The Small Business Administration (SBA) has officially released a copy of the Loan Forgiveness Application for recipients of loans from the Paycheck Protection Program (PPP). We recently provided an overview of the PPP loan program, which forgives all or a portion of this loan depending on how the funds are spent. In part two of this series, we will cover the process of applying for forgiveness.
As with most information related to the PPP, it is important to note details on these regulations are evolving on an ongoing basis. We strongly encourage all recipients of PPP loans to consult with their tax and legal advisors, as well as their banking representatives, to verify the most up-to-date information.
Overview of The Loan Forgiveness Process
Recipients of PPP loans have eight weeks to spend the funds on qualified items. Our previous post covers these items in more detail. At the end of those eight weeks, you gather your financial documentation and apply for forgiveness via the Loan Forgiveness Application, with the bank who disbursed the funds. The bank has 60 days to respond to your request for forgiveness and notifies you of any amount you still owe.
Gather Your Documents
The SBA is requiring the following documentation to verify how you spend your PPP loan funds. Payroll and related expenses should comprise of 75% of the total amount spent to qualify for forgiveness.
Payroll and Related Expenses
- Bank account statements or payroll reports to indicate cash compensation paid to employees.*
- Employment tax forms for the eight-week period you spent your PPP loan funds (also known as the “Covered Period”). For tax forms, the SBA is requesting payroll tax forms (usually 941) and state quarterly wage and unemployment filings.*
- Payment receipts, cancelled checks or account statements documenting the amount of employer contributions to employee health insurance and retirement plans.
*If you use a third-party payroll service, they will likely provide you with these documents and provide additional guidance on how changes in your payroll due to layoffs, furloughs, etc. could reduce the amount that qualifies for forgiveness.
Many small businesses file payroll taxes (form 941) on a quarterly basis which may not sync closely with the eight-week period for which they need documentation. For example, if you receive funds in the second quarter (April-June), but your eight weeks does not end until the third quarter (July-Sept), you would have to wait as long as October to receive your payroll tax documentation and file for loan forgiveness. It remains unclear at this time (May 2020) if any additional flexibility will be granted by the SBA to file for loan forgiveness prior to all your documentation becoming available.
It also remains unclear what documents a sole proprietor or partnership that does not have payroll and therefore does not file separate employment taxes will need to supply.
Documentation of Non-payroll Expenses
To document the approved non-payroll costs of items such as rent, mortgage interest and utilities, the SBA is requiring proof these obligations or services were established prior to February 15, 2020 and evidence of payments during the eight-week period.
Business Mortgage Payments and Other Debt Obligations
To document business-related debt obligations, the business would provide a lender amortization schedule and receipt of payments. The borrower should also be prepared to provide account statements from February 2020 (to prove the obligation was established prior to 2/15/20) and during the eight-week covered period.
Rent and lease payments
To document rent or lease payments, a copy of the lease agreement must be produced showing it was in force before February 15, 2020. To document the payments made during the eight-week period, the business owner needs to produce statements, usually provided by the landlord or lessee, showing the payments or cancelled checks. This applies to rents on real property and any leased personal property such as equipment, company cars, etc..
Similar to the above, utility payments require an invoice or statements from February 2020 showing the utility service was established by the 2/15/20 deadline. To document payments made during the eight-week period, the business can use account statements showing the payments made, cancelled checks or bank-account statements showing the payment.
Contact Your Bank
While you are completing the Loan Forgiveness Application and gathering documents, it is highly advisable to contact your banking representative and discuss what, if any, other documentation or paperwork may be required. From what we are seeing today, requirements not consistent across lending institutions and your bank may ask for additional information or clarification.
Account For Your Loan
Once your application and all documentation has been submitted, the bank has 60 days to notify you if your entire loan will be forgiven. Any amount NOT forgiven becomes a loan at 1% for up to 2 years. If you have not done so already, consult with your bookkeeper or accountant to ensure that PPP funds are properly recorded and any remaining loan amounts are reflected in your financial records including your balance sheet.
Plan For Repayment
Business who still have an outstanding balance to pay back will then need to determine a plan for repayment. You may wait up to 6 months to begin paying off your loan, but interest will accrue during this time. The government has also mandated no additional fees, including pre-payment fees, can be charged by the bank. For this reason, you will save money paying the loan off ahead of time if you are in a financial position to do so.
ABOUT FIRM NUMBERS
Firm Numbers provides small business owners bookkeeping and financial reporting designed to help you make better management decisions. Firm Numbers offers flat-fee monthly service packages to address the pain points of law firms and professional service providers nationwide.
- Weekly bookkeeping to ensure timely delivery of your numbers
- Enhanced reporting to provide additional management insight
- Service teams lead by former law firm CFOs and Business Advisors
Our goal is to help you be the boss, not the bookkeeper. We pull you out of reactive decision-making based on emotion and provide the necessary tools to objectively run your business.