The Complete Guide to PPP Loan Forgiveness: Part One

 The Paycheck Protection Program (PPP) is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Lawmakers signed the CARES Act into law on March 27, 2020. PPP loans were designed to incentivize employers to keep their employees on payroll during the current pandemic. The legislation authorized the Treasury department to use the SBA small business lending program to fund loans up to $10 million per borrower. Business owners use these funds to cover payroll, mortgage interest, rent, and utilities. Understanding what the PPP is as well as learning how to navigate PPP loan forgiveness is very important for business owners.

PPP borrowers can qualify to have these loans forgiven if the proceeds are used to pay for certain eligible costs (explained below). We are answering some of the common questions that business owners have.

How do I get PPP loan forgiveness?

The loan will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities. You cannot use the funds for the principal on your mortgage. Sixty percent of the forgiven amount MUST be used for payroll. Your accountant can provide you with the application or you can download it here. This will need to be filled out and sent to your lending institution. Your lending institution may have an online application. You should check with them before you go through and fill out the paper application. 

What is the deadline for PPP loan forgiveness?

There was some confusion regarding the deadline for PPP loan forgiveness. This is because the PPP loan forgiveness application forms (3508, 3508EZ, and 3508S) display an expiration date of 10/31/2020 in the upper-right corner. This date reflects a temporary expiration date for the approved use of the forms. This date will be extended, and when approved, the same forms with the new expiration date will be forgiven. Basically, you can disregard that date. 

That said, borrowers may submit a loan forgiveness application any time before the maturity date of the loan. The maturity date is two or five years from loan origination depending on when you took it out. Loans taken out before June 5, 2020, have a two-year maturation date. Those taken out after June 5, 2020 have a five-year maturation date. If the borrower DOES NOT apply for loan forgiveness within 10 months after the last day of the borrower’s loan covered period, then loan payments are no longer deferred. At that point, the borrower must begin making payments.

What can I do to ensure loan forgiveness?

Your loan might NOT be forgiven if you do any of the following:

1. Reduce employee headcount or employee salaries/wages during your loan forgiveness covered period. The main purpose of the PPP is to protect people from losing their paychecks. This means reducing employees can put you at risk.

2. Additionally, if you received an advance through the Economic Injury Disaster Loan (EIDL) program, it will be deducted from your forgivable amount. 

3. Also, funds that borrowers spend on ineligible costs may not be forgiven. An example of this is payments made to independent contractors.

What if my PPP loan is not forgiven in full?

If your loan is not forgiven or is only partially forgiven, you will be required to repay any amount that is not forgiven at 1% interest over five years. Loan payments will be deferred for six months but will start incurring interest immediately. PPP loans do not have fees and there are no prepayment penalties.

What documents do I need for PPP loan forgiveness?

1. Documentation verifying the number of employees on payroll and pay rates. This includes IRS payroll tax filings and state income, payroll, and unemployment insurance. You will need to provide proof of payment such as canceled checks, ACHs, bank statements, or wires. 

2. Documentation verifying payments on covered mortgage (interest) obligations, lease obligations, and utilities. Again, you will need to provide proof of payment.

What are considered utilities for PPP loan forgiveness?

The loan forgiveness application language issued on May 15, 2020, has helped clarify this aspect of forgiveness. It states that you may include “business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.”  The term “transportation” refers only to the gas used driving your business vehicle. 

Documentation needed for utilities would be the same as above:  canceled checks, ACHs, bank statements, or wires. Keep in mind service contracts need to have been in effect prior to February 15, 2020, for each utility you are claiming.

The PPP loan forgiveness application is complex. We highly recommend that you contact a certified accountant to assist you through the process. Accounovation is a technology-driven, process-focused, and people-powered accounting firm. We are ready, willing, and able to help and guide you in making the most of your financial assets with your small business. Please feel free to contact us for more information.