salaries or hourly wages.
Under this rule, borrowers that a) received a PPP loan of $50,000 or less, and b) spent their loan proceeds on qualified expenses automatically qualify for full loan forgiveness.
(The only exception to this rule is if the business is affiliated with other businesses. In that situation, the total PPP loans across all affiliated businesses can not exceed $2 million; if it does, the business can not use form 3580S—even if their individual PPP loan was for $50,000 or less.)
SBA Form 3580S is the most simple and streamlined of the loan forgiveness applications—and the easiest for borrowers to complete and submit.
SBA Form 3508EZ
SBA Form 3508EZ is for borrowers with PPP loan amounts of more than $50,000—and, similar to Form 2508S, it’s a shorter, more streamlined application with fewer calculations than the full loan forgiveness application, SBA Form 3508.
In order for businesses to be eligible for SBA Form 3508EZ, they must meet one of the three following requirements:
- The borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application;
- The borrower didn’t reduce annual salary or hourly wages of any employee making less than $100,000/year by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period AND the borrower didn’t reduce employee headcount; or
- The borrower didn’t reduce annual salary or hourly wages of any employee making less than $100,000/year by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period AND the borrower was unable to operate at the same level of business activity due to compliance with COVID-related guidance and/or requirements
Businesses that qualify for SBA Form 3508EZ don’t have to go through the process of filling out a Schedule A worksheet.
SBA Form 3508
All other borrowers—including borrowers who reduced employee headcount and want to qualify for an exemption under the FTE Safe Harbor and self-employed individuals, sole proprietors, independent contractors who don’t meet the requirements for Form 3508EZ—will need to fill out the original loan forgiveness application, SBA Form 3508.
SBA Form 3508 is the most comprehensive of the three loan forgiveness applications and requires applicants to complete the Schedule A worksheet, which outlines expenses and calculates reductions to FTEs and employee salaries/wages.
Keep in mind that, depending on your application and how your PPP loan funds were used, you may need to submit supporting documentation to your lender (for example, payroll tax filings, payment receipts, account statements, tax forms, and/or cancelled checks) in order to qualify for loan forgiveness.
Submit your loan forgiveness application and get your PPP loan forgiven
Navigating the PPP loan forgiveness application process can feel overwhelming—particularly because there are three different applications. But now that you understand the differences between SBA Form 3508, SBA Form 3508EZ, and SBA Form 3508S, you’re armed with the information you need to choose, complete, and submit the right application for your business—and get the ball rolling on your loan forgiveness process.