If you applied for and received a Paycheck Protection Program (PPP) loan, there is a possibility you could have your loan fully forgiven. If a PPP loan is forgiven, you will essentially have received a grant to help your business recover from the effects of COVID-19 closures. Currently, what you do with your PPP loan during the eight weeks after receiving it may qualify you for partial or full loan forgiveness. Read on for tips on how to get your loan forgiven.
Use Your Loan for Eligible Expenses
To qualify for PPP loan forgiveness, you must use 100% of the loan for eligible expenses, with the majority of your loan covering payroll expenses. You can break it down as 75% towards payroll costs like salaries, wages, and employee benefits, and 25% towards non-payroll expenses such as interest on mortgages, rent, and utilities.
Pay Attention to the Eight Week Period
The loan is meant to cover eight weeks’ worth of expenses, so loan forgiveness will depend on your costs during that period. The clock starts when your lender makes your first loan disbursement, and eight weeks from that date is known as the “covered period.” If you have money left over, you can return it to your lender or use it, but with the knowledge that you will have to pay that portion back with 1% interest.
Keep Your Employee Headcount Up
The primary purpose of the Paycheck Protection Program is to keep employees on payroll and off of unemployment. This is why keeping your employee headcount the same as it was when you applied is essential for loan forgiveness. When you applied for the PPP, you included all full-time and part-time workers. For loan forgiveness, the CARES Act will look at your average full-time equivalent (FTE) employees during the eight weeks. The SBA will then reduce PPP loan forgiveness based on the average FTE employee reduction.
Don’t Reduce an Employee’s Wages by More Than 25%
If you want full loan forgiveness, don’t reduce an employee’s wages by more than 25% of what they received in the last full quarter. If you have reduced your employee’s wages, increase their compensation as soon as you receive the PPP loan.
As always, a great practice in business management is to document everything. Keep documents that support your PPP loan application, and record everything after receiving your first loan disbursement. Make sure to document:
- When you receive your loan
- Each time you spend part of the loan
- Accrued interest on the loan
Keep copies of every expense you use your loan to cover, no matter how small. It also helps to separate your PPP-relevant documents from your other funds.
Apply for Loan Forgiveness
Your lender may have additional documentation requirements, but the SBA will require you to provide documentation which shows the following:
- Payroll costs during the loan period
- Number of FTE employees on the payroll
- Interest on mortgage payments
- Rent payments
- Utility payments
Once you apply for loan forgiveness, your lender has 60 days to make their decision. If your loan is partially or fully forgiven, update your accounting books to reflect the change.
What If My Loan Isn’t Forgiven?
If part, or all, of your loan, isn’t forgiven, you will have to pay it back. When paying back unforgiven PPP loan funds, you will have:
- A 2-year loan term
- 1% interest rate, accruing immediately
- 6-month payment deferral from the date of the loan disbursement
If you want to pay off your loan balance before the two years are over, there is no prepayment penalty.
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