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One of the single largest ways the federal government sought to aid businesses suffering from coronavirus-related shutdowns was the implementation of the Paycheck Protection Program (PPP). After its creation in March 2020, the program was modified several times to ensure more businesses could participate, with the final deadline for PPP hitting on August 8, 2020. As of that deadline, the SBA approved 5.2 million loans worth more than $525 billion.

What made the program so popular was the ability for businesses to have their loans forgiven, effectively making them grants. However, the loans came with specific criteria that needed to be fulfilled in order to have them forgiven. Below we will outline requirements for loan forgiveness, how to get a forgiveness application and other important details for those businesses hoping to have their PPP loan forgiven.

[Go here to see the U.S. Chamber of Commerce's PPP Loan Forgiveness Guide]

Background on PPP

First, let’s explain briefly how the PPP program actually worked to better explain the forgiveness aspect. The PPP program was created in March 2020 as part of the federal government’s $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act. On top of tax breaks and changes in the CARES Act, the PPP was designed to provide a simple way for businesses to keep their employees on payroll.

Generally speaking, PPP loans were issued with generous terms. PPP loans have an interest rate of 1%, with loans issued prior to June 5 maturing after two years and loans issued after June 5 maturing after five years. No collateral or personal guarantees were required for the loan and no fees were charged to small businesses by the banks or credit unions authorizing the loans. The maximum size allowed for a single loan was $10 million. While the loan terms were generous, the best aspect of them was that they could be forgiven.

The Treasury Department has indicated that it plans to automatically audit all PPP loans larger than $2 million. Smaller loans most likely won’t be targeted for audit but some “spot checks” will occur. Additionally, banks including JPMorgan Chase & Co (the single largest lender of PPP loans) said they will investigate instances of borrowers misusing PPP funds.

Requirements for loan forgiveness

To qualify for PPP loan forgiveness, the SBA set up various requirements that must be fulfilled. Effectively, forgiveness is granted to employers that kept or rehired employees while also maintaining general salary levels from before the pandemic. Employers can still be eligible for partial forgiveness if they don’t meet all of these criteria, such as if full-time headcount declined or salaries decreased somewhat.

Requirements include:

  • Funds are allowed to be used for payroll costs, rent, utilities and interest on mortgages.
  • At least 60% of loan must be used for payroll costs.
  • While the loan is being used, employers must attempt in good faith to maintain similar levels of employment and pay that they had prior to the pandemic.

Notably, as long a business submits a loan forgiveness application within 10 months of their loan being used, they are not required to make any payments on the loan.

Complete a loan forgiveness application

As long as you have abided by the rules and requirements provided by the SBA, it’s time to fill out and submit a loan forgiveness application. Small businesses with employees should fill out the standard PPP forgiveness application while sole proprietors, independent contractors and self-employed people who have no employees should fill out the EZ version of the application.

For small businesses with employees, the fairly simple five-page application asks businesses to submit details such as payroll and nonpayroll costs, adjustments for wage reductions and potential forgiveness amounts. Additionally, you’ll use the application to certify that the loan funds were used as intended, that you verified payments to employees and generally that the forms and information submitted to the SBA are true.

The loan forgiveness application also includes measures to “reduce compliance burdens and simplify the process for borrowers,” including:

  • The ability for borrowers to calculate payroll costs using an “alternative payroll covered period” that better aligns with a borrower’s normal payroll cycles.
  • The flexibility to include some payroll and nonpayroll expenses paid or incurred during the 24-week period after receiving their PPP loan (meaning employers would not be limited only to costs in the original two-month timeline).
  • Instructions on how to easily calculate loan forgiveness.
  • An exemption to help with loan forgiveness based on borrowers rehiring workers by June 30.
  • An exemption from loan forgiveness reduction for any borrowers who made a “good-faith, written offer to rehire workers” that was later declined.

Once the loan forgiveness application has been submitted, then businesses will wait to find out if it has been accepted. Notably, as long a business submits a loan forgiveness application within 10 months of their loan being used, they are not required to make any payments on the loan. If the loan is then fully forgiven, then the business does not need to make any payments at all. If the loan is only partially forgiven or not forgiven at all, the loan must be paid off before its maturity date.

Impact on business taxes

After the loan has been forgiven, businesses should be prepared for the forgiven loan to impact their 2020 business taxes. While a forgiven PPP loan is tax-exempt, using the loan can also reduce how much you can write off on your business taxes. This means that some of your everyday expenses like payroll, rent and utilities that would normally be deductible from taxable income would not be deducted. Without this deduction, your business may in fact owe more taxes at the end of the year than normal.

More questions and answers

On a final note, the Small Business Administration has released an extensive document of frequently asked questions about PPP loan forgiveness. This document outlines specific use cases, including what types of compensation count as payroll costs, what costs are eligible for forgiveness, how to calculate how much will be forgiven and more. Additionally, it would be smart to get in touch with your personal financial advisor or accountant to review all of your PPP details before submitting a forgiveness application.

For more resources from the U.S. Chamber of Commerce:

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Published September 11, 2020