During the Covid-19 crisis many small businesses are struggling with the stress of new health procedures, the implementation of remote work, and hemorrhaging cash flow which harms the ability to meet financial responsibilities and maintain employee salaries. According to a special report on Coronavirus from Metlife and the US Chamber of Commerce, 54% of small businesses have either closed or expect they could close within the coming weeks.
Since April 3, 2020, sole proprietors and other small businesses in the US were able to apply for a new loan program created by the CARES Act called the Payment Protection Plan (PPP), which is backed by the SBA and 100% forgivable provided certain conditions are met. The program was initially intended to provide eight weeks of payroll funds for businesses struggling during the pandemic.
However, a bill called the Payment Protection Flexibility Act passed the House one May 28, and is awaiting Senate approval. This act would extend the time to spend the loaned funds from eight weeks to 24 weeks and reduce the payroll percentage spend requirement from 75% to 60%.
With the first, initial 8-week period coming to a close, many businesses owners are nevertheless beginning to request forgiveness on their PPP loans. The SBA has so far provided several rounds of guidance and clarification regarding PPP loan forgiveness in order to clear confusion among small businesses, and here are some key things to know.
Common Questions About PPP Forgiveness
How much of the loan must be used for payroll?
In order to meet the criteria for loan forgiveness per the initial rule set prior to any changes proposed by the Payment Protection Flexibility Act, the following conditions must be met:
75% of funds must be used for payroll costs.
Salaries must remain at or above 75% of their volume prior to the pandemic.
The borrower’s loan forgiveness will be reduced if the average number of weekly full-time equivalent employees (FTEs) during the 8-week period is less than the average number of FTEs during the borrower's chosen reference period. Borrowers can choose between the following reference periods:
February 15 to June 30, 2019,
January 1 to February 29, 2020, or
In the case of a seasonal employer a consecutive 12-week period between May 1 and September 15, 2019
There are exceptions for which the borrowers will not be penalized for any FTE reductions if either of the following occurred:
The borrower made a good-faith, written offer to rehire the employee during the 8-week period that was rejected by the employee
The employee was fired for cause, voluntarily resigned, or voluntarily requested a reduction in hours
When does the 8-week forgiveness period start?
The 8-week period lasts 56 days starting on the day the PPP loan was disbursed OR for borrowers with a biweekly (or more frequent) payroll schedule, the 8 weeks (56 days) beginning on the first day of the first pay period following the PPP loan disbursement.
For which purposes can my business use PPP loan funds and still qualify for forgiveness?
Payroll expenses
Health benefits
Mortgage interest
Rent
Utilities, which also include telephone, transportation and internet costs.
What supporting documentation am I required to provide?
Payroll tax filings (Form 941)
Income, payroll, and unemployment insurance filings from your state
Documents verifying any retirement and health insurance contributions
Documents verifying that your eligible interest, rent, and utility payments were active in February 2020
Where can I get an up-to-date PPP loan forgiveness application?
The SBA offers a downloadable PPP loan forgiveness application that includes instructions for necessary calculations on their website here.
How long until I know whether or not my PPP loan is forgiven?
Your lender will process your forgiveness application, and they are legally required to give you a yes or no response within 60 days of you submitting your application.
If the SBA rules that my business was ineligible for a PPP loan or denies forgiveness of the funds borrowed, what do I do next?
If your loan is not forgiven, your lender will provide you with additional documentation to appeal the decision. If you’re still required to repay the loan, it has a two year maturity period and an interest rate of 1%. There is no prepayment penalty if you decide to pay it off early.
Will the forgiveness period be extended to 16 or 24 weeks?
As of June 2, the Senate has yet to vote on the bill. Small business owners are advised to watch the news closely for updates regarding Senate and House negotiations for PPP flexibility considerations.
Does the SBA have any regularly-updated resources I can refer to regarding PPP forgiveness?
Yes, the SBA has compiled a PPP Forgiveness Resource Center that is regularly updated and covers business-specific information such as special considerations for self-employed PPP borrowers, partnerships, etc. You can access the resource center here.
An Evolving Process
Guidance on PPP loan forgiveness is likely to continue to evolve over the next several weeks, and business owners should look for updates from the SBA for further instructions and clarifications of this constantly changing playbook. Until then, however, existing rules continue to apply to all current borrowers.