PPP Loan Forgiveness – Overview of the Loan Forgiveness Process
The Small Business Administration (SBA) has officially released a copy of the Loan Forgiveness Application for recipients of loans from the Paycheck Protection Program (PPP). We recently provided an overview of the PPP loan program, which forgives all or a portion of this loan depending on how the funds are spent. In part two of this series, we will cover the process of applying for forgiveness.
As with most information related to the PPP, it is important to note details on these regulations are evolving on an ongoing basis. We strongly encourage all recipients of PPP loans to consult with their tax and legal advisors, as well as their banking representatives, to verify the most up-to-date information.
Overview of the loan forgiveness process
Recipients of PPP loans have eight weeks to spend the funds on qualified items. Our previous post covers these items in more detail. At the end of those eight weeks, you gather your financial documentation and apply for forgiveness via the Loan Forgiveness Application, with the bank that disbursed the funds.
The bank has 60 days to respond to your request for forgiveness and notifies you of any amount you still owe.
Financial documentation needed
The SBA is requiring the following documentation to verify how you spend your PPP loan funds. Payroll and related expenses should comprise 75% of the total amount spent to qualify for forgiveness.
Payroll and Related Expenses
Bank account statements or payroll reports to indicate cash compensation paid to employees.*
Employment tax forms for the eight-week period (also known as the “Covered Period”). For tax forms, the SBA is requesting payroll tax forms (usually 941) and state quarterly wage and unemployment filings.*
Payment receipts, cancelled checks, or account statements documenting the amount of employer contributions to employee health insurance and retirement plans.
*If you use a third-party payroll service, they should be able to provide you with these documents.
Many small businesses file payroll taxes (form 941) on a quarterly basis which may not sync closely with the eight-week period for which they need documentation. For example, if you receive funds in the second quarter (April-June), but your eight weeks does not end until the third quarter (July-Sept), you would have to wait as long as October to receive your payroll tax documentation and file for loan forgiveness. It remains unclear at this time (May 2020) if any additional flexibility will be granted by the SBA to file for loan forgiveness prior to all your documentation becoming available.
It is also unclear what documents a sole proprietor or partnership that does not have payroll and therefore does not file separate employment taxes will need to supply.
Documentation of non-payroll expenses
To document the approved non-payroll costs of items such as rent, mortgage interest and utilities, the SBA is requiring proof these obligations or services were established prior to February 15, 2020, and evidence of payments during the eight-week period.
Business Mortgage Payments and Other Debt Obligations
To document business-related debt obligations, the business would provide a lender amortization schedule and receipt of payments. The borrower should also be prepared to provide account statements from February 2020 and during the eight-week covered period.
Rent and lease payments
To document rent or lease payments, a copy of the lease agreement must be produced showing it was in force before February 15, 2020. To document the payments made during the eight-week period, the business owner needs to produce statements, usually provided by the landlord or lessee, showing the payments or cancelled checks. This applies to rents on real property and any leased personal property such as equipment
Utility Payments
Similar to the above, utility payments require an invoice or statements from February 2020 showing the utility service in place. To document payments made during the eight-week period, the business can use account statements showing the payments made, cancelled checks or bank account statements showing the payment.
Verify before submitting your application to the bank
While you are completing the Loan Forgiveness Application and gathering documents, it is highly advisable to contact your banking representative and discuss what, if any, other documentation may be required. From what we are seeing today, requirements not consistent across lending institutions, and your bank may ask for additional information or clarification.
After submitting your application
Once your application and all documentation have been submitted, the bank has 60 days to notify you if your entire loan will be forgiven. Any amount NOT forgiven becomes a loan at 1% for up to 2 years. You may wait up to 6 months to begin making payments, but interest will accrue during this time. The government has also mandated no additional fees, including pre-payment fees, can be charged by the bank. For this reason, you will save money paying the loan off ahead of time if you are in a financial position to do so.
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