The Paycheck Protection Program offers SBA-backed loans for small businesses affected by the COVID-19 pandemic. These PPP loans are forgivable under several circumstances, which makes them enormously helpful to businesses that are struggling during these troubled times. Here’s how PPP loans work — and what forgiveness means for your business.
What is the Paycheck Protection Program?
The original Paycheck Protection Program was established as part of the CARES Act, which was signed into law on March 27, 2020. On June 3, Congress passed the Paycheck Protection Program Flexibility Act (PPPFA) to modify the provisions of the PPP loans to reflect the continuation of the pandemic. The changes expand the timeline in which businesses can receive and use funds, as well as how they use the funds.
Qualifying for a PPP Loan
As long as you were in business before February 15, 2020, and have fewer than 500 employees, you are generally eligible for a PPP loan. You qualify for up to 2.5 times your average monthly payroll cost, up to $10 million. While the PPP was established to help you maintain payroll, you may also use the funds to cover mortgage, rent, and utilities and have the entire cost of your loan forgiven.
Qualifying for PPP Loan Forgiveness
Under the original program, to qualify for forgiveness, you had to spend at least 75 percent of the loan on payroll. The PPPFA reduced this required amount to 60 percent. You also have more time to restore your payroll if you laid off employees: you now have until December 31, 2020. Because the new covered term is now 24 weeks instead of 8 weeks, you can also use your PPP loan to cover a larger percentage of payroll costs and have it forgiven. However, you must pay your employees at least 75 percent of what they were making before February 15, 2020. If you don’t, a proportionate loan amount will not be forgiven.
If you weren’t able to rehire employees or find someone to fill their role, you must apply for an exemption if you wish to avoid having your forgiveness reduced. Reasons for exemptions include employees who were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in hours.
Applying for PPP Loan Forgiveness
You won’t automatically receive forgiveness if you meet these criteria. You must apply for it through the lender who handled your PPP loan. Some lenders have additional requirements, but per law, you must provide documents verifying the following information:
- the number of employees, their hourly status, and their pay rates for the covered period
- payroll tax filings
- retirement and health insurance contributions
- documentation of eligible interest, rent, and utility payments
Note that payments to independent contractors and freelancers are not eligible for PPP loan forgiveness. Also, any expenses you list for forgiveness cannot be claimed as a tax deduction when you file for 2020.
Repaying An Unforgiven Loan
If you are unable to restore your payroll and do not qualify for an exemption (or if you use PPP loan proceeds for unqualified expenses), you may have only part of the loan forgiven. Under the original CARES Act provisions, you would need to start repaying within 6 months and finish within 2 years. You now have up to 10 months from the PPP’s expiration, and you have up to 5 years to repay. Either way, your interest is only 1 percent.
The PPPFA has made it easier for businesses to achieve forgiveness for their PPP loans. It’s important to document all expenses and ensure that you meet the payroll requirements. As long as you maintain your employees’ status at 75 percent of their previous pay (or restore it to this level by December 31, 2020) and as long as you use PPP loan proceeds for qualifying expenses, you usually can have 100 percent of the loan amount forgiven.
If you are not able to return to the same level of business activity and are concerned about not being approved for loan forgiveness, document as much as possible (lack of qualified employees, county mandates, etc.) and keep close track of your expenses. You may be able to apply for an exemption.
Under these new provisions, most businesses now have greater flexibility in receiving and using a PPP loan. The deadline to apply has been extended until August 8. While new applicants will not qualify for the full covered period (the cap is December 31), a PPP loan can still be an excellent opportunity for small businesses to keep their valued employees on payroll and pay their bills — with an option for full loan forgiveness.