On Friday, May 15, 2020, the Small Business Administration (SBA) introduced the PPP loan forgiveness application. As you know, the Paycheck Protection Program loan was a provision in the CARES Act that provided small business owners with funding. What hasn’t been clear, are the exact details and timing of the forgiveness for these loans. The SBA has now made those details known. We will discuss the loan itself and what the PPP loan forgiveness application is like.
- Small businesses with fewer than 500 employees can apply for the PPP loan
- Billions of dollars are available and may be forgivable
- New application provides clarity on forgiveness
What is the PPP Loan?
With small business shuttered across the country, and countless more limited, the government included billions of dollars in loans. The $2 trillion stimulus package, known as the CARES Act, introduced us to the loans offered by the SBA. Those funds got depleted quickly. However, another $310 billion in funding was added recently. That money is going fast, so it’s important for all business owners that need funding, fill out the required forms ASAP.
Only businesses with less than 500 employees may be eligible for the funding. The SBA has become stricter about who gets the funds, so hedge funds, private equity firms and many public companies are ineligible. Also, certain industries like casinos and farms and ranches, along with those in bankruptcy proceedings cannot apply.
Those approved for the PPP loan will receive 2.5x their average monthly payroll (not including compensation above $100,000 for each employee). Your business must have been opened prior to February 15, 2020. For the loan to be forgiven, 75% must be spent on payroll, benefits and taxes. Up to 25% can be used to pay rent, utilities and mortgage interest. There is no guidance as to the so-called 75/25 rule changing right now. Any portion not forgiven will be taxed at 1.0% with payments not due for six months. This amount must be paid back within two years.
PPP Loan Forgiveness
Prior to the PPP loan forgiveness application (download the PDF) being released, little was known what business owners must do to have these loans forgiven. The application explains many things, including the following, important items.
All loans under $2 million are forgivable. If your business received more, you will likely be audited. You will need to show how those funds were used. The application details how these companies will be looked upon. Of course, most small businesses will not come near this amount. If you received $10 or $20,000, you should not be at risk of an audit. Of course, you must still prove your loan was spent for payroll.
How Long Do You Have to Spend Those Funds?
Essentially, you have eight weeks to cover the expenses from your business. However, when that time frame started, wasn’t clear. Many business were not (and could not be) open during this pandemic. Obviously, payroll hasn’t been paid during this time. Restaurant owners have asked the President to expand the time-frame to 24 weeks, which is a real possibility.
However, as it stands in the application, the current eight week time-frame will start on the date of your first payroll, if you so choose. This is opposed to it automatically starting once the check hits your bank. The money might not be spent if your payroll goes out a day or two before that happens. This will give small business owners some time to dole out the funds.
Number of Employees
It’s fairly standard that you must maintain your average number of employees for the loan. Any reduction in salary will lead to a similar decrease in your loan amount. However, there are exceptions based on why the employee is no longer working for you.
First, are “good-faith” offers to rehire an employee who has declined such invitation. Next, are any employee who have been fired cause. Obviously, you are not required to keep an employee who is not living up to the job expectations. Lastly, any employees who voluntarily resigned or quit will not be included.
Many experts say that the PPP loan forgiveness application doesn’t address everything. As we mentioned earlier, the eight week period is something that needs addressing. Shall a business owner be allowed to choose that period? Should it be extended (for as long as 24 weeks)? These questions may be answered in the near future.
At the very least, there is more clarity about the loan forgiveness process. No small business owners should feel like they should not apply for a PPP loan. Billions of dollars are going to similar people across the nation. It’s best to speak with a financial advisor to see exactly what you might receive and how to go about using those funds.
If you have any questions, feel free to reach out to us @ 800.472.0646 at any time. You can also check our our YouTube page with tons of material related to the CARES Act, SBA loans and other COVID-19 education. Be safe!