[from the US Chamber of Commerce] Paycheck Protection Program loans have helped many companies make it through COVID-19-related disruptions. Here is what businesses need to do to get their PPP loans forgiven.
This story was updated 1/8/21: The Paycheck Protection Program (PPP) will re-open the week of January 11 for new borrowers and certain existing PPP borrowers. To promote access to capital, initially only community financial institutions will be able to make First Draw PPP Loans on Monday, January 11, and Second Draw PPP Loans on Wednesday, January 13. The PPP will open to all participating lenders shortly thereafter.
One of the most extensive ways the federal government sought to aid businesses suffering from coronavirus-related shutdowns and disruptions was implementing the Paycheck Protection Program (PPP).
After its creation in March 2020, the program has been modified several times to ensure more businesses could participate, with the SBA approving more than 5 million loans worth more than $525 billion throughout 2020.
What made the program so popular was the ability for businesses to have their loans forgiven, effectively making them grants. However, the loans were issued with specific criteria that needed to be fulfilled 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, including the latest revisions issued by the federal government in December 2020.
Background on the Paycheck Protection Program
First, let’s explain briefly how the PPP works to better explain the forgiveness aspect. The PPP 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 and cover some additional expenses.
The PPP program was further modified with major revisions in June 2020 and December 2020 to add more flexibility for how borrowers spend loan funds. The December bill also reopened the PPP program so more businesses could apply for a first-time loan and created the ability for businesses to potentially obtain a second PPP loan.
Generally speaking, PPP loans carry generous terms. All 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. Basically, PPP loans issued before June 5, 2020, must be paid back in two years, and loans issued after that must be paid back in 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. While the loan terms were generous, the best aspect of them was that they could be forgiven.
The Treasury Department said 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 would investigate instances of borrowers misusing PPP funds.
Requirements for loan forgiveness
To qualify for PPP loan forgiveness, businesses must fulfill various requirements. The terms regarding forgiveness were last updated in December 2020.
Effectively, forgiveness is granted to employers that have kept or rehired employees while also maintaining 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 for full forgiveness include:
- At least 60% of the loan must be used for payroll costs.
- The remaining 40% of the loan can be spent on the following expenses: (1) qualifying mortgage interest or rent obligations; (2) utility costs; (3) operations costs such as business and accounting software; (4) property damage such as destruction from civil unrest that was not insured; (5) supplier costs on essential goods; and (6) worker protection expenditures such as personal protective equipment (PPE) and sneeze-guards.
- While the loan is being used, employers must attempt in good faith to maintain similar levels of employment and pay what they had prior to the pandemic.
Read the full article at USChamber.com.
