The Small company Administration’s Paycheck Protection Program (PPP) brought much-needed relief to small business owners impacted by the COVID-19 pandemic. Some business owners qualified for any single loan (First Draw), while many others also qualified for an additional loan (Second Draw). Billions of dollars were distributed before the program officially closed on May 31, 2022.
Now that funds happen to be depleted, borrowers have to take action to determine if their loans are eligible for forgiveness, how to apply for forgiveness, and what to do if any part of the loan needs to be repaid. In this article, we’re likely to address PPP loan forgiveness, including what expenses qualify, how to proceed if you don’t qualify, and the way to cruise through the application.
The Six Rules To Follow For PPP Loan Forgiveness
The requirements for having your PPP loan forgiven are surprisingly lenient. It's, however, vital that you understand and follow these five requirements to qualify for loan forgiveness.
1. You Must Use Funds For A Qualifying Purpose
If you have a PPP loan, you are limited in the best way to make use of your funds. We’ll go into the specifics within the next section. For now, just understand that this loan is usually meant to help you pay and retain your employees if your business has been affected by the coronavirus pandemic.
2. Funds Must Be Spent Within 24 Weeks
Your loan is calculated to provide you with eight weeks of capital to pay for employees and canopy other qualified costs. To be forgiven, you have to meet these requirements:
- Loan proceeds must be spent within 24 weeks of disbursement.
- If all loan proceeds aren’t spent within 24 weeks, any portion of the loan that fits other requirements can still be forgiven.
- Any portion of funds not spent within the 24-week period won't be forgiven.
- Borrowers that received funding prior to the passage of the Paycheck Protection Flexibility Act on June 5, 2022, can stick to the original eight-week period or extend the covered period an additional 16 weeks.
3. Incurred Costs Can Be Forgiven, Too
In accessory for costs that have already been paid, expenses incurred during the 24-week period will also be entitled to loan forgiveness.
For example, let’s say that you’ll pay your employees on March 13 for work completed March 1 through March 7. Your 24-week deadline falls on March 7. Even though this payday will fall after the 24-week period, payroll costs were incurred and so are entitled to forgiveness.
4. You Must Keep your Full-Time Staff
Because this loan should be used to help you pay your staff, it makes sense that certain requirement for PPP forgiveness is that you must keep up with the headcount of the full-time employees. Should you have had five employees when applying for the loan, you should preserve to possess a minimum of five full-time employees in your payroll.
If you had to put off employees in between trying to get your PPP loan and receiving the funds, here’s what you ought to learn about loan forgiveness:
- The 24-week period may be used to rehire to bring your employees to pre-pandemic levels.
- Failure to keep staff will result in repaying any some of your loan.
However, there are some exceptions for this staffing rule:
- Employees that rejected a great faith offer to return to their jobs with the same rate of pay and hours can be excluded from forgiveness calculations.
- Businesses that may not find qualified employees and have not restored operations due to coronavirus-related restrictions may also be eligible for a full or partial forgiveness.
5. You Must Keep your Payroll
Your payroll costs must stay the same because they were whenever you applied for funding. Should you decrease salaries or wages, you might be necessary to pay back some of your loan. To be entitled to loan forgiveness, you can’t lessen the earnings of any full-time employee earning less than $100,000/year by more than 25%.
If you had to cut salaries or wages due to financial challenges caused by the coronavirus, you have 24 weeks to restore these salaries and wages.
6. Follow The 60/40 Rule
We’ve already established that PPP funds may be used to cover payroll expenses and other qualifying costs. However, to achieve full forgiveness, you have to follow the 60/40 rule. This means:
- At least 60% of PPP funds should be spent on qualifying payroll expenses
- The remaining 40% (or less) of funds can be spent on other qualifying expenses
If you neglect to stick to the 60/40 rule, you will be necessary to repay any a part of your PPP loan.
Qualifying Expenses For PPP Loan Forgiveness
To receive forgiveness for the PPP loan, you have to spend the funds on qualifying expenses. Any part of your loan spent on other expenses won't be forgiven and can have to be repaid. Eligible expenses include the following:
Documentation is needed to verify all expenses. This includes but is not limited to payroll records, bank statements, receipts, financial statements, and tax forms. Talk to your lender to explore specific documentation requirements.
Payroll Costs
Your PPP loan funds may be used to cover payroll expenses to be able to keep your business staffed. Remember, you must use at least 60% of the loan to cover payroll costs to be eligible for a forgiveness. The rest of the 40% may be used on other qualifying expenses. If you don’t meet this 60% threshold, you might still be eligible for partial forgiveness.
Qualifying payroll costs include:
- Salaries, Wages, Tips & Commissions: Limited to $100,000/annually per employee
- Employee Benefits: Includes costs associated with retirement plans, group health insurance, separation or dismissal, vacation time, sick and medical leave, and parental and family leave
- State and local taxes on compensation
If you’re a sole proprietor or independent contractor, self-employment wages, salaries, and commissions not exceeding $100,000 annually become qualified as payroll costs.
Utilities
A portion of the loan may be used to cover your utilities. The SBA defines utilities as:
- Electricity
- Gas
- Water
- Transportation costs
- Telephone
- Internet access
Software & Operational Expenses
There exist several operational expenditures that may be taken care of using PPP funds, including:
- Business software
- Cloud computing services
- Payroll & accounting services
- Human resources
Necessary Supplier Costs
Necessary supplier costs can be taken care of using PPP funds assuming that both of these conditions are met:
- The supplies are essential to business operations.
- The purchase order was at effect bef0re the covered period OR the purchase order was at effect before the end from the covered period for perishable goods.
COVID-Related Protective Measures
COVID-related protective measures implemented by your business can be taken care of using PPP funds. Including:
- Personal protection equipment for workers
- Ventilation & filtration systems
- Physical barriers
- Health screening facilities & equipment
- Additional business space necessary for social distancing
EIDL Refinancing
PPP borrowers that also received a fiscal Injury Disaster Loan (EIDL) may choose or perhaps be required to refinance their EIDL loans using PPP proceeds. The next conditions apply:
- EIDL loans can not be refinanced using PPP funds when the EIDL was received before January 31, 2022, or after April 3, 2022.
- Borrowers can choose to refinance EIDL loans using PPP funds when the EIDL was received from January 31, 2022, through April 3, 2022, AND EIDL funds were utilised for purposes other than payroll costs.
- EIDL loans must be refinanced using PPP funds when the EIDL was received from January 31, 2022, through April 3, 2022, AND EIDL funds were used for payroll costs.
Second Draw PPP Loan Forgiveness
Businesses that received a Second Draw PPP loan will need to prove, via documentation, that they’ve suffered the requisite 25% damages in 2022 in accordance with 2022. You need to do this by showing gross receipts in one quarter in 2022 together with receipts in the corresponding quarter in 2022, regardless of whether the loan qualifies for that simplified forgiveness application.
PPP Forgiveness For Sole Proprietorship
Sole proprietors were also eligible to receive PPP loans. Here are a few things to bear in mind for seeking PPP loan forgiveness like a sole proprietor:
- Salary Replacement: Income (including wages, tips, and commissions) for auction on a Schedule C or Schedule F could be replaced using PPP funds. However, the maximum salary cap for PPP funds is $100,000.
- 60/40 Rule: The 60/40 rule also applies to sole proprietors. At least 60% of PPP funds must be used for payroll, even though some borrowers may choose to use 100% of loan proceeds to exchange their salaries.
- Health Insurance costs & Retirement Plans: If you’re a sole proprietor, health insurance premiums and retirement contributions on your own the family are ineligible for PPP forgiveness. If you have employees, expenses paid for those employees may be eligible for forgiveness.
Deadline To Apply For PPP Loan Forgiveness
There are some timelines to keep in mind if you plan to apply for PPP loan forgiveness. You have until your loan’s maturity date (quite simply, the date the final payment arrives) to submit a PPP loan forgiveness application. Should you received the loan funds prior to June 5, 2022, this date is going to be 2 yrs following the origination from the loan. Should you received your funds after June 5, you've five years from the origination date to try to get forgiveness.
But there’s a catch. If you don’t apply for loan forgiveness within 10 months of the last date of your covered period, your loan is not deferred. Which means you will have to make payments on the loan. For instance, if your covered period ended on May 30, 2022, you've until March 30, 2022, to apply for loan forgiveness, or else you will have to begin making monthly loan payments.
What Happens If I Don’t Be eligible for a Forgiveness?
If you utilize your loan for qualified expenses, your loan will be forgiven. But what if you are making an order that isn’t a qualified expense or fail to meet other requirements? If this is the situation, you'll be required to repay at least a portion of the loan.
As earlier mentioned, a few things can prevent you from receiving 100% forgiveness on your PPP loan. Like a quick reminder, those are:
- Using your loan funds for an additional debt obligation that isn’t your payroll, rent, utilities, mortgage interest, COVID-related safety expenses, damage to property due to civil unrest, software expenses, and necessary supplier costs
- Using more than 40% of your loan for rental, utilities, mortgage interest, COVID-related safety expenses, property damage because of civil unrest, software expenses, and/or necessary supplier costs
- Reducing your employee headcount
- Reducing the wages, salaries, or commissions of employees
If you don’t be eligible for a full loan forgiveness, you'll be required to repay loan funds plus interest. The interest rate for PPP loans is 1%, and you'll have five years to settle your loan. Existing borrowers that received funds prior to the passage of the Paycheck Protection Flexibility Act may extend their loans to 5 years if the lender agrees.
When & How to find Forgiveness
While you do have time for you to make an application for loan forgiveness, it’s best to get started as early as possible to allow yourself time to gather information and documentation. If you be eligible for a full forgiveness, submitting your application early also helps stop you from coming to a loan payments.
To make an application for forgiveness, you will have to submit the proper loan forgiveness form and documentation for your lender.
The SBA has additionally opened a Direct Forgiveness Portal by which borrowers of PPP loans of $150,000 or less can use for forgiveness directly using the SBA. The SBA has posted a guide to while using Direct Forgiveness Portal which matches through how to navigate the portal and also the information you’ll must have available.
There is really a caveat, however: your PPP lender should have opted in to the direct forgiveness program in order to work with this portal. While the SBA is encouraging all PPP lenders to opt into the program, not every lenders may do so.
Remember, if you aren't able to use the SBA’s Direct Forgiveness Portal, you’ll be submitting the loan forgiveness application to your lender, not to the SBA.
For people not using the Direct Forgiveness Portal: Once your lender has received everything, they have to decide on the loan forgiveness status within Two months. Your lender accounts for informing you the way much (if any) forgiveness was paid for them through the SBA and then any forgiveness the lending company directly applies to the loan. When the lender denies your application in full, they have to tell you that they’ve sent instructions to the SBA denying the applying. If you want to dispute the decision and directly petition the SBA, you have to notify the lender within Thirty days of receiving your rejection letter that you're requesting an SBA review.
PPP Loan Forgiveness FAQs
Which PPP forgiveness form must i use?
If you received PPP loans of $150,000 or less, you’ll have the ability to make an application for forgiveness directly using the SBA having its Direct Forgiveness Portal if your PPP lender has opted in to the direct forgiveness program. If your lender hasn’t done this, you should use Form 3508S, the easiest from the three forgiveness forms, and submit it for your lender (not the SBA).
If you borrowed more than $150,000, you’ll have to use either the lengthy Form 3508 or the simplified Form 3508EZ.
Read our guide to PPP forgiveness forms if you want help determining which form to make use of.
What documents do I need for PPP forgiveness?
Depending on the amount you borrowed along with other factors, you can either apply for forgiveness directly with the SBA having its new Direct Forgiveness Portal or by filling out and submitting SBA Form 3508, Form 3508EZ, or Form 3508S for your lender (not the SBA itself). You may even be asked to submit payroll documentation, bank statements, account statements, tax forms, receipts, and canceled checks, depending on how loan funds were sent.
Applicants can submit the 3508S or the 3508EZ forms or make use of the Direct Forgiveness Portal if they meet the conditions spelled out within the When & How to find Forgiveness portion of this short article.
My lender hasn't started accepting applications yet. What do I actually do?
Don’t worry! Be assured that you’ll be able to apply for forgiveness before your 10-month post-covered-period window for forgiveness closes.
I have a PPP loan, and I'm selling my company. Must i follow special guidelines?
On October 2, 2022, the SBA issued new guidelines regarding notification and consent requirements for business ownership changes from anyone who has removed PPP loans. You need to read them entirely if you plan to market your business after receiving a PPP loan. However, know that SBA consent is going to be necessary for any change in ownership unless one of the following criteria is met:
- The PPP loan has already been satisfied (i.e., it's been paid in full or forgiven through the SBA).
- In a stock sale or merger, the sale or transfer is for less than 50% of the borrower’s stock/ownership OR the PPP borrower completes a forgiveness application reflecting its utilization of all of the PPP loan proceeds and submits it, together with any required supporting documentation, to the PPP Lender. An interest-bearing escrow account controlled by the PPP Lender is established with funds comparable to the PPP loan’s outstanding balance. After the forgiveness process (including any benefit of SBA’s decision) is finished, the escrow funds must be disbursed first to settle any remaining PPP loan balance plus interest.
Can one get forgiveness basically use my PPP loan to pay for myself?
Yes. The self-employed can claim a portion of their PPP funds as personal compensation while still receiving forgiveness for that loan. These borrowers can allocate 2.5 months’ worth of net profit to non-public compensation. This compensation is forgivable, as per the dog owner Compensation Replacement rule.
Read our article on the Owner Compensation Replacement rule for additional information.
What are the new rules for PPP loan forgiveness?
Under the economical Aid Act, new rules benefiting borrowers were put in place, including:
- Opening up Second Draw loans to eligible borrowers
- Adding new eligible expenses for loan forgiveness, including supplier costs, property damages, operations expenditures, and worker protection expenditures
- Allowing borrowers to select their covered period between eight to 24 weeks
- Adding a simplified forgiveness process for borrowers of smaller loans
Will PPP loans be automatically forgiven?
PPP loans aren't automatically forgiven. The correct PPP loan forgiveness application and documentation will have to be listed in the lender inside the allotted time frame for full or partial forgiveness. Eligible borrowers may also be able to apply for loan forgiveness directly through the SBA’s Direct Forgiveness Portal.
