When Is the Best Time to Apply for PPP Loan Forgiveness?
Ezra Cabrera | November 2, 2021
Key Takeaways
- If a business has received funds from the Paycheck Protection Program, then the loan may be fully forgivable if at least 60% was spent on salaries. The remaining 40% may have been used to pay for rent, utilities, and mortgages.
- Though PPP loan forgiveness applications have no deadline, it’s best for business owners to apply immediately.
- Business owners must first check if their lenders are already accepting forgiveness applications. If they are, then forgiveness applications may be sent to the lender’s online portal.
The Small Business Paycheck Protection Program was launched to help small businesses. The goal was to keep their workforce employed during various lockdowns and restrictions amid the pandemic.
This was done by providing small businesses with funds so they can pay up to eight weeks’ worth of salaries, plus employee benefits. Businesses can also use the money to pay for rent, utilities, and mortgages.
Though the funds were distributed as loans, they will be fully forgiven when used for the expenses mentioned above. However, at least 60% of the amount forgiven must have been used for payroll.
Also, loan payments will be deferred for six months. There is also no need for collateral or personal guarantees. Additional fees also aren’t charged.
Forgiveness may be granted when employers are able to maintain their employee headcount or at least immediately rehire employees. Salary levels must also be maintained. The amount forgiven may be reduced if a business reduces the number of its full-time employees, or if employee salaries decrease.
Simply put, if a business has received funds from the Paycheck Protection Program, then the loan may be fully forgivable if it was spent properly.
When to Apply for PPP Forgiveness
PPP loan forgiveness applications have no deadline. This means that lenders will keep on accepting applications as long as borrowers still have outstanding PPP loans.
However, it is recommended that a business applies for forgiveness before making the first PPP loan payment. PPP loans can cover anywhere from eight to 24-weeks. Loan payments are then deferred for 10 months after this covered period ends. This means that business owners don’t have to worry about making the first payment for almost a year after receiving the money.
When the 10-month deferral period ends, business owners then have to start making monthly payments. It’s important for business owners to know that the loan has a 1% interest and that the term ranges from two to five years. It’s best not to wait for the end of the deferral period before applying for loan forgiveness.
This means that the best time for business owners to apply for forgiveness is as soon as possible. There are some lenders that are already accepting PPP loan forgiveness applications. However, there are also lenders that have paused their acceptance of forgiveness applications, such as Chase and PNC. This is because updates have to be made on forms released on January 19, 2021. These are forms 3508, 3508EZ, and 3508S.
Why Some Forgiveness Application Forms Aren’t Available
Various changes were made to the Payment Protection Program when the second stimulus bill was rolled out last December (2020).
Part of the changes included a simplified PPP forgiveness application form. This is for loan amounts that are $150,000 or less. There are now new forgivable expenses such as operational expenses and supplier costs. Also included are property damages caused by 2020 riots or public disturbances. To add to all this, there is now a Second Draw PPP loan for businesses that need additional funding.
Due to these reasons, both the Small Business Association and other lenders need time to update their forgiveness application processes.
How to Apply for PPP Loan Forgiveness
The first thing business owners should do is to contact their PPP lender so they can fill out the correct form. Lenders can then provide them with the SBA Form 3508, SBA Form 3508EZ, or SBA Form 3508S. Some lenders may also provide equivalent forms.
It’s important to note, however, that the 3508EZ and the 3508S are shortened application forms for borrowers who meet certain requirements.
The second step is to compile all the documentation needed.
For payroll, documentation must be provided for all payroll periods that overlapped with the covered period. The documents that should be included are:
Bank account statements
These must provide information regarding compensation paid to employees. If no bank statements are available, then third-party payroll service provider reports may instead be submitted.
Tax forms
These must cover the periods that overlap with the covered period. If tax forms cannot be provided, then equivalent third-party payroll service provider reports may be submitted.
Payroll tax filings reported to the IRS
This is typically Form 941. Payroll tax filings about to be reported should also be submitted.
State quarterly business and individual employee wage reports
These should include unemployment insurance tax filings that have been reported or will be reported to the relevant state.
Employer contributions
These should include payment receipts, canceled checks, and account statements that document an employer’s contributions to employee health insurance and retirement plans paid for by the PPP loan amount.
What should not be included are qualified wages paid between April 1, 2020 and December 31, 2021 that are taken into account for purposes of claiming:
- The Employee Retention Credit under section 2301 of the CARES Act
Amended by sections 206 and 207 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (additional Guidance on the Employee Retention Credit under Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (PDF) and Guidance on the Employee Retention Credit under the CARES Act for the First and Second Calendar Quarters of 2021 (PDF) are both available from the IRS). - The Employee Retention Credit under section 3134 of the Internal Revenue Code of 1986
Enacted by the American Rescue Plan of 2021.
Business owners should not report these qualified wages in the payroll costs on their loan forgiveness application as these will affect the qualified wages that can be used to claim the employee retention credit.
For non-payroll, documents that account for expenses incurred during the covered period should be submitted. For mortgage, rent, and business utility expenses that have existed before February 15, 2020, the documents must show that they were paid for during the covered period.
Here are the documents that business owners must submit:
Business mortgage interest payments
These include the lender amortization schedule, receipts that verify payments, or lender account statements.
Business rent or lease payments
These may be copies of the current lease agreement and receipts. Canceled checks verifying eligible payments may also be submitted.
Business utility payments
These may include copies of invoices and receipts, account statements, or canceled checks.
Covered operations expenditures
These may be copies of invoices, purchase orders paid, receipts, canceled checks, or account statements that verify eligible payments.
Covered property damage costs
Similar to operations expenditures, these may be copies of invoices, purchase orders paid, receipts, canceled checks, or account statements verifying eligible payments. However, they should have proper verification that shows that the costs were related to uninsured property damage due to public disturbance, looting, or vandalism that occurred in 2020.
Covered supplier costs
These may be copies of contracts, purchase orders paid or in effect during the covered period (with the exception of perishable goods), invoices, and receipts, canceled checks, or account statements that verify eligible payments.
Covered worker protection expenditures
These also include copies of invoices, purchase orders paid, receipts, canceled checks, or account statements that show eligible payments. However, there should be proper verification that the expenditures were used to comply with COVID-19 protocols.
The final step is to submit the forgiveness form and all other documents to the PPP lender. Business owners may also consult their lenders for further guidance.
Final Thoughts
If a business has received funds from the Paycheck Protection Program, then the loan may be fully forgivable if at least 60% was spent on salaries. The remaining 40% may have been used to pay for rent, utilities, and mortgages.
Though PPP loan forgiveness applications have no deadline, it’s best for business owners to apply immediately.
Business owners must first check if their lenders are already accepting forgiveness applications. If they are, then forgiveness applications can be sent to the lender’s online portal.
If a lender isn’t currently accepting forgiveness applications, then all a business owner can do is wait. Business owners may also use the time to review their documents to ensure that they meet the requirements.
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