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.
As borrowers begin to fill out loan forgiveness applications, it is important to understand how loan forgiveness works and what to do if you still have money left to spend at the end of your covered period. We dove into the research for you to answer five of the most frequently asked questions about PPP loan forgiveness and what to do with your funding.
Biz2Credit Answers Small Business FAQs on the Paycheck Protection Program
The CARES Act, passed in March 2020, provided relief for the United States during the Covid-19 pandemic and economic crisis. One of the hallmark programs for small business owners was the Paycheck Protection Program (PPP) that provided loans to small businesses, which could be forgiven if the business owners used the loan money for two specific purposes: payroll costs and qualifying non-payroll costs. Here is what you need to know.
What is a covered period and how does it relate to loan forgiveness?
This is a really good place to start. According to the Small Business Administration (SBA), a covered period is “either (1) the 24-week (168-day) period beginning on the PPP loan disbursement date, or (2) if the borrower received its PPP loan before June 5, 2020, the borrower may elect to use an eight-week (56-day) Covered Period.” So, your covered period depends on when you received your loan. If you pay your employees on a biweekly or more frequent schedule, you may have chosen an Alternative Payroll Covered Period, which means “your covered period begins on the first day of the first pay period following disbursement of the loan.” Most people will have a 24-week period, although the SBA notes that the covered period for everyone ends no later than December 31, 2020.
The Paycheck Protection Program Flexibility Act of 2020, passed on June 5, 2020, made changes to the loans. The main changes in the legislation are related to the forgiveness of loans in which the bill:
- extends the covered period from an 8-week period to 24-weeks
- allows recipients to defer payments until they receive compensation for forgiven amounts, and extends the deferral period
- notes that loan recipients “who do not apply for forgiveness shall have 10 months from the program’s expiration [December 31, 2020] to begin making payments.
These changes focus primarily on the covered period, but also extend to the repayment terms of the loan and the time period for PPP loan forgiveness later. The first part is that borrowers can apply for loan forgiveness at any point during their covered period – but that if they do not apply for forgiveness, there is a set amount of time before payments will be required. (Borrowers can defer payments until the amount that will be forgiven is approved, which will vary for each loan recipient.)
The second part relates to what happens if the borrower’s loan is not forgiven (see terms of loan below for more information) and they need to pay back the money. The funds are on a 5-year loan term with a 1 percent interest rate and a 6-month deferral from the date of disbursement; as noted above, borrowers who do not apply for forgiveness have a 10-month deferral before they have to begin making payments.
The final, and most important, note on this is that the covered period for later loans may expire early because December 31, 2020, is the final cutoff date for eligible expenses. Unfortunately, “for loans being disbursed July 16 and later, this means that you will not be able to take full advantage of the 24 weeks,” Bench notes. This may leave you with money at the end of the covered period that could be converted into an actual loan, but don’t worry! We have advice on that later…
How do I know if I have “eligible expenses”?
A lot of the discussion around loan forgiveness centers around the term “eligible expenses,” which can be confusing when trying to figure out if you qualify for forgiveness and what you can spend the PPP loan money on. The June 5 Paycheck Protection Program Flexibility Act of 2020 changed one of the main rules around eligible expenses: moving forward, non-payroll expenses could be up to 40 percent of eligible expenses while payroll expenses had to be 60 percent for the loan to be forgivable. What does this entail?
According to the SBA, payroll costs consists of:
- compensation to employees: salary, hourly wages, commissions, or similar compensation,
- “payment for vacation, parental, family, medical, or sick leave,”
- severance packages,
- employee benefits including health insurance coverage and insurance premiums, as well as retirement benefits,
- payment of state and local taxes, including any necessary payroll taxes, payroll tax filings, and income taxes,
- “and for an independent contractor or sole proprietor: wages, commissions, income, or net earnings from self-employment or similar compensation.”
The SBA also outlines non-payroll costs, which consists of:
- Covered mortgage obligations
- Includes mortgage interest payments on “property incurred before February 15, 2020”
- Does not include “prepayment or payment of principal” on a business mortgage
- Covered business rent obligations
- Includes lease payments or rent payments for properties “in force before February 15, 2020”
- These are pursuant to lease agreements for the property
- Covered utility payments
- Payments for “electricity, gas, water, transportation, telephone, or internet access,” that began before February 15, 2020
- “An eligible non-payroll cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.”
- “Count non-payroll costs that were both paid and incurred only once.”
What are the terms of my loan?
The Paycheck Protection Program was available until August 8, 2020 and provided loans with either a 2-year or 5-year maturity and 1 percent interest rate. The SBA would forgive loans if “all employee retention criteria are met, and the funds are used for eligible expenses” – which means that the loan forgiveness amount could be the full amount of the loan.
Small businesses along with sole proprietors, independent contractors, and self-employed individuals were eligible for the program as long as they were in operation before February 15, 2020. (The latter group with self-employment income must file “a form 1040, Schedule C” to be eligible.”) The important terms for the loans are the same, whether you are the only individual employee or you have a large number of employees in your business.
The basics are the 60/40 rule: 60 percent for payroll costs and 40 percent for qualifying non-payroll costs, which is detailed above. A few specifications around these are that, according to the PPP loan forgiveness application for borrowers, by the SBA, a loan forgiveness reduction will be required if there are any “salary or hourly wage reductions in excess of 25 percent.” (This reduction can be eliminated if the wages are restored to pre-Covid levels as well.) Businesses, also, only qualify for full loan forgiveness “if they maintain their number of full-time equivalent employees (FTE)” in addition to maintaining wages at pre-Covid levels.
One important thing to remember is the revision to your loan terms that came with the Paycheck Protection Program Flexibility Act of 2020: it extended the “period in which an employer may rehire or eliminate a reduction in employment, salary, or wages that would otherwise reduce the forgivable amount of a paycheck protection loan” to December 31, 2020. The forgivable amount is determined without regard to a reduction in the number of employees if the borrower has been unable to hire former employees and/or is unable to return to the “same level of business activity” due to federal requirements or guidance related to the coronavirus. Basically, if you are unable to rehire employees due to the coronavirus pandemic and guidelines, then it will not impact your eligibility for loan forgiveness.
When should I apply for loan forgiveness?
According to the SBA, the cutoff for the covered period and applying your Paycheck Protection Program loan to eligible expenses is December 31, 2020. They write in an August FAQ: “Nonpayroll costs must be paid or incurred during the Covered Period to be eligible for loan forgiveness. For payroll costs only, the borrower may elect to use the Alternative Payroll Covered Period to align with its biweekly or more frequent payroll schedule.”
So how do you apply for loan forgiveness? You should first contact your lender for guidance and for “SBA Form 3508, SBA Form 3508EZ, SBA Form 3508S, or a Lender equivalent,” according to the SBA. The other thing to be sure of is that when you submitted an application form for the loan, you certified in good faith that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” One thing to note is that the SBA and Treasury Department created a safe harbor for “any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.” This is important because your loan will not be eligible for forgiveness if you did not make the application in good faith.
The other time to apply for forgiveness is when all of your loan funds have been exhausted within the covered period.
What happens if I didn’t spend all of the money from my loan?
The last, and probably most important, question we receive is what to do if you have extra money left over at the end of the covered period for paying eligible expenses. Well, there are two options:
- Return the money to your lender. The eligible expenses you paid with the spent money will be part of your loan forgiveness application, and the money returned will be not applied.
- Use the PPP funds left over after the covered money but know that you will have to pay that portion back like a regular loan. For the PPP loan amount that is not forgiven (this extra amount after the covered period would not be forgiven) you are looking at a loan with a 2-year or 5-year maturity and a 1 percent interest rate.
The part of your loan that you used for eligible expenses will still be eligible for forgiveness, but it is the money left that you could hold on to and spend with a low-interest rate and reasonable term. If you are looking for additional guidance as a PPP borrower about what to do with your remaining funds from the SBA loan, you can consult with your lender and the SBA website.