How PPP Loan Forgiveness Works

When the COVD-19 pandemic hit, thousands of small businesses were shutting their doors, laying off workers, and wondering if they would ever open up again. However, once Congress passed the CARES Act, businesses could take out loans that would prop them up and survive the pandemic. Best of all, these Paycheck Protection Program (PPP) loans were set up to be forgivable. However, forgiveness is not set in stone with these loans, meaning business owners who perhaps let deadlines lapse may be on the hook for whatever amount of money they borrowed. If you took out such a loan and have questions as to how PPP loan forgiveness works, here are some things to remember.

Used for Designated Expenses

To begin with, PPP loan borrowers will be eligible to have their loans forgiven only if they used the money on designated expenses allowed for by the program. Yet whatever amount of money was spent on designated expenses over the course of 24 weeks or only eight weeks, these loans will be eligible for forgiveness. For example, 100% of payments made to payroll will be forgiven, as will rent, utilities, and mortgage interest up to 40% of the PPP loan. But even if your loan is forgiven, remember that the expenses covered by the PPP loan will not be tax-deductible.

First-Draw Loan Forgiveness

If you received a first-draw PPP loan, you will be eligible for loan forgiveness if you meet certain criteria during the eight or 24-week period that was covered. This includes maintaining compensation and employee levels, spending your loan on payroll and other approved expenses, and making sure at least 60% of your loan proceeds were spent on payroll. As for second-draw PPP loans, the only difference in making sure you get loan forgiveness is that you must have maintained your employee and compensation levels exactly as you did when you received your first-draw loan.

You Must Use Up Your Loan Proceeds

Though you will be eager to make sure your PPP loan is forgiven, this does not mean you can apply for forgiveness soon after getting your loan. In fact, you can apply for loan forgiveness only after you have used up all of your loan proceeds on the expenses noted earlier. Also, note that once you have used up your loan proceeds, you may apply for forgiveness at any time, so long as you do so by the maturity date of your loan.

Failing to Ask for Forgiveness

Since these loans can be completely forgiven, it is imperative you know exactly not only how to spend your funds, but also your deadlines for when you might have to start making monthly loan payments, which is something you definitely can't afford at the moment. To make sure your PPP loan payments are deferred, you must apply for forgiveness no later than 10 months after the last day of your covered period. If you don't, your PPP lender will then expect a monthly payment from your business.

Apply For Loan Forgiveness With the SBA or Your Lender?

Whether you are self-employed, an LLC, or have another type of business structure, you will need to determine if you will apply to the SBA or a specific lender for loan forgiveness. Should your lender be a participant in direct forgiveness, you can apply to the SBA anytime after August 4, 2021. If your employer is not participating in this program, you will apply directly to your lender to have your loan forgiven. When doing so, you will need to submit SBA Form 3508, 3508EZ, or 3508S. In some instances, your lender may have forms equivalent to these they will want you to use, so always ask your lender for assistance if you have questions.

Compiling Your Documentation

If you use SBA Form 3508S, it will be much easier for you and your business. By using this form, you won't be required to provide more documentation that shows the calculations used to determine the amount of your loan forgiveness. However, don't be surprised if the SBA requests more documents when reviewing your loan and its forgiveness. To make sure you use the proper documentation when filling out your forms, always have bank statements, tax filings, receipts and cancelled checks for utilities and rent, and any other documentation you believe may be necessary.

Monitor Your Application

Upon submitting your PPP loan forgiveness application, don't forget about it and assume all is well. Instead, don't be afraid to contact the SBA or your specific lender to find out how things are going. In cases where the SBA chooses to review your loan, the process may take some time to complete. Once the review is finished, the SBA or your lender will inform you of whatever decision was made. Should you disagree with the decision, you have the right to appeal. Also, your lender will be responsible for notifying you of whatever amount the SBA has forgiven from your loan, as well the date any payment on the remaining amount will be due.

Ask for Help if Needed

Even though the PPP loan forgiveness form is only two pages long, it comes with several pages of instructions and worksheets to help you make the correct computations. However, even at only two pages, chances are you will still have many questions along the way. Therefore, don't be afraid to ask for help if you need it. Whether it's from your lender, the Small Business Administration, or an accountant or CPA you know and trust, having others assist you with the paperwork can help you avoid errors that could delay having your loan forgiven, forcing you to make unnecessary loan payments you likely can't afford.

Since the PPP loans you received helped you keep your business afloat and allowed your employees to continue earning a living, make sure you pay attention to the details now that you're ready to have the loan forgiven. By doing so, you'll get peace of mind and a loan that is forgiven by the SBA or your lender.