Earlier in the pandemic, the Small Business Administration (SBA) made loans available to help employers keep employees on the payroll. The loan program was called the Paycheck Protection Program (PPP). The government did not want many millions more people than necessary to go on unemployment. Many businesses were mandatorily shut down because they were not deemed essential. Businesses that received the loan now need to apply to get the forgiveness for the loan that was promised.
The Loan Terms
Because there were two different Congressional approval dates (stimulus packages) for funds to be given to the PPP program, there are also two different maturity dates. Loans that were approved before June 5 will reach maturity in two years. Those loans that were approved after June 5 have a five-year maturity date. The loans have an interest rate of one percent and no collateral was required. No fees could be charged by the lender.
The money had to be used within a limited time. The first loans required that businesses use the money within 8 weeks. The second loan was more lenient, allowing up to 24-weeks for distribution of the money.
When paying employees’ salaries, there were some stipulations concerning how much they were to be paid. Employers had to supply information about how many employees they had when they applied and how much they paid each. The salary had to be at least 75% of the employees’ salary before the pandemic. When applying for loan forgiveness, they will have to report how many employees they had when they applied and how many there were when applying for forgiveness.
The Key to Loan Forgiveness
The SBA warned from the beginning that accurate records will need to be kept of how the money was used. Initially, 70 percent of the loan was to be used for employees’ salaries, and the rest could be used for regular business costs but were limited to mortgage or rent payments, and utilities. When the second funding of the PPP was given, the percentages were changed to 60 and 40 percent.
The money that would be forgiven had to be used according to the guidelines provided. Although the money could have been used for other purposes, that portion would have to be repaid to the lender.
The Things That “Salary” Includes
Knowing what counts as salary is important because the SBA will only accept certain uses and will not accept other payments. In addition to an employees’ regular salary, amounts used for the following can be included:
- Regular employer cost of employee benefits – including life insurance
- Normal equivalent of tips
- Payment of retirement benefits
- Payments made for family, medical, parental, sick leave, and vacations.
When to Apply for Forgiveness
You can apply for loan forgiveness through the lender that gave you the loan. There is a limited time in which the application needs to be submitted. You can apply for loan forgiveness any time after the “covered” period is over, which is the time after you receive the loan and the following either 8 or 24 weeks in which the money must be used. You can apply at any time within the loan period, but it will be due when the period is ended (either two- or five-years). If you do not apply within that window, all money in the loan will have to be repaid and no loan forgiveness will be given.
Forms for loan forgiveness need to be obtained from the SBA. Your lender may also have alternate forms.