As of May 28, 2021, the Paycheck Protection Program has run out of funding. You can learn more about the PPP with our COVID-19 resource hub.
How Do I Receive Forgiveness for my PPP Loan?
When the coronavirus pandemic struck the United States earlier this year, there was no doubt that small businesses across the United States were going to need serious assistance in navigating through and surviving what has been a tumultuous time.
This spring, as part of the CARES Act passed by congress and the Trump administration, the Paycheck Protection Program (PPP) gave out more than $525 billion in forgivable loans. This has been done with the cooperation of the United States Small Business Administration (SBA) and financial institutions and lenders across the country.
These loans, which have ranged from sizes of less than $25,000 and more than $4 million, came with the possibility of forgiveness if small businesses managed to meet a series of requirements.
As we head into the month of November, many businesses are nearing the end of their PPP coverage periods, and they will undoubtedly be rushing to apply for loan forgiveness soon.
One of the downsides of the PPP program is that, on account of how quickly Congress, in cooperation with the U.S. Treasury, rolled out the program, early on there were a lot of ambiguities and inconsistencies in the requirements and guidelines for full forgiveness of loans. Obviously, the COVID-19 pandemic necessitated that Congress move quickly. However, at the same time, there was a great deal of outcry on account of businesses like ShakeShack and the Los Angeles Lakers taking out PPP loans – businesses the loans obviously weren’t designed for.
Since that time, the Treasury and the SBA have managed to provide much clearer guidelines surrounding the forgiveness process and forgiveness amounts. However, even so, one of the biggest questions that small business owners have been asking is what they should expect and what they should have prepared for the loan forgiveness application and process in order to maximize their eligibility for forgiveness.
In this post, we will cover some of the details for preparing to apply for loan forgiveness at the end of your coverage period, as well as discuss one of the valuable tools that Biz2Credit, in partnership with the American Institute of Certified Public Accountants (AICPA), has rolled out to help small businesses with applying for PPP loan forgiveness.
How Does the PPP Loan Forgiveness Process Work?
The process for applying for Paycheck Protection Program loan forgiveness is fairly straightforward:
– Borrowers complete a forgiveness application
– PPP lenders review each application for accuracy and then submits it to the SBA
- The SBA reviews the application and makes a forgiveness decision, including what amount of the loan, if not all of the loan, will be forgiven
– The SBA then informs the lender as to their decision and sends them the requisite funds.
– The lender is then responsible for the disbursement of the money to the borrower and the borrower is then responsible for paying back any and all unforgiven amounts at a 1% interest rate (the length of the payback period is dependent on the time at which the loan was originally taken).
It is important to note the role your lender will be playing as a middle-man in this process. As such, it is a good idea to get in contact with one of your lender’s representatives if you have any questions about how they are handling the process, as it may vary so slightly from lender to lender. However, overall, the previous process outlined is how it should work on a basic, fundamental level.
The Reimbursement Process Depends on the Size of the PPP Loan
The original forgiveness process proved to be extremely complicated, especially for small business owners who are often not experienced and do not have the time to deal with complex financial loan forms. This was clearly overburdening for small business owners, particularly those with small loans of less than $50,000.
As a result, the SBA and the U.S. Treasury Department have released three different forms of varying complexity for various circumstances: Form 3508, Form 3508S, and Form 3508EZ. We will briefly cover each one and the requirements for filling them out.
Form 3508S: Loans of $50,000 or Less
PPP borrowers who took out PPP loans of $50,000 or less have the advantage of being able to submit a streamlined form called Form 3508S. This is by far the simplest form to fill out, as it is only one-page.
The Treasury and SBA introduced this form on account of the fact that loans under $50,000 represents a small percentage of the total loans given out and businesses. Additionally, businesses that took out loans less than $50,000 are quite small in comparison to some of the other small businesses that took out loans via the PPP program. Essentially, borrowers just have to certify that they spent 60% or more of the loan amount on payroll and the remaining amount (40% or less) on the other non-payroll costs that were deemed eligible expenses by the SBA and Treasury.
Form 3508EZ: Loans of More than $50,000
There are a number of businesses that are not eligible to use Form 3508S but whose circumstances do not necessitate that they fill out the regular form either. In order to address this, the SBA also offers another forgiveness application form that small businesses can use. This form is Form 3508EZ. It is designed to streamline the loan process for business that received loans or more than $50,000 but which meet a number of predetermined eligibility requirements. These eligibility requirements include:
– Sole proprietors and self-employed independent contractors who had no employees at the time they applied for a PPP loan initially.
– Businesses that did not cut the full-time equivalent (FTE) hours of employees working for the business (this does not include employees that you terminated prior to taking out the loan and whom you were unable to rehire or replaced with similarly-qualified individuals) and did not reduce the salary and/or cut the wages of any employee making less than $100,000 a year.
– Businesses who were unable to operate financially at a level equivalent to their standing on February 15th, 2020, on account of COVID-19 health regulations and who did not reduce the pay of their employees making under $100,000 a year by more than 25%.
If your business meets any one of these sets of requirements, then you are eligible to use the shortened and streamlined Form 3508EZ.
Form 3508: Loans Over $50,000 that are Not Eligible to Utilize Form 3508EZ
If your small business is not eligible to use the EZ form, then you will have to fill out Form 3508, which is the regular loan forgiveness application. You will have to use this form if your loan and business meet the following conditions most likely:
– You were not a self-employed borrower, independent contractors, or sole-proprietor with NO employees at the time you originally applied for your PPP loan.
– Your business reduced the salary and/or wages of employees who were earning less than $100,000 a year by more than 25%.
– You reduced the number of full-time equivalent (FTE) employees.
– Your business has been able to operate at the same level of business at which it was operating prior to February 15th, 2020.
Unsurprisingly, this form is significantly longer and more complicated than either Form 3058S or Form 3508EZ. We will discuss where you can receive assistance with filling out this form later on.
What Are Good Documents to Have Handy?
Naturally, being organized and detail-oriented is key to running a small business of any kind, but it is particularly important for small businesses that took out PPP loans, especially if they do not qualify for one of the streamlined application processes. You should be able to verify and provide documentation of all of your expenses to prove you spent the money for which you are asking forgiveness on eligible expenses. Remember, the burden will be on you to prove the eligibility of your expenses if necessary, not on the SBA, Treasury, or your lender to prove that your expenses were not eligible.
As such, we recommend that you bear in mind the importance of keeping organized documentation of all your expenses. You should also be carefully tracking your spending to make sure you meet the loan forgiveness spending percentage requirements during the covered period.
Here are a few documents that are good to have on hand:
- IRS 8821 (Signed) (optional)
- Payroll reports or IRS Form 941 for Covered Period
- Payment receipts for employer-sponsored benefits paid (if applicable)
- Bank statements for full Covered Period
- Business Utility Bills / Statements for the Covered Period (if applicable)
- Business Mortgage Interest Payment Receipts for Covered Period (if applicable)
- Business rent / lease payment receipts for Covered Period (if applicable)
- PPP Loan Forgiveness Form/Application (Signed)
If you have all of these documents on hand, you should be in good shape for providing the necessary information to the SBA and Treasury to receive loan forgiveness. They will also provide you with documented evidence if you need to support your claims later on to the SBA and/or Treasury. Remember, there is no time like the present to start getting these documents in order!
Obviously, having all of this information is even more important if you expect that you are going to have to fill out the regular forgiveness form, Form 3508, since it requires the most detailed information on your business’ spending and expenses.
However, those who are only going to have to fill out the simpler PPP loan forgiveness applications should NOT take this as an indication that you don’t have to keep detailed documentation. You never know if you are going to have to fill out one of the more extensive and demanding forms, and there is always the possibility that the SBA will require you to provide additional evidence of your spending. You do not want to be caught off guard. As the old saying goes, it is better to be over-prepared than underprepared
Future Changes to the Program
It is certainly possible that the program will see changes in the future. You can be confident that any changes will only make it easier for your business to receive forgiveness, as they are not going to make the standards more stringent on small businesses and independent contractors that have already taken out PPP loans.
Currently, a number of lawmakers on Capitol Hill are floating the idea of automatic forgiveness. Under this proposal, loans under a certain amount, potentially $150,000, would be forgiven automatically without businesses needing to provide lengthy documentation.
On account of the highly fluid nature of developments regarding COVID-19 stimulus, small business owners would be wise to keep an eye on Capitol Hill. There is potential for grants, including ones similar to the Economic Injury Disaster Loan (EIDL) grants that were offered at the start of the pandemic, and other financial stimulus to be provided to small businesses in the future.
What If a Loan Amount is Not Forgiven?
The nice thing about the PPP loan program is that they are also offering partial forgiveness, so if you failed to meet the requirements for the full value of the funds you received, you may still be eligible for some kind of forgiveness. As previously noted, any amount for which you are not forgiven will be rolled over into a 1% interest rate loan with the payback period depending on when you initially took out the loan. Your lender will provide you with details on this after the SBA has decided on how much of your loan they will forgive.
What If I Need Assistance with Filling Out the Forms?
Small businesses that need assistance filling out the forms can visit our PPP Loan Forgiveness Tool. This tool, which we have created for small businesses in partnership with the AICPA, is a free resource designed to assist small business owners with the process of filling out the PPP loan forgiveness forms.
The tool is fully automated, can fill out the required forms, and provide and automatic forgiveness eligibility calculation. We highly recommend that small business owners check it out, even if they don’t necessarily need assistance with their forms. It can really speed up the process of applying for loan forgiveness.
The regular PPP SBA loan forgiveness form, Form 3508, can be quite daunting. Our online tool can be used for the form. However, it is certainly possible that you may need some additional help. If you assistance with the form, we recommend seeking out a certified public accountant (CPA). This will cost money, however, if you are trying to receive full forgiveness or forgiveness for a large portion of a large loan, spending money for the assistance of a CPA can definitely be money well-spent. The last thing you want to do is fail to receive the full amount of forgiveness that you are eligible for on account of mistakes in filling out your loan forgiveness application.
As can be seen, there are a lot of variables involved with applying for PPP loan forgiveness. The process can definitely seem overwhelming. However, the SBA has been really good about providing processes and forms that are easier for smaller businesses with smaller, less-complex loans as opposed to processes being used for the larger loans that have been given out.
Bear in mind that the complexity of the process, particularly the regular form, has been designed to help minimize the ability of large businesses to take advantage of the program. The PPP program was designed with the small business owner in mind.
The important thing is that you remain diligent about tracking your expenses and adhering to the SBA guidelines for the program. You don’t want to be caught off guard at the end and not receive the amount of forgiveness that you expected.
Remember, as noted, there is no time like the present to start getting forms in order and organizing the expense, tax, payroll, and other documents. The earlier you get started on this the more prepared you will be when it comes time to apply for forgiveness.
Plus, don’t forget to check out our free online tool. It can be a great resource!
As always, please continue to check back. We will continue to post additional information on the PPP loan program, COVID-19 stimulus, and other useful small business articles as the situation and information continues to develop.