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Small business owners who have taken advantage of the Paycheck Protection Program (PPP) can apply for loan forgiveness for eligible expenses. PPP forgiveness requires an application through the Small Business Administration (SBA) online portal or an individual lender.
Keep in mind that depending on the loan amount, borrowers may need to certify that the funds have been spent on eligible expenses or provide evidence of eligible expenses. However, forgiveness of the Economic Injury Disaster Loan (EIDL) is not available.
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What is credit forgiveness?
Loan forgiveness is the process by which a lender fulfills a borrower’s obligation to repay their loan. Depending on the loan and the type of cancellation, some or all of the outstanding loan balance may be forgiven. This is in contrast to grant money, which generally does not have to be repaid even without an explicit forgiveness.
In connection with PPP loans, borrowers are eligible for forgiveness if they use the funds to meet specific expenses.
When to apply for PPP loan forgiveness
PPP borrowers can apply for forgiveness up to the date the loan matures – two years for loans originated before June 5, 2020, or five years for loans issued after that date. While it is best to request forgiveness before the end of the payment grace period (10 months after the end of the coverage period), borrowers must also wait until they have spent any loan proceeds they wish to be forgiven.
Specifically, borrowers who received credit funds before the PPP closed on May 31, 2021 are now outside of the coverage period and may apply for credit forgiveness.
How to Apply for PPP Loan Forgiveness
Depending on the lender, PPP borrowers must apply for forgiveness directly with the SBA or with their respective financial institutions. However, the process and requirements are similar regardless of the method. Follow these steps to apply for PPP loan forgiveness:
1. Gather the required documents
The documents required to fill out an application for loan forgiveness depend on several factors. Still, there are some required loan forgiveness documents that many borrowers are likely to need when applying for forgiveness.
For example, if your loan is less than $150,000, you don’t need to provide receipts, but second draw borrowers will need to provide proof of the required loss of income. Loans over $150,000 require more documentation. Organizing these materials can streamline the process and improve your chances of having your PPP loan forgiven.
2. Determine if your lender participates in direct forgiveness
Whether your lender participates in direct forgiveness determines how you apply for credit forgiveness. Start by searching for your lender on the SBA’s list of participating lenders to find out where to apply.
3. Submit the forgiveness form and documentation
If your lender participates in direct forgiveness, complete the forgiveness form through the SBA PPP Direct Forgiveness Portal. Otherwise, you must follow your lender’s instructions for completing and submitting SBA Form 3508, SBA Form 3508EZ, SBA Form 3508S, or the lender’s equivalent. Also submit any required documentation as required by the SBA or your bank or credit union.
4. Wait for an answer
Depending on how you apply for PPP loan forgiveness, you may receive a response from the SBA or your lender. Generally, however, you will receive notice from both parties when your loan is reviewed and a decision is made. Eventually, your lender will let you know how much of the loan has been forgiven and, if applicable, the date your first payment is due.
PPP Loan Forgiveness Conditions
To qualify for PPP loan forgiveness, recipients must have maintained their staffing and compensation levels during the period covered by the loan. The coverage period for loans granted in 2020 is 24 weeks after disbursement; However, borrowers can opt for an eight-week coverage period if their loan was funded before June 5, 2020. Borrowers who received a first or second draw loan in 2021 can choose between an eight-week and 24-week coverage period.
Forgiving of a loan also requires that the proceeds be used to meet eligible expenses during the Covered Period, with at least 60% spent on payroll costs.
Expenditure eligible for loan forgiveness
Under the original PPP, only payroll and operating costs were eligible for waiver. However, the Coronavirus Response and Relief Supplemental Appropriations Act, passed in December 2020, expanded eligible expenses. These are the expenses that are generally eligible for PPP loan forgiveness:
- Labor costs, including salaries, wages, tips, commissions and benefits
- Mortgage rates for commercial property (for mortgages signed before February 15, 2020)
- Rent or lease payments for businesses signed before February 15, 2020
- Business utilities including electricity, gas, water, transport, telephone and internet access
- Operating expenses such as business software and necessary supplier costs
- Repair costs for property damage or other uninsured damage that occurred in 2020 and as a result of the Covid-19 pandemic
- Occupational health and safety spending such as personal protective equipment or property improvements to achieve Covid compliance
Documents Required for Loan Forgiveness
The documentation requirements for PPP loan forgiveness depend on the size of the loan and the use of the funds. For loans over $150,000, borrowers must provide evidence of how the PPP funds were used. Loans under $150,000 do not require documentation of expenses. Instead, borrowers must use SBA Form 3508S to certify that the funds were spent in accordance with PPP guidelines.
Where documentary evidence is required for PPP loan forgiveness, the exact documents required will depend on how the loan funds were spent. For example, if loan proceeds were used to cover wage costs, you may be required to provide copies of these documents:
- Third-party payroll reports or tax forms for the Covered Period, including payroll tax returns
- Provide quarterly business and individual payroll reports
- State unemployment insurance tax returns
- bank statements
- Payment receipts, canceled checks, or bank statements showing contribution to employer’s health and retirement accounts
If loans were used to cover other expenses, these documents may be required as part of the forgiveness process:
- Amortization schedule or receipts from the lender showing interest payments on commercial mortgages
- Rent, lease and utility bills reflecting payments made
- Invoices, receipts or purchase orders showing covered business expenses, property damage costs and supplier costs
- Canceled checks or receipts for other covered expenses such as protective equipment and safety modifications
Covid EIDLs are non-forgivable and must be repaid in full. However, borrowers can take advantage of a 30-month payment grace period that begins on the date of the promissory note. This grace period applies to loans approved in 2020, 2021 and 2022 and is an extension of the original 12-month grace period.
In contrast, Targeted EIDL Advance or Supplemental Targeted Advance Funds (up to $15,000) are considered grants and do not have to be repaid.
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