The COVID-19 pandemic has hit U.S. small businesses very hard. In March, Congress created the Paycheck Protection Program as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to save jobs and prop up struggling businesses during the pandemic. Under the PPP, small businesses could borrow up $10 million from private lenders without collateral, personal guarantees, or fees. These loans don't have to be repaid to the extent they're used to cover the first 24 weeks (eight weeks for those who received their loans before June 5, 2020) of the business's payroll costs, rent, utilities and mortgage interest. However, at least 60% of the forgiven amount must be used for payroll.
The PPP ran from early April through early August. In total, more than $525 billion has been distributed to more than 5 million small businesses. One reason the PPP was so attractive to borrowers was the potential to turn these loans into grants. The program, however, has been criticized for problems with its rollout and the complicated process of getting loans forgiven.
The Small Business Administration began processing loan forgiveness applications on October 2. As of late September, lenders have submitted about 96,000 forgiveness applications to the SBA. Those applications represent about 2% of all PPP loans.
Simplified Loan Forgiveness for Smaller Loans
After much speculation about legislation to provide automatic PPP loan forgiveness for certain loans, the SBA recently acted on its own to give some relief to some borrowers, since an automatic forgiveness bill has yet to move forward in Congress.
Recipients of PPP loans of $50,000 or less can apply for forgiveness using a simplified application that was released by the Treasury Department and the SBA on October 8. A borrower that, together with its affiliates, received loans totaling $2 million or greater may not use the new form to apply for forgiveness.
The SBA says that out of a total of 5.2 million PPP loans that the agency has approved, roughly 3.5 million were loans of $50,000 or less.
The new application streamlines the forgiveness process for PPP borrowers by doing away with complicated full-time equivalence (FTE) or salary reduction calculations.
The new SBA loan forgiveness application (Form 3508S) requires fewer calculations and less documentation for eligible borrowers than the two other forms – SBA Forms 3508 and 3508EZ. This is primarily because businesses that borrowed $50,000 or less are exempt from the CARES Act provisions that impose a reduction penalty if the borrower reduced FTE employees or the salary or wages of employees during the covered period.
Businesses that borrowed $50,000 or less will still have to certify that:
- Funds were used for eligible expenses;
- Payroll costs were at least 60% of the forgiveness amount; and
- They meet the owner-employee's limitations and caps.
Borrowers also need to provide documentation that supports the eligible payroll and nonpayroll payments from the covered period, such as:
- Tax forms;
- Payment receipts, cancelled checks, or account statements documenting the amount of employer contributions to employee benefit plans;
- Copies of lender amortization schedules and receipts or cancelled checks verifying eligible payments from the covered period;
- Business rent or lease payments; and
- Business utility payments.
The supporting documentation must be retained for six years after the date the loan is forgiven or repaid in full.
The PPP has undergone many changes since it was first created. These might not be the last changes to the program. Nevertheless, borrowers who are qualified to use Form 3508S should consider starting the process for loan forgiveness as soon as possible, as they're unlikely to see additional program changes. Given the large volume of outstanding PPP loans, both lenders and the SBA may become overwhelmed with an influx of forgiveness applications.
Rodrigo Sermeño covers the financial services, housing, small business, and cryptocurrency industries for The Kiplinger Letter. Before joining Kiplinger in 2014, he worked for several think tanks and non-profit organizations in Washington, D.C., including the New America Foundation, the Streit Council, and the Arca Foundation. Rodrigo graduated from George Mason University with a bachelor's degree in international affairs. He also holds a master's in public policy from George Mason University's Schar School of Policy and Government.
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