To assist small businesses impacted by COVID-19, the federal government has passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes multiple initiatives to provide financial assistance to small businesses and their employees. One program created under the CARES Act is a Small Business Administration (SBA) loan program known as the Paycheck Protection Program (PPP). SBA PPP loans are designed to provide small businesses with funds to help keep employees on their payrolls. For more information on how PPP loans work, check out our guide.
All or a portion of each Paycheck Protection Program loan is eligible for loan forgiveness, as long as the business spent the funds on eligible expenses. To be eligible for loan forgiveness, you must spend a certain percentage of your funds on payroll costs. Here’s a breakdown on how to use your funds and document those uses to be eligible for forgiveness.
Keep reading to learn more about how loan forgiveness for PPP loans work.
What is the Paycheck Protection Program (PPP)?
SBA PPP loans provide financial assistance to small businesses who have been affected by COVID-19 to help them keep employees on their payrolls. SBA PPP loans can be used for payroll costs, interest on mortgages, rent payments, utility payments, and/or interest on debt obligations incurred before 2/15/20.
Loan amounts are up to 2.5x your monthly payroll costs and payments are deferred for the first 6 months. The loan comes with a 1% fixed interest rate and a term length of two years. For more information on how PPP loans work, check out our guide.
To be eligible for loan forgiveness, you must spend a certain percentage of your funds on payroll costs. Here’s a breakdown on how to use your funds and document it to be eligible for forgiveness.
How does Paycheck Protection Program loan forgiveness work?
A key part of SBA PPP loans is that they are eligible for loan forgiveness. Businesses that meet certain criteria are eligible to have a portion of their loans forgiven if the funds were used for payroll costs, interest on mortgages, rent payments, and utility payments made in the eight weeks following the loan origination.
What are eligible expenses?
Current guidance is that at least 75% of the funds must have been used to cover payroll expenses. Payroll expense is comprised of the same calculation used when applying for a PPP loan – for a more in depth guide on calculating your PPP loan amount, check out our guide. Acceptable payroll costs can include salary, health insurance costs, retirement benefits, paid time off or leave, and state and local taxes on employee compensation. No more than 25% of your loan can be spent on rent, mortgage interest, or utility payments.
If you’re a sole proprietor, self-employed or an independent contractor, acceptable payroll costs are your net income up to $100,000.
What are disqualifying expenses?
You may use your PPP loan on rent payments, utility payments, and interest on mortgages. However, the amount of your loan that is eligible for forgiveness will be reduced if these payments exceed 25% of your loan.
Additionally, the amount you are eligible to have forgiven will be reduced if:
- The business does not maintain full-time employee headcount, or does not attempt to rehire by June 30, 2020 (you will not face a reduction in forgiveness, if you provide a written offer of rehire to an employee and that offer is declined)
- There is a reduction in employee wages of more than 25%
What if I can’t meet loan forgiveness expense requirements?
Depending on your business, you may decide that it does not make sense for you to use 75% of your loan amount on payroll costs and maintain full headcount. For example, your payroll costs may be outweighed by rent or mortgage payments. Or perhaps it does not make sense for your business to re-hire employees by June 30. In those cases, some or all of your loan will not be forgiven. Instead, you will pay a fixed 1% interest rate on the unforgiven portion of your loan. Payment will still be deferred for the first 6 months, and the loan term will still be for 2 years.
How do I apply for PPP loan forgiveness?
Businesses are eligible to apply for loan forgiveness beginning 8 weeks after the PPP loan was originated. Reach out to the lender who facilitated your PPP loan to begin the loan forgiveness process. They will process your request and notify you within 60 days of your request to let you know if your loan has been forgiven and the amount forgiven. After receiving the PPP funds, be sure to keep records of the forgivable expenses you are spending your PPP funds on and track the portion of the PPP funds you are spending on non-payroll costs within the 8-week period.
OnDeck is here to support small businesses – check out our COVID-19 Resource Hub for more helpful information for small businesses impacted by COVID-19. You can also learn more about other resources, including financial assistance, available from the SBA for small businesses here.
*This article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any financial transaction.