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 can demonstrate it spent the funds on eligible expenses. To be eligible for loan forgiveness, you must also spend a certain percentage of your PPP funds on payroll costs.
Keep reading to learn more about how loan forgiveness for PPP loans works. This guide reflects changes made to the loan forgiveness program under the Paycheck Protection Program (PPP) Flexibility Act, which was passed on June 5, 2020 (the “PPP Flexibility Act”).
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, for a maximum of $2 million. Under the PPP Flexibility Act, the term length of a PPP loan was extended to 5 years. For PPP loans approved by the SBA prior to the passage of the PPP Flexibility Act on June 5, 2020, the term length is 24 months.
For more information on how PPP loans work, check out our guide.
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 24 weeks following the loan origination. If you received a PPP loan prior to June 5, 2020, you may elect to apply for forgiveness at the end of the 8-week period or the 24-week period, in each case following the date your loan was originated, to maximize your ability to qualify for 100% forgiveness of your PPP loan amount.
What are eligible expenses?
To be eligible for full loan forgiveness, you must spend at least 60% of the PPP funds on eligible payroll expenses. In the context of forgiveness, your payroll expenses are calculated the same as when you were applying for a PPP loan and calculating your PPP loan amount – for a more in-depth guide on calculating such payroll expenses, 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 40% of your aggregate loan proceeds 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?
In addition to covering payroll 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 non-payroll expenses exceed 40% of your total loan amount.
Additionally, the amount you are eligible to have forgiven will be reduced if:
- Your business does not maintain full-time employee headcount, or does not attempt to rehire by December 31, 2020. Note, however, you will not face a reduction in forgiveness, if you provide a written offer of rehire to an employee and that offer is declined.
- Your business reduces employee wages by more than 25% and does not reinstate wages to previous levels by December 31, 2020.
The levels of full-time headcount and wages that must be maintained are based upon one of the following three time periods, chosen by the borrower:
- Average number of full-time employees on monthly payroll between February 15, 2019 and June 30, 2019;
- Average number of full-time employees on monthly payroll between January 1, 2020 and February 29, 2020; or
- Seasonal businesses can also choose to show the average number of full-time employees on monthly payroll between February 15, 2019 and June 30, 2019; between January 1, 2020 and February 29, 2020; or any consecutive 12-week period between May 1, 2019 and September 15, 2019.
What if I can’t meet loan forgiveness requirements?
Depending on your business, you may decide that it does not make sense for you to use +60% of your loan amount on payroll costs or to maintain full headcount and compensation levels. For example, your business may have pressing rent or mortgage interest obligations that exceed 40% of your PPP loan amount. Or perhaps it does not make sense for your business to re-hire employees by December 31, 2020 because of new reduced capacity requirements. In those cases, some portion of your loan will not be forgiven. Instead, you will pay a fixed 1% interest rate on the unforgiven portion of your loan once your payment deferral period has expired and for the remainder of your loan term.
Payments on the loan are deferred up to the date on which the amount of loan forgiveness is approved by the SBA. If the borrower does not apply for loan forgiveness within 10 months of their loan being eligible for forgiveness (i.e., 24 weeks after loan disbursement), then the borrower must begin making loan payments on the full loan amount at such time. Payments will be monthly on any unforgiven portion of the loan.
As an example, if you took a loan on May 1, your covered forgiveness period will end on August 31, 2020 (24 weeks from the origination date). If you fail to apply for loan forgiveness by June 1, 2021 (10 months later), then you will have to begin paying back your PPP loan on a monthly basis, including any accrued interest
How do I apply for PPP loan forgiveness?
If your PPP loan was approved by the SBA prior to June 5, 2020, you may choose to either keep your existing 8-week loan forgiveness window, or switch to the new extended 24-week loan forgiveness window. If your PPP loan was approved by the SBA after June 5, 2020, your loan comes with a 24-week loan forgiveness period.
We encourage all PPP loan holders to take advantage of the longer covered period for PPP expenses in order to maximize your ability to qualify for 100% forgiveness of your PPP loan. As a reminder, repayment of your PPP loan will only begin once the amount of your loan forgiveness is approved by the SBA, or 10 months after the expiration of the new covered period of 24 weeks. So, the extended forgiveness period has the practical effect of extending your payment deferral period as well.
After receiving your 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 covered forgiveness period.
Once your forgiveness window is up (whether at 8 or 24 weeks), you are eligible to apply for loan forgiveness. Reach out to the lender who facilitated your PPP loan to begin the loan forgiveness process. They will process your request and are required to notify you within 60 days of the SBA’s decision with respect to your forgiveness request.
Keep in mind that you must apply for loan forgiveness within 10 months of the date when your forgiveness window closes. If you do not, you will be required to start repaying your full loan amount at a 1% interest rate.
For businesses with PPP Loans <$50K, you can find your Application form here and application instructions here. For businesses with PPP Loans >$50K, there are two applications, the EZ Application and the Full Forgiveness Application. To qualify for the EZ Application, you must be able to certify to one of the following:
- You are a non-employer (self-employed) business, independent contractor or sole proprietorship
- You did not reduce annual salaries/hourly wages of employees by more than 25% and did not reduce staffing levels during the covered period
- You did not reduce annual salaries/hourly wages of employees by more than 25% and can demonstrate that you were unable to operate at normal business levels
If you are eligible for the EZ Application, you can find the EZ Application form here and application instructions here. If you are not eligible for the EZ Application, you can find the Full Forgiveness Application form here and application instructions here.
For answers to common PPP Loan Forgiveness questions, check out this FAQ guide from the SBA and Department of Treasury.
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 visit the SBA website for more information on coronavirus relief options for small businesses.
*This article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for health, tax, legal or accounting advice. You should consult your own health professionals or tax, legal and accounting advisors before implementing any business changes.