The Paycheck Protection Program – Applying for Loan Forgiveness

Logo for the SBA PPP which covers payroll

PPP Loan Forgiveness – Application Process

Hello again,

This post was written by Jim T., Passport Software’s Director of Training. We hope you find it useful in applying for PPP loan forgiveness.

The Coronavirus Aid, Relief, and Economic Security Act, known as the CARES Act was signed into law by President Trump on March 27, 2020. The $2.2 trillion in spending included stimulus payments to individuals, increased unemployment benefits, and the creation of the Paycheck Protection Program

The Paycheck Protection Program (PPP) is an SBA loan program designed to provide a direct incentive for small businesses to keep their workers on the payroll. The loan amounts were generally equal to 2.5 times the businesses’ monthly payroll costs.  The loan could be used to cover payroll, rent, mortgage interest, and utilities.

The PPP program has allowances for forgiveness of the PPP loan. Given that the purpose of the loan was to keep people employed, a business that didn’t reduce payroll is very likely to have its loan forgiven.

Loan Forgiveness Application Process

An application for loan forgiveness may be filed at any time, before the maturity date of the loan. There are three different forms that may be used for the application, depending on the particular circumstances, the 3508S, the 3508EZ, and the 3508. We will discuss each of these in detail below.

While this all seems very complicated, it can be made much easier by focusing on the parts that apply to your situation, and ignoring the rest.

All of the forms have the common element of using either an 8 week, or 24 week, “Covered Period”; or an “Alternative Covered Period”. The Covered Period is either: (1) the 24-week (168-day) period beginning on the PPP Loan Disbursement Date, or (2) if the Borrower received its PPP loan before June 5, 2020, the Borrower may elect to use an eight-week (56- day) Covered Period.

For example, if the Borrower is using a 24-week Covered Period and received its PPP loan proceeds on Monday, April 20, the first day of the Covered Period is April 20 and the last day of the Covered Period is Sunday, October 4. In no event may the Covered Period extend beyond December 31, 2020.

Alternative Payroll Covered Period

For administrative convenience, Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the 24-week (168-day) period or for loans received before June 5, 2020 at the election of the borrower, the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date.

For example, if the Borrower is using a 24-week Alternative Payroll Covered Period and received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, October 10.

Borrowers that elect to use the Alternative Payroll Covered Period must apply the Alternative Payroll Covered Period wherever there is a reference in this application to “the Covered Period or the Alternative Payroll Covered Period.” However, Borrowers must apply the Covered Period.

Eligible Payroll Costs

1- Cash Compensation: This includes gross salaries, wages, commissions, tips, and vacation and sick leave. The amount is limited to an annualized salary of $100,000, per individual, which is $15,385 for 8 weeks, and $46,154 for 24 weeks.

2-Employee benefits: This includes employer contributions to employee health plans, retirement plans, and state and local taxes such as unemployment insurance.

3- Owner Compensation: For an 8 week period, this is capped at $15,835, and for a 24 week period, this is capped at $20,835.

Eligible Non-Payroll Costs

These must be paid or incurred during the Covered Period, and paid before the next billing date.

1- Payment of mortgage interest

2- Rent payments

3- Utility payments

3508S

Form: https://home.treasury.gov/system/files/136/PPP-Loan-Forgiveness-Application-Form-3508S.pdf

Instructions: https://home.treasury.gov/system/files/136/PPP-Loan-Forgiveness-Application-Form-3508S-Instructions.pdf

The 3508S (S is for simplified) may be used when the total loan amount does not exceed $50,000.  The simplified form requires less documentation and calculations.  The simplification is based on the borrower making certain representations:

1- The amount of the forgiveness doesn’t exceed the loan amount, and was used to pay for eligible expenses.

2- Eligible payroll costs make up 60% or more of the forgiveness amount.

3- The borrower has submitted the necessary documents to the lender and is prepared to provide additional documentation upon request.

There are more details and legalese buried in the fine print, but that is the essence of it. If you appear to qualify for the simplified application, by all means, read the detail, but there is nothing more of substance in it; just the typical legal warnings that you’d better be telling the truth.

3508EZ

Form: Paycheck Protection Program Loan Forgiveness Application Form 3508EZ (treasury.gov)

Instructions:  PPP-Loan-Forgiveness-Application-Form-EZ-Instructions.pdf (treasury.gov)

The Form 3508EZ is the next level of forgiveness applications; it requires more information than the 3508S, but not as much as the 3508. If you can check any ONE of the following boxes, you may apply using this form. I am including the exact language, per the IRS instructions, here:

1- The Borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form (SBA Form 2483).

2- The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period (as defined below) compared to the period between January 1, 2020 and March 31, 2020 (for purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000); AND The Borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period. (Ignore reductions that arose from an inability to rehire individuals who were employees on February 15, 2020 if the Borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020. Also ignore reductions in an employee’s hours that the Borrower offered to restore and the employee refused. See 85 FR 33004, 33007 (June 1, 2020) for more details.

3- The Borrower did not reduce annual salary or hourly wages of any employee by more than 25 percent during the Covered Period or the Alternative Payroll Covered Period (as defined below) compared to the period between January 1, 2020 and March 31, 2020 (for purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000); AND The Borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

3508

Form: PPP Loan Forgiveness Application (treasury.gov)

Instructions: PPP Loan Forgiveness Application Instructions for Borrowers (sba.gov)

The longest version of the forgiveness application is the 3508. If you don’t qualify for the 3508S or the 3508EZ, this is your form. The basic rules don’t change between the forms, but the documentation is a little more extensive for the 3508. You will have to submit more documentation to your lender than with the other forms, but it’s all stuff that you need to have on hand anyway.

Resources

The PPP loan program is administered by the SBA, in conjunction with your bank. Most banks have webinars, and other resources to help with filing your applications. The SBA’s website has additional resources related to the PPP loan, and many other small business needs. Go to www.sba.gov/local-assistance for help.

Another source of help is a group called The MBA Response. I have to admit that I’m not familiar with this group, but they have MBA student volunteers who can help with the loan forgiveness application and will also offer advice on your website, social media, and review sites. Smart, young students who are eager to help can only be a good thing. You can contact them by emailing Elizabeth.Militio@nfib.org.

Finally, there is the question of taxability. The IRS ruled (Notice 2020-32) that the forgiveness is tax-exempt income, and accordingly, any expenses that give rise to that income cannot be deducted.  Since the PPP loan will only be forgiven if used for certain expenses, those expenses cannot be deducted, in effect making the loan forgiveness taxable. This becomes an issue of timing. For most companies, loan forgiveness will not happen until 2021 per Rev. Rul. 2020-27 https://www.irs.gov/pub/irs-drop/rr-20-27.pdf if “the taxpayer reasonably expects to receive forgiveness” in 2021, the covered expenses cannot be deducted in 2020. If the expenses are not deducted, but forgiveness is not ultimately granted, the expenses can be deducted on the 2020 return, whether it be the original or an amended return.

IRS CIRCULAR 230 DISCLOSURE: To comply with requirements imposed by the Department of the Treasury, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written by the practitioner to be used, and that it cannot be used by any taxpayer, for the purpose of (i) avoiding penalties that may be imposed on the taxpayer, and (ii) supporting the promotion or marketing of any transactions or matters addressed herein.

If you have any questions, you can call me, Jim Turner (JT) 800-969-7900 x120. Or contact us – we are here to help.

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