The Payroll Protection Program (PPP) loans helped many companies in the US make it through the Covid 19 disruptions. If you’ve secured a loan, you’re most likely using the funds to keep your employees paid and your business liquid. After you borrow your PPP loan, you will also need to start thinking of getting it paid off. One option is getting it forgiven, but applying for forgiveness can be very intimidating especially if your business only has limited resources at your disposal right now. What made the program popular was the ability for borrowers to have their loans forgiven. However, the payroll deduction loans are issued with specific criteria for debt relief. There are different options you can take to pay your loan at your most preferred pace. Here’s a comprehensive guide to help you make sure you’re on track to acquire full forgiveness every step of the way.
Understanding PPP Loan Forgiveness
First, a quick refresher of what the PPP is really all about, especially if you’ve already applied several months ago. Here’s everything you need to know and remember about the PPP loan program.
What is the PPP Loan?
The PPP loan gives emergency funds to small businesses struggling financially to minimize the effect of the Covid-19 pandemic. It provides employers with support from payroll loan banks for up to 8 weeks including its benefits. This program also helps pay rent, cover bills, and reimburse applicable overhead.
The primary purpose of PPP loans is for the benefit of employees. The program originated from the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Small Business Administration (SBA) backs the payroll deduction loans as they get support from the Department of Treasury.
It authorizes up to $659 billion toward job retention and other expenses. Borrowers can choose between an 8-week or 24-week disbursement period.
PPP Loan Forgiveness explained
Every debt must be paid. PPP borrowers are entitled to loan forgiveness if the funds were legally used for payroll loans, business mortgages, and utility payments. These should be returned during your chosen disbursement period.
Borrowers are eligible to apply for forgiveness anytime up to the maturity date of the loan. If they fail to apply within 10 months, the PPP loan payment will no longer be deferred, and they will have to begin giving loan payments to their PPP lender.
Choosing the PPP Loan Forgiveness form to use
Your lender processes the applications for PPP forgiveness.
You need to fill out a PPP loan forgiveness application form. You have 3 PPP loan forgiveness options. The SBA made these available for different loan circumstances.
Form 3508S
This is for borrowers who have loan amounts greater than $150,000. If you’re one of them, you can use this form if you meet the criteria and if you certify good faith in the following:
If you have employees earning $100,000 or less, make sure you didn’t lessen their annual salary by more than 25%.
You didn’t cut the number of your employees or their average working hours between January 1, 2020.
Make sure the end of the payroll deduction loan is covered with eligible expenses for your business.
Your business was unable to operate to its maximum capacity since the related rules of maintenance standard, social distancing, and other work/customer safety requirements compliance with the Covid-19.
To apply for this form, you will also need to submit documents summarizing your payroll and other expenses when applying for this forgiveness
Form 3508EZ
This is for borrowers who have loan amounts greater than $150,000. If you’re one of them, you can use this form if you meet the criteria and if you certify good faith in the following:
If you have employees earning $100,000 or less, make sure you didn’t lessen their annual salary by more than 25%.
You didn’t cut the number of your employees or their average working hours between January 1, 2020.
Make sure the end of the payroll deduction loan is covered with eligible expenses for your business.
Your business was unable to operate to its maximum capacity since the related rules of maintenance standard, social distancing, and other work/customer safety requirements compliance with the Covid-19.
To apply for this form, you will also need to submit documents summarizing your payroll and other expenses when applying for this forgiveness.
Form 3508
This is for borrowers who aren’t able to use forms 3508S or 3508EZ. It’s the longest form among the three.
Make sure to fill out the form’s section for PPP Schedule A. This part includes a table summarizing your Full-time Equivalent (FTE) and salary deductions for the given period.
Before you manually fill out this section, see if your payroll provider has a PPP report provider. Some payroll loan companies have all the information you need in a document. This will save you time.
Borrowers using form 3508 also need to provide documents for payroll and other eligible expenses.
How can I get my PPP loan forgiven?
If you’re ready to apply for forgiveness, contact your PPP lender. They will direct you to the right loan forgiveness form you’ll need. You need to submit the form along with the paperwork detailing how you spent your loan.
Forgiveness is granted to borrowers who kept or rehired employees. They should also be effective in maintaining their staff’s levels of salary before the pandemic.
Make sure you’re also safe from PPP loan fraud, so you won’t have to deal with hefty payments and penalties along the way.
Expenses eligible for loan forgiveness
Along with your loan forgiveness application, you will need to provide proof on how you spent your PPP loan. Remember, only funds spent on allowable expenses will be forgiven. And at least 60% of your loan must be spent on payroll costs to qualify for full forgiveness.
You will need to provide proof of how you spent your entire PPP loan. Keep in mind, only funds spent on eligible expenses will be forgiven. These are:
Payroll costs
Operating costs
Supplier costs
Property damage
Worker protection
Steps to apply for PPP Loan Forgiveness
Applying for the PPP loan forgiveness process can be a tedious process. But if you get to see its overview, it becomes less intimidating.
Remember, it all starts and ends with your PPP lender. Here’s a step-by-step guide on how you can apply for PPP loan forgiveness.
Contact your PPP lender
Your lender will provide you with the form you need to apply for PPP loan forgiveness. Whether it’s Form 3508S, Form 3508EZ, or Form 3508.
If you need further assistance on how to fill out and submit your application, your lender will guide you.
Compile your documentation and requirements
The SBA needs to see proof that you spent the loan properly before you can apply for PPP loan forgiveness. You need to have documentation for both payroll and non-payroll expenses.
Payroll expenses are the number of wages and salaries you pay for services. It also includes bonuses, incentives, and other additional benefits. These include:
Bank statements
Overtime pay
Payment receipts
Tax documents
Productivity bonus
Perfect attendance bonus
Third-party payroll reports
Health card
Social security
Non-payroll expenses are usually operating costs that you pay to keep your company moving. These include:
Electricity, water, and Internet bill
Account statements
Rent
Maintenance payment
Submit the documentation and forgiveness form to your PPP lender
Complete all the required details in the application form. Submit it to your lender along with the documentation that verifies your spending.
Then follow up with your lender to submit additional documentation as requested. Consult your lender for additional guidance and provide the requested requirements in a timely manner.
Keep communicating with your PPP lender throughout the entire process
You won’t stop after submitting all forms and documents. Stay in the loop and keep in touch with your lender.
Your PPP lender is responsible for notifying you of all the updates you need to know. If SBA reviews your loan, your lender will let you know right away. You also have the right to appeal certain SBA loan review decisions.
What is the time frame for PPP loan forgiveness?
One of the questions that PPP borrowers always ask is, “What should be my cover period to calculate my loan forgiveness?”
Your cover period pertains to the timeframe of your loan. You have to spend your PPP funds on eligible expenses to be entitled to forgiveness.
Keep in mind, you need to spend all your funding on forgivable expenses and you should have the right documentation with you. You are eligible to apply for employer payroll loan forgiveness anytime before your covered period expires. There are 3 PPP cover periods.
8-week cover period
If you received your PPP loan before June 5, 2020, you have the option to choose between an 8-week or 24-week cover period.
When you choose the 8-week cover period to defer your payments, you should apply for forgiveness within 10 months of your cover period.
Here are the advantages of choosing an 8-week cover period.
You get faster forgiveness. Extending your forgiveness to 24 weeks may lead to the entire loan process extending to next year. If you apply for other employer payroll loans during that time, you could have a difficult time being eligible with the PPP forgiveness issue still around.
It’s easier to meet staffing requirements. Maintaining the number of employees is one condition for loan forgiveness. Some small business owners might find it more convenient to maintain staffing levels for 8 weeks than 24 weeks.
You take advantage of current rules and interpretations. The regulations for calculating loan forgiveness are changing fast. If you qualify for full forgiveness after 8 weeks, it would be good to apply right away. If you wait for a few more months, there’s no telling how the guidelines will change and if you will still be qualified.
24-week cover period
If you received your PPP funds after June 5, 2020, then you are only eligible for a 24-week cover period. You should apply for forgiveness within 10 months of your cover period if you want to defer payments.
Here are the advantages of choosing a 24-week cover period.
You have more time to plan. Take advantage of the extended forgiveness period. This gives you more leeway to talk to your advisors and strategize ways on paying your debts.
More portion of your employer payroll loan during Covid can be spent on payroll costs. You’re given more chances to spend your fund on wages, payroll loans, taxes, and benefits.
Alternative payroll cover period
If you have bi-weekly payroll periods, you can also adjust your covered period to start the first pay period after you receive the funds. With this, the cover period aligns better with your payroll schedule. Using this method doesn’t change the cutoff to apply for forgiveness
When does the 24-week PPP period start?
The 24-week period started when the PPP Flexibility Act was implemented last June 5, 2020. Borrowers must apply for forgiveness within 10 months of their covered period if they want to defer their payments.
Most borrowers may find that using the 24-week period gives them more flexibility. By choosing this time frame, you get to:
Increase your forgiveness chances
Plan in advance
Rehire employees
Restore wages
Wait for more updates
If you think you’re also prone to loan fraud, you can also take advantage of getting in touch with a PPP law firm for safety measures
What are the new rules for PPP loan forgiveness?
Some changes were implemented to the PPP loans. Former president Donald Trump signed the PPP Flexibility Act which stated changes in employer payroll loans last June 5, 2020.
This gives borrowers more time to spend government employee payroll loans to obtain forgiveness.
The new law modifies several provisions of the PPP loan to make the process easier for borrowers. Most of the changes are related to forgiveness. This allows borrowers under PPP to defer payroll taxes.
If you’ve already borrowed a loan or you’re planning to get one, here are some changes that you need to keep in mind.
Easier payroll requirements
Before, you needed to spend at least 75% of their PPP payroll loans. The remaining 25% goes to rent, mortgage interest, and utilities for the loan to be forgiven. This was known as the 75/25 rule.
The PPP Flexibility act reduces this by making it 60/40. So in order for a loan to be forgiven, you are now allowed to spend 60% on payroll while the remaining 40% goes to other eligible expenses like mortgage interest, rent, and utilities.
Extension of forgiveness period
Now, you have a longer timeframe to spend your government employee payroll loans during Covid. The cover period is extended from 8 weeks to 24 weeks. This extension is automatic and there’s no need to inform your lender about this.
The extension applies to all payroll deduction loans. However, those who got their loans before June 5, 2020, can still go with the original 8-week period. This condition most likely benefits self-employed PPP borrowers, because they’re able to choose between the 8-week and 2.5-month owner compensation replacement.
When an employer fails to rehire workers, they can qualify for a new exemption when they’re able to provide documents that prove they were unable to return to normal operating levels.
Rescheduled rehiring exemptions
The deadline employers were allowed to rehire laid-off employees and restore employee wages was originally between February 15 to April 26, 2020. Because of the PPP Flexibility Act, it was extended from June 30 to December 31, 2020.
Deferral and clarification repayment
There’s no need to repay the PPP loan until your forgiveness application is completed. The 6-month payments were removed thanks to the PPP Flexibility Act.
Borrowers are given up to 10 months after the end of their cover period to apply for forgiveness. After that given time frame, payments will be required.
Tax deferral for government employee payroll loans
The PPP Flexibility Act removes the responsibility of having payroll taxes to be immediately due. Employer payroll taxes remain deferred.
Program extension
PPP loans approved after June 5, 2020, will automatically have a loan length of five years. Existing loans originally have 2 years. It can be extended to 5 years if the borrower and lender will agree.
