Paycheck Protection Program (PPP) Loan Forgiveness – Straightforward Guidance for SMB Owners

Update: This article is up-to-date with the changes made through the PPP Flexibility Act which was signed into law June 5, 2020, as well as the amendments made to PPP loan forgiveness on August 4, 2020.

For small business owners, one of the most attractive parts of the Paycheck Protection Program is the ability to have the entire loan amount forgiven.

If you were able to obtain a PPP loan, forgiveness is something you will not want to miss out on.

So how do you get PPP loan forgiveness?

What are the rules?

And what happens if you don’t qualify for PPP loan forgiveness?

Keep reading and get all of the answers you’re looking for!

What are the terms of PPP?

The Paycheck Protection Program was introduced under the CARES Act in an effort to combat the economic toll that coronavirus shutdowns are having on small businesses. More specifically, the program is designed to help businesses cover payroll costs along with mortgage interest payments, rent, and utility expenses. Using PPP funds for other purposes is forbidden.

The qualifying criteria for PPP loans are:
1. Your organization meets the SBA definition of a ‘small business’, is a nonprofit, veterans organization, Tribal business concern, sole proprietorship, or if you’re a self-employed individual or independent contractor
2. You can prove that your business has been affected by the coronavirus pandemic
3. Your business has fewer than 500 employees
4. Your business was active prior to February 15, 2020

***According to changes made on August 4, 2020:

“Sole proprietors, independent contractors, and self-employed individuals who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form automatically qualify to use the Loan Forgiveness Application Form 3508EZ…”

Learn more about Paycheck Protection Program eligibility.

If your business does qualify for a PPP loan, you could be looking at receiving up to $20,833 per employee (max $10 million) with a 5-year term and a fixed interest rate of 1%. On top of that, if you follow certain steps your business may also be eligible for 100% forgiveness on the PPP loan (basically turning it into a grant). More on that below.

Not everyone will get approved, unfortunately. Find out what to do if you’re rejected for a PPP loan.

What are PPP loan funds for?

Unlike regular business loans, Paycheck Protection Program loans are specifically intended to assist small businesses in covering the expenses they have for payroll primarily and for mortgage interest payments, rent, and/or utilities on a secondary basis. To be more precise, as per PPP guidelines no more than 40% of the loan amount is permitted for the ‘secondary’ expenses.

Payroll costs include:

• Salary
• Wages
• Tips
• Vacation pay
• Parental, family, medical, or sick leave
• Retirement benefits
• Group health care benefit payments
• Dismissal or separation allowance
• State and local taxes
  
  

Using PPP funds for other purposes besides those specified in the PPP guidelines is against the program’s rules, and the U.S. government may press criminal charges if you do.

If you’re searching for financial aid to help your business meet expenses but the Paycheck Protection Program doesn’t fit your requirements, look over the details of the SBA’s Economic Injury Disaster Loan (EIDL) program. An EIDL can be used much more flexibly than a PPP loan but has different terms and conditions.

Compare the PPP vs. EIDL program before deciding to apply for either one (or both)!

Will PPP loans be forgiven?

There are four criteria your business must meet in order to qualify for PPP loan forgiveness:

1. Use the funds for intended purposes (as listed above) within the first 24 weeks after receiving the loan.
2. Use at least 60% of the funds for payroll costs.
3. Don’t fire any employees or cut any of their pay.
4. Any changes that you had made to the number of employees or the amount you pay them between February 15, 2020 and April 26, 2020 must be returned to pre-existing levels by December 31, 2020.

An exception to point #4 can be made if:

• You’re unable to rehire an employee
• You’re able to demonstrate your inability to hire another qualified employee
• You’re able to demonstrate your inability to get the business running back at the levels it was operating before February 15, 2020

Be sure that your business meets all of those requirements. If even one of those criteria is missing, your business will not be able to qualify for PPP loan forgiveness.

Note: If you use less than 60% of the loan amount on payroll, you will be obligated to pay back the difference at an interest rate of 1%. Say you use 60% on payroll, 25% on rent and utilities, and 15% on a new marketing campaign. In that case you’ll have to pay back that 15% plus interest.

How to get your PPP loan forgiven?

Meeting the eligibility criteria for PPP loan forgiveness is only step one. You’ll actually have to apply for PPP loan forgiveness, which has a range of steps in-and-of-itself.

Before you do apply for PPP loan forgiveness be sure to gather the documents that will be required for that application.

Documents needed for PPP loan forgiveness include:

• Verification of the number of full-time employees on payroll and their pay rates. That includes IRS payroll tax filings along with insurance filings for state income, payroll, as well as unemployment.
• Verification of any other uses of PPP funds (mortgage interest, rent, or utility payments)
• Certification of goodwill from the business’s representative clearly indicating that the documents provided are accurate & true and that the loan was used for eligible purposes

You can apply for PPP loan forgiveness directly through the lender that serviced the loan. The lender must process your request for PPP loan forgiveness and provide their answer within 60 days of your application.

What to do if you’re not approved for PPP loan forgiveness?

If your business isn’t approved for PPP loan forgiveness, you may be permitted to submit any/all missing documentation that the lender could use to reevaluate your application. Check directly with your lender if they will allow reevaluations of PPP loan forgiveness applications.

If your business remains ineligible for PPP loan forgiveness, you will be obligated to pay back the loan over a period of 5 years at a fixed interest rate of 1%.

But, it’s important to note that there are no prepayment penalties! So, you can begin paying back the loan as soon as you want without the risk of adding to the overall amount you repay. Of course, paying back a PPP loan may be easier if you’re based in a state that has business reopening plans set for earlier dates.

Paycheck Protection Program forgiveness – FAQs

1. Are federal taxes included under “payroll costs”?
No, payroll costs should be calculated without taking into account federal taxes (whether imposed or withheld). See question 16 of the Treasury Department’s PPP FAQ sheet, here.

2. If I have my PPP loan forgiven, can I also have PPP expenses deducted from my taxes?
No. When a PPP loan is forgiven, it’s already deemed tax-free. In order to prevent redundancies, the IRS does not allow forgiven PPP loans to be tax-deductible.

3. What if I’m not sure I’ll be eligible for forgiveness and I want to give the money back?
You are permitted to return PPP loan funds up until May 14 with no questions asked.

4. Do I need to rehire the same employees or fill the same positions?
No. Your lender will be assessing the number of employees and the pay rates. They will not take into account who is being hired or what positions they fill.

Final thoughts

The coronavirus pandemic has brought about its fair share of unprecedented problems, but at the same time, it has forced the development of some unprecedented solutions.

Of all the ways that the government is combating the coronavirus crisis, giving small businesses the ability to have loans forgiven through the Paycheck Protection Program is one that’s attracted lots of attention. Don’t let this opportunity pass you by – apply for a PPP loan today if you haven’t already done so.