Earlier this year, the Small Business Association provided a kickstart to the small business economy by providing a Paycheck Protection Loan to provide a “direct incentive for small businesses to keep workers on the payroll”. Known as a PPP loan, many entrepreneurs and small business owners were able to muddle through the application process to receive a lifeline to holding companies together and keeping their team members paid. But the PPP is a loan, and unless you apply for forgiveness, it has to be paid back. So how do you do that?
Let’s review what you could use the funds for.
HOW TO APPLY FOR FORGIVENESS
There are a couple of steps in the application process. Remember that even though most applications were accepted and approved by banks and credit unions, the PPP loan received is actually managed by the the SBA, who says they will forgive all loans where the proper employee criteria are met, and the funds are used for eligible expenses. This means that while you’ll be contacting the bank who gave you the loan, the process and forms are dictated by the SBA.
FIND OUT YOUR COVERED PERIOD DATE. This date is important, because 10 months after this date is the when deferred payments end, and you have to start making payments on the loan. Borrowers may submit a loan forgiveness application any time before the maturity date of the loan, which is either two or five years from loan origination. You can still request forgiveness as long as you do so prior to the maturity date, but you’d have to make payments until your application is received and approved.
CONTACT YOUR PPP LENDER AND COMPLETE THE CORRECT FORM. Likely because of all of the changes to the process, many lenders are not yet accepting forgiveness applications, but you can get a head start by understanding what will be required of you. The SBA made things a bit easier in recent months when they released a simpler version of the forgiveness application for borrowers who received $50,000 or less. Form 3508S is only two pages long, and removes most of the complicated FTE calculations that are present in the main form. In addition, Form 3508EZ is available for those who are independent contractors, self-employed or sole proprietors with no employees. A note that if you did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form, you automatically qualify to use the Loan Forgiveness Application Form 3508EZ.
COMPILE YOUR DOCUMENTATION. Based on the requirements above, there are a few different documents that should be collected in order to provide support for the eligible expenses incurred, including those for payroll, business rent or mortgage interest, and utility payments. Good record keeping and proper financial statements are going to be imperative for your loan to be forgiven, so make sure you have everything needed to submit when it’s time.
SUBMIT THE DOCUMENTS TO YOUR LENDER. Not all lenders are following the same steps to receive documents, so make sure you follow the instructions of your bank to provide the required support for your application. If additional information is requested, be sure to provide in a timely manner.
What if you don’t meet the qualifications and have to pay it back?
According to the SBA:
If the loan is fully forgiven, the borrower is not responsible for any payments. If only a portion of the loan is forgiven, or if the forgiveness application is denied, any remaining balance due on the loan must be repaid by the borrower on or before the maturity date of the loan. Interest accrues during the time between the disbursement of the loan and SBA remittance of the forgiveness amount. The borrower is responsible for paying the accrued interest on any amount of the loan that is not forgiven.
So, if you have to pay it back, you have to do so plus the accrued interest that started when you received the loan. All outstanding amounts must be paid by the maturity date.
The good news is, you have time and a low interest rate to do so. PPP loans have an interest rate of 1%, and have a maturity date based on when the loan was issued:
Prior to June 5, 2020 = 2 years
After June 5, 2020 = 5 years
Want more nitty gritty details? The SBA has a nice long FAQs doc that may help answer your questions, but if you want more direct support for your specific situation from a CPA, we invite you to schedule a Clarity Call with us to discuss.