If you are the owner of a small business that obtained a Paycheck Protection Program (PPP) loan, you are most likely aware that the loan can be partially or totally forgiven if you used the loan proceeds for the required purposes. Loan forgiveness is not automatic and must be applied for. The borrower must submit a request to the lender or, if different, the lender who is servicing the loan, who then must make a decision upon the amount of forgiveness within 60 days.
The request must include documents to verify the number of full-time equivalent (FTE) employees and pay rates, as well as the payments on eligible mortgage, lease and utility obligations. The borrower must certify that the documents are true and that the borrower used the forgiveness amount to keep employees and make eligible mortgage interest, rent and utility payments.
The process of obtaining a PPP loan and applying for forgiveness has been complicated from the start, with guidance from the Small Business Administration (SBA) and the IRS coming in dribs and drabs; for a while, it seemed that the rules were modified every week. The original forgiveness application provided by the SBA was horrendously complicated and one almost needed an accounting degree to figure it out. It required the applicant to complete numerous complicated side computations and did not provide any corresponding worksheets.
To clarify the process, Congress stepped in and passed the Paycheck Protection Program Flexibility Act. As part of that legislation, the SBA was required to simplify the forgiveness application. In response, the SBA did somewhat simplify Form 3508, the original forgiveness application, and created an easier version: Form 3508EZ.
The 3508EZ is for use by:
- Self-employed borrowers with no employees.
- Generally, borrowers with employees who, during the covered period,
- Did not reduce the annual salary or hourly wages of any employee by more than 25%;
- Did not reduce the number of employees or the average paid hours of employees; and
- Was unable to operate during the covered period at the same level of business activity as it did before February 15, 2020, due to compliance with requirements established or guidance issued by the Department of Health and Human Services, Centers for Disease Control and Prevention or Occupational Safety and Health Administration.
During the week of October 5th, the SBA released yet another simplified application, SBA Form 3508S, along with instructions for its use. This form can only be used if the total PPP loan amount the borrower received from their lender was $50,000 or less.
A borrower who qualifies for and uses SBA Form 3508S (or their lender’s equivalent form) is exempt from any reductions in the borrower’s loan forgiveness amount based on reductions in FTE employees or employee salaries or wages from the CARES Act that would otherwise apply.
While SBA Form 3508S does not require borrowers to show the calculations they used to determine their loan forgiveness amount, the SBA may request information and documents to review those calculations as part of its loan review process. Accordingly, the borrower must retain, for 6 years from the date when the loan is forgiven or repaid, all documentation submitted with the loan application to prove the borrower’s certification of eligibility for the PPP loan and material compliance with the PPP’s requirements, and to back up the loan forgiveness application.
Keep in mind that the application for forgiveness, which can be submitted electronically, must be submitted within 10 months after the end of the covered period to the borrower’s lender or the lender servicing the borrower’s loan.
If you have questions about how these changes might apply to your situation or need assistance with completing your forgiveness application, please give our office a call.