As a small business, you may have applied for a Paycheck Protection Program Loan to keep your business going at the height of the pandemic, many did. Now that the program has closed, after approving over 5 million loans, here is what small businesses need to know to ensure forgiveness.
Background Information on the Paycheck Protection Program (PPP)
The Paycheck Protection Program loans were first created under the CARES Act back in March. These loans were designed to incentivize employers to retain the entire staff on their payroll despite the harsh economic climate.
All employers with 500 or less employees were qualified to apply for these loans, this even included non profit organizations. These loans are to be forgiven if the majority of funds was used to cover payroll costs, mortgages, rents, or utilities.
The government funding in place for these loans quickly ran dry but more funding was directed to fund PPP loans. As of August 8, 2020, this program ended and now employers must be sure that they follow the latest guidance to ensure that their loans are forgiven as planned.
The Paycheck Protection Program Flexibility Act (PPPFA)
This was passed into law on June 5, 2020. This Act addresses some of the issues that employers were having when it came to allocating their loan money.
Originally, employers were required to spend 75% of their loan funds on payroll, leaving 25% for rent, mortgage, or utilities payments. The PPPFA provides some more leniency for employers, adjusting this amount to 60% for payroll and 40% for rents, mortgages, and/or utilities. This provided employers with slightly more freedom on how they allocate their loan funding.
The PPPFA also addresses the covered period of time that employers are eligible for loan forgiveness. This was adjusted from eight weeks to twenty-four weeks.
Guidance on Loan Forgiveness
The Small Business Association (SBA) released some additional guidance on loan forgiveness back on August 11, 2020. This information includes the most frequently asked questions they have received from borrowers.
Some of the most frequently asked questions address the time frame in which they must apply for forgiveness and if there are any “safe harbors” to ensure that borrowers can obtain loan forgiveness. We will cover the highlights of this document, but it can be found in its entirety at Frequently Asked Questions about PPP Loan Forgiveness (08-11-2020)
Employers have a covered period of eight to twenty-four weeks to use the entirety of their PPP loan. According to the updated guidance on June 5, 2020, employers have 10 months from the end of their covered period to apply for loan forgiveness.
Many employers are concerned that they could be audited on their PPP loans, therefore they are hoping that the SBA will put in place “safe harbors” to ensure loan forgiveness. The SBA currently has a safe harbor in place that reasons all loans under $2 million were made in good faith.
Applying for Loan Forgiveness
On June 5, 2020, a new loan forgiveness application was released to replace the original Form 3508. The Form 3508EZ was created because the original form was very complicated and many business owners were struggling to complete it.
The Form 3508EZ should be completed and submitted to the lender. Lenders will then have up to 60 days to review the application and the payroll and financial statements submitted by the borrower. Based on the information provided, the lender will forgive the loan completely or in part, given that all the funds were spent according to the guidelines.
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