This year has been a doozy for business owners and, with the end of it just around the corner the last thing you likely want to do is take a walk down memory lane through it's challenges. But that's exactly what I'm asking you to do as you read this article, so please sit back (hopefully with a cup of cozy) and let's talk PPP Forgiveness.
Back in March, when the world was almost promising to fall down around us, you started to hear unheard of terms. Acronyms floated through the news channels and websites and your accountant's mouth like fall leaves float on a breezy day. Terms like PPP, EIDL, and SBA became commonplace references for some of us and we rushed to find out just what they meant. For us here at Noble Business Services, that meant long nights and early mornings trying to unpack the mysteries of the CARES Act.
What we discovered was what you are likely now familiar with:
EIDL - the small business loan administered by the SBA that bears an interest rate of around 3.75% and a term length of 30 years.
EIDL Grant - the non-taxable, non-loan portion of EIDL that you could be eligible for once you applied for the actual EIDL loan. In the early days, many people thought this was an automatic $10,000 grant to applicants, but materialized as a grant of $1000 per employee - up to $10,000. It was also promised to be delivered in 3 days which became somewhat of a joke as it took the SBA weeks or even months to process the rush of applications.
PPP - the loan that was so uber popular that a second round was authorized and exhausted much quicker than anticipated. It is a loan with all the stipulations, terms and conditions of a regular loan - plus some. For those who did not read their Promissory Note documents carefully, there could be some unpleasant surprises if you want to sell your company, liquidate some assets, or who thought this would be a cheap and easy tool to invest in business equipment or growth. The PPP has been in the news for it's forgiveness aspect that sounds easier than it is, but still qualifies as what was an excellent, but limited, shelter from the economic storms that small business owners faced during this year.
Today we're going to unpack just what the forgiveness process of the PPP loan entails (not intended to be a comprehensive or step-by-step walkthrough of requesting forgiveness).
(Note: To our Covid-19 Clients: even though my team and I are completing the forgiveness applications for you, I still implore you to read this article so you can see that hiring us for this process was money well spent!).
Before we go further, I want to reiterate something that I said in the beginning of all this craziness:
"I do not like debt. At all. I have always been focused on helping people overcome their debt. I believe that the borrower is servant to the lender and that, for the most part, businesses should operate without debt. But... (you knew that "but" was coming!).We are in unprecedented times. Times that are going to test the mettle of each of us, small businesses especially. The government is requiring that most businesses shut their doors.That means loss of revenue.That means laying off team members.That means, for some, maybe never re-opening their doors.I consider those things the "greater evil" of our time (more-so than a government loan). As someone who owns two small businesses and works with dozens of others, I believe that business is the lifeblood of our economy.The SBA loans are not going to save you. It's not enough to have money during this time. It's going to take Energy, Creativity, and Ingenuity to get through.
At the end of the day, it's about businesses being able to hold on through this downturn. I am fully convinced that we will come out of this - the question is, What can you do now to be stronger in 2 months than you were 2 months ago? Maybe an SBA loan will help. Or maybe you just need someone to be a second set of eyes on your numbers and assure you that you're going to be alright. Either way, we want to be part of your sur-thrival!"
With that little disclaimer behind us, let's talk PPP Forgiveness (for reals this time!).
If you received a PPP loan, by this time, the money is likely gone. The program went through substantial changes multiple times, but its emphasis was always on payroll. What began as a 75% threshold (the amount that had to be spent on payroll in order to make the loan forgivable), has now become 60%. The "covered period" (the length of time a business owner had to pay for eligible expenses) increased from the original 8 weeks to the more beneficial 24 week period (the 8 week period is still an option that can be elected on the forgiveness application).
Forgiveness applications need to be submitted by 10-months after the covered period - giving plenty of time to make sure all the documentation is collected and a complete application can be submitted without chasing down missing information. If you received your PPP loan in May and have a 24 week covered period, your forgiveness application will be due around July/August of 2021.
For loans $50K and under, a Form 3508EZ may be submitted. This is a simplified and streamlined form that asks for minimal information and documentation. Other lenders will need to use Forms 3508, 3508S, or 3509. Each of the Forms becomes a little more complicated and requires additional documentation to prove expenses.
Business owners who spent their funds legitimately (at least 60% on payroll and the remainder on mortgage interest, utilities, rent, etc.), there should be no problems with securing the forgiveness of the loan. Many have already applied and seen the entirety of their loans wiped away. However, there are a couple scenarios that you should be aware of that could reduce your forgiveness amount:
If the number of FTE (full time equivalent) employees is less at the end of your covered period than it was as of the first quarter of 2020, you may not receive full forgiveness. Additionally, if you reduced anyone's salary more than 25%, the forgiveness could again be reduced. Finally, if you paid any one employee in any pay period more than what would have been more than $100,000 for a year if that pay rate had been sustained, you may have forgiveness reduced (it's not entirely clear if this provision includes S Corp Shareholders).
There are some safe-harbor type exceptions to the above forgiveness-reducing issues, so if you know that you would fit in that category, we would explore whether you would qualify for an exception. One of those exceptions is to be used in instances when a business was closed due to government mandate and reduced or discontinued paying wages. Totally makes sense to have that exception.
Here are the documents that you should expect to need as you complete the forgiveness application:
- Payroll Details for each employee
- Bank account statements and/or third-party payroll reports
- 941 Reports
- State Unemployment Reports
- Profit & Loss Reports (for various periods)
- Details on any government instituted business closures
- Documentation showing the number of FTE on payroll per week (for various periods)
- Documentation showing lease and utility accounts established before the loan was received
- Proof of payment on any leases and/or utility accounts
- ...and many more!
The forgiveness application process is cumbersome and critical. It can be frustrating trying to keep up with all the changes that have been made in such a short amount of time. But when all is said and done, you will have received cash to pay your employees, kept food on their tables, and won't owe it back to the SBA. Now, the expenses that you paid with that forgivable amount will not create a tax deduction for your business, leaving you, in reality, with increased taxable income.
But that's a discussion for another day...
