Updated 8/21: The SBA Loan Forgiveness program is evolving quickly as the government processes and approves new applications. As new information about requirements becomes available, we’ll add it here.
As the SBA has worked with the federal government to roll out funding in the form of PPP loans, one burning question has remained on the minds of small business owners: how can i qualify for the SBA loan forgiveness program?
For most business owners looking to survive the coronavirus crisis without making staff cuts or scaling back, the PPP loan’s potential for complete forgiveness is the most appealing draw. Many businesses that qualified for PPP loans have already received funding, and begun spending it.
Throughout this process, the government has given small business owners little information about how the SBA loan forgiveness program will work in increments. When distributing funds, they provided guidelines about how the funds can be used. Now that the SBA loan forgiveness application is available, even more details have come to light regarding approved use of funds.
Even if you followed the protocols outlined in the PPP loan agreement, you’ll still need to submit an application to be granted forgiveness. Some businesses may not qualify for complete forgiveness, but could receive partial forgiveness.
Until now, the best advice was available through legal and/or financial counsel—who, for the most part, were equally in the dark. As this situation is unprecedented and quickly developing, there may not be clear answers on everything—but we’ll do our best to provide you with the information you need to qualify.
When the SBA rolled out the PPP loan, the bottom line was clear: businesses that abided by the guidelines could qualify for forgiveness. The goal of this funding program was to ensure that business owners had the resources they needed to minimize layoffs, keeping the American economy strong. To achieve this, PPP loan amounts are calculated based on total payroll costs for the duration of 2 months—up to $100K for every employee. You can also try using an SBA PPP loan calculator.
In addition to payroll, qualifying small business owners were also permitted to use a small portion on operating costs. Among other expenses, these include rent, mortgage interest payments, utilities, and more.
To qualify for forgiveness, though, businesses must not use over 25% of the total amount for non-payroll costs. These requirements initially specified that business owners must maintain all employees, or rehire employees who were laid off, by June 30. However, this changed when the Congress approved the PPP Flexibility Act.
This act, which aimed to afford business owners with more leniency in loan usage guidelines, extended the time frame during which they must spend the funds from 8 to 24 weeks. Instead of the initial deadline of June 30th, business owners had until December 31st to use the funds.
Thanks to new information from the SBA PPP loan forgiveness application, we know now even more about how the process will work.
With this new application came some much-needed information about how the loan forgiveness program will work.
Business owners must complete the SBA loan forgiveness application (SBA form 3508) to receive any leniency. The application contains four parts, including one optional section:
The application itself will require basic information about your business, as well as a few other important numbers:
Whether you’re applying to receive full or partial forgiveness, you must complete this application.
The SBA also released a shorter PPP loan forgiveness application, SBA form 3508EZ. This is a simplified forgiveness application for businesses that meet the following criteria:
As mentioned above, the PPP Flexibility Act extended the period during which business owners could spend their funds. The initial deadline was June 30, and the new deadline is December 31.
The application also contains more precise information about which expenses are forgivable. These forgivable expenses are divided into four distinct categories:
This SBA loan forgiveness program is open to businesses that allocate at least 75% of the funds toward payroll during the 8 week covered period.
However, the SBA has put some measures in place to accommodate businesses with a regimented payroll schedule. Payroll costs incurred—but not yet paid—may also be eligible for forgiveness. If your payroll plan doesn’t align with the 8 week covered period that begins when you receive your SBA PPP loan, then you may be able to file for an alternative payroll covered period.
As the SBA established earlier, PPP loans allow for only $100K per employee. This means that, for the 8 week covered period, individual salaries can’t exceed $15,385. This amount includes both salary or wages and paid leave costs.
However, other employee-related cash expenses, such as health insurance, retirement plans, and state/local taxes, are not included in this $100K per employee allowance.
For small business owners themselves, the rules are slightly different. Compensation is capped at $100K annual (or $15K for the covered period), or the 8-week equivalent of individual 2019 earnings—whichever is lower. If you need help navigating this calculation, be sure to reach out to your financial advisor or lawyer.
To meet the SBA loan forgiveness program requirements, this funding can only be put toward business mortgage obligation interest payments—not to prepayment or payment on principal. Additionally, these costs must have been incurred before February 15, 2020. Similarly, rent and utilities costs must also have been incurred prior to February 15.
As previously mentioned, all business owners that receive a PPP loan can apply for forgiveness. However, depending on how business owners spend this money, they may receive anything from partial to complete forgiveness.
Because the extent to which your PPP loan is forgiven depends largely on how you spend this money, the best way to receive full forgiveness is by thoroughly documenting your expenses.
To prove you spent the bulk of your money on payroll, you may have to (or be requested to) provide one or more of the following documents:
For other non-payroll expenses approved under the PPP loan, you may be asked to provide other proof. This can include canceled checks, payment receipts and account statements.
While the PPP loan program was conceived, designed and administered by the SBA, loans were provided through private lenders. This means that lenders ultimately receive payments from those who receive partial forgiveness, and make decisions regarding who’s forgiven.
As a result, there’s not general process for how exactly PPP loans are forgiven.
After you apply for PPP loan forgiveness, lenders are obligated to make a decision within 60 days. You should receive a notice informing you whether your loan is fully or partially forgiven.
The loan forgiveness guidelines are firmly in place, but using funds outside these parameters isn’t necessarily illegal. If you decide to put your extra cash toward other expenses, you may decrease the percentage of the loan that’s forgiven, but doing so is entirely legal.
While the loan forgiveness guidelines are firmly in place, using funds outside these parameters isn’t necessarily illegal. If you decide that having extra cash on hand for other expenses is a priority, then you have the freedom to spend your money accordingly.
Just because you don’t meet every requirement doesn’t mean you’re liable to pay back the full amount. Instead of full forgiveness, you may still qualify for partial SBA loan forgiveness.
The CARES Act stipulates that forgiveness will be reduced for businesses that reduce their full time staff. However, businesses that provide a written offer to rehire staff after the pandemic ends may be excluded. It also mentions that, for businesses that retain staff but cut wages by more than 25%, the forgiveness amount may be reduced.
If you’re looking for a reliable source of information about how to navigate your business in uncertain times, you’ve come to the right place. At National, we take pride in helping small business owners make educated and informed decisions. Check back here to learn about the latest updates to the PPP program, and learn more about growing your business.
For guidance on how your small business should go about obtaining PPP loan forgiveness, be sure to contact your financial advisor or accountant.
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