If you received a loan through the Paycheck Protection Program, you might be eligible for forgiveness on money owed.
As COVID-19 continues to impact businesses worldwide, smaller companies are looking for ways to stay afloat. Many of these businesses applied for PPP loans, and there is good news: portions of the loans are forgivable, as long as you meet criteria and work through the necessary paperwork.
Here’s some information on PPP loan forgiveness, as well as Economic Injury Disaster Loans (EIDL).
What is the PPP?
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act included the Paycheck Protection Program (PPP), which handed out $342.3 billion until its suspension on April 16, 2020.
That wasn’t the end, however. As the Paycheck Protection Program and Health Care Enhancement Act became law on April 24, 2020, it added another $320 billion in PPP funding. This program lasted until June 30, 2020.
Finally, the Paycheck Protection Program Flexibility Act went into effect on May 26, 2020, expanding the loan coverage period from eight weeks to either 24 weeks or until December 31, 2020. Businesses that receive this money for 24 weeks will have different forgiveness rules, so this is essential information to remember.
This law also extended the loan term from two years to five years for loans received after June 4, and it lowered the forgivable percentage of these loans for payroll costs from 75% to 60%.
Eligibility for these loans was limited to small businesses, nonprofits, the self-employed, independent contractors, and sole proprietors for an amount equal to 2.5 times the company’s monthly payroll costs at an interest rate of 1%.
The definition of payroll costs
Payroll costs are an important factor in determining how much of a loan your business can receive. The definition of payroll costs to award a loan includes wages, salary, tips, and commission made by workers, and is capped at $100,000 per year per employee.
This $100,000 amount includes employee benefits like medical, vacation, sick, family, or parental leave, a dismissal allowance, insurance premiums, and employer contributions to benefits or retirement plans. Other items covered under the term “payroll costs” include state and local taxes and unemployment insurance.
How PPP loan forgiveness works
After receiving your loan, you could have a percentage of it forgiven, based on a few factors.
To apply for PPP loan forgiveness, you’ll start by filling out an application form. The EZ Form is the shortest and most straightforward, but only certain entities are eligible to use it. You could fill this form out yourself, although it’s recommended that you receive some assistance to verify its accuracy.
Eligibility for the EZ Application is reserved for independent contractors, self-employed individuals, and sole proprietors with no employees. Small businesses that did not reduce their workers’ salary or hourly wages by 25% or more and did not lay-off employees or reduce their hours are also eligible. In special situations, the business could receive loan forgiveness when reducing employee hours, if there was a reduction in their business activity due to compliance with various federal agencies’ requirements.
The other option is the Standard Form, which you’ll have to do if the EZ Form doesn’t apply to your business. It’s highly advisable to have a trained professional walk you through this longer form to avoid mistakes.
The Standard Application includes a loan forgiveness calculation form, PPP Schedule A worksheets, wage reduction calculations, full-time equivalent calculations, and demographic information. Your loan forgiveness amount could decrease if the full-time equivalent calculations show you reduced your employees’ hours by too much or reduced employee wages by more than 25%.
From the time the loan forgiveness application is received, the lender has 60 days to decide. From there, the lender will send the approved request to the SBA, and the SBA has another 90 days to accept or reject it. The SBA then sends the forgiven funds to the lender, and you have two to five years to repay the outstanding amount.
If the lender rejects your application, you can appeal the decision with additional supporting documentation. Your appeal is another situation where you’ll want to receive help from a professional.
Documentation that you might have to provide includes bank statements or payroll reports, tax forms, and payment receipts proving that you’re paying your employees.
For nonpayroll expenses, documents like a lender amortization schedule, lender account statement, rental or lease agreement, receipts or canceled checks, and utility invoices could be necessary.
What expenses are eligible for PPP forgiveness?
You aren’t eligible to receive loan forgiveness for every expense you incur during this time, as the amount relates to payroll costs. These payroll costs have a different definition than on your initial application, however.
For starters, loan forgiveness does not apply to the tax credits claimed under the Families First Coronavirus Response Act—it’s only for PPP loans.
The amount a company can claim forgiveness for employee salaries is capped at an annualized limit of $100,000, or $15,385 for an eight-week period and $46,154 for 24 weeks. For employees making less than $100,000 per year, you’ll receive forgiveness on an amount equal to eight or 24 weeks of their salary from 2019.
Business owners have slightly different forgivable amounts. These individuals are still eligible for forgiveness on up to $15,385 for eight weeks, but the number is capped at $20,833 for 24 weeks.
As far as benefits go, PPP loan forgiveness is available for the employer portion of group health insurance and retirement benefits, but this doesn’t apply to self-employed individuals, general partners, or owner-employees of S corporations. Owner-employees of C corporations cannot receive forgiveness on their retirement contributions either.
You can also receive loan forgiveness for money put toward nonpayroll costs, including mortgage interest on any business property, rent or lease payments, and utility payments like electricity, gas, internet, telephone, and transportation. You must have been making payments on these items before February 15, 2020, to be eligible, and nonpayroll costs can only make-up 40% of your total forgiveness amount.
An explanation of the Economic Injury Disaster Loan
PPP isn’t the only option for financial assistance during this pandemic. The Economic Injury Disaster Loan (EIDL) is also an option.
Eligibility for this money is limited to small and U.S. agricultural businesses. The funds must be used solely as working capital to limit the economic injury sustained as a result of COVID-19 from January 2020 onward.
The amount businesses can receive is based on need. They’re eligible for up to $2 million, with a non-recourse amount of up to $200,000. There’s also a grant of up to $10,000 or $1,000 per employee that the business does not have to repay.
As far as the interest rate goes, it sits at 3.75% for small businesses and 2.75% for nonprofits over a 30-year term. There is a 13-month grace period before the repayment period begins.
Getting the assistance you need
It’s in your business’s best interest to have as much of your PPP loan forgiven as possible, as this will help your financial situation moving forward. If you’re unsure about how to go about filing your application, professional help is available.
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