Paycheck Protection Program Loan Forgiveness
Editor’s Note: Information in this article was last updated on June 24, 2020.
What is the Paycheck Protection Program Flexibility Act?
If you have a Paycheck Protection Program loan, you may be wondering what you need to do to have the loan forgiven. On June 5, 2020 the Paycheck Protection Program Flexibility Act (PPPFA) was signed into law. The PPPFA makes it easier for small business owners to obtain loan forgiveness by relaxing the original PPP rules. Need to know what changed? Let’s dive in!
Forgiveness Time Period
The Paycheck Protection Program is a federal financial assistance program that provides forgivable loans to small businesses. PPP loans provide small business owners with funding equal to 2.5 times your average monthly payroll costs. Originally, business owners had only 8 weeks to use the loan funds and obtain forgiveness. The PPPFA extended the forgiveness period from 8 weeks to 24 weeks after loan origination.
Permitted Use of Funds
The primary goal of the Paycheck Protection Program is to help small business owners continue to pay their employees. For the loan to be forgiven, business owners were originally required to spend at least 75% of PPP funds they receive on payroll-related expenses. Many business owners were unhappy with this requirement, and for good reason. If a business is running at a fraction of its original capacity and is suffering from greatly reduced income, the savvy business owner will reduce expenses accordingly to help protect profit. The PPPFA reduced the requirement for payroll-related spending from 75% to 60%. No more than 40% of the funds can be spent on rent, mortgage interest, and utilities.
Rehiring Deadline and Requirements
The PPPFA extended the deadline to rehire laid off workers by six months. Employers now have until December 31, 2020 to rehire workers. In addition, the PPPFA relaxed the requirements for rehiring workers. Businesses with reduced headcount are eligible for loan forgiveness if they demonstrate one or more of the following:
- An inability to rehire similarly qualified employees as those that were laid off
- An inability to return to previous levels of business activity
- An inability to rehire someone the business employed on or before February 15, 2020
Applying for Forgiveness
Keep detailed records of how you used your PPP funds and be sure to spend only on approved expenses. You’ll need to provide payroll and other financial information when you apply for forgiveness. Many payroll processors have developed PPP payroll reports specifically for this purpose. In addition, you must provide information about headcount, spending on mortgage or rent, and utilities. If you have an SBA EIDL loan, you’ll be asked to report the loan and loan advance amounts you received.
How do you apply? The Small Business Administration published applications for loan forgiveness, a revised 3508 application and a 3508EZ form. Review this checklist to see if you qualify for using the simpler EZ form. Submit your application to the lender that provided you with the loan. Check with your lender for any specific requirements they have for submitting your application and the supporting documentation. If you need assistance gathering the required documentation, your payroll processor, CPA, or CFO may be able to help.
Repayment of Unforgiven Funds
The PPPFA will enable more small business owners to obtain full loan forgiveness. However, if you aren’t able to obtain full forgiveness based on your use of the funds, the good news is that the PPPFA extended the repayment term for the loan from two years to five years. The annual interest rate for the loan was left unchanged at 1.0% annually.
For more information about the Paycheck Protection Program Flexibility Act, view the full text of the Act here.
About Momentum CFO
Momentum CFO is a boutique firm specializing in outsourced Chief Financial Officer services for small to mid-size businesses. We bring the benefits of Fortune 500 financial expertise to your business without the expense of hiring a full-time CFO.