It’s not often you get a chance to turn a loan into an outright grant, but that’s potentially one of the most attractive features of the Paycheck Protection Program (PPP). Right now, banks are in the early stages of accepting PPP Loan Forgiveness applications. Fifth Third Bank started the process a couple of weeks ago. Bank of America sent emails last Friday saying that the Forgiveness Application is now available. The nations’ biggest bank, Chase, hasn’t started yet. Their website says they are continuing to “prepare to accept your Forgiveness requests.”
Banks opening up the process might be welcoming news for those of you eager to get these loans off of your balance sheet. But just because banks are taking applications, does that mean you should apply? A few words of caution before you do.
Your covered period matters
Even though some banks are opening the forgiveness applications, they are being selective about when you can apply. Bank of America, for instance, will only take your application after your covered period ends. By contrast, TD Bank allows you to apply when your loan proceeds were spent (or incurred) within the covered period. That means you can apply early if you exhaust your funds before end of the covered period. Fifth Third is sending out emails to borrowers in waves in order to provider “better customer service.”
Your covered period is important because it affects when you can apply for forgiveness. If you were funded before June 5, 2020, you get to choose between an 8-week covered period (which has passed) or the 24-week covered period, which for those of you who were approved and funded in April may be coming up.
There’s also an alternative covered period, which starts the first day of the first pay period following deposit of loan funds.
If you were funded on or after June 5, 2020, and have to wait the entire covered period, you won’t be able to apply for forgiveness until November 20th at the earliest. Selecting the right covered period not only influences they amount of time you have to spend the funds. By choosing the longer pay period, you have even more time to spend the money on payroll and non-payroll costs. In short, the more time you have to spend the money, the more will be eligible for forgiveness. This is especially important for the self-employed and owner-employees whose compensation was capped at 2.5 month’s worth of 2019 net profit.
In order to get that full amount forgiven, you’d have to take the entire 24 week covered period. If you apply early, you may not get the entire amount forgiven.
Currently, there are two types for Forgiveness applications
The EZ version applies to borrowers that:
- Are self-employed and have no employees; OR
- Did not reduce the salaries or wages of their employees by more than 25% and did not reduce the number or hours of their employees; OR
- Experienced reductions in business activity as a result of health directives related to COVID—19 and did not reduce the salaries or wages of their employees by more than 25%.
The application requires fewer calculations and less documentation for eligible borrowers. You can determine if you are able to use the EZ application by reviewing the Checklist for Using SBA Form 3508EZ (PDF) on the SBA’s website.
The longer version of the application has the dreaded adjustments for Full-Time Equivalency (FTE) and Salary/Hourly Wage Reductions, which will be messy. Makes sure to take your time and get your documents together before you start that process.
Some of the substantiation you may need may include:
Payroll:
Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period: Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941); and ii. State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state.
Nonpayroll: for obligations/services prior to February 15, 2020 and eligible payments from the Covered Period.
Business mortgage interest payments: You’ll need a copy of the lender amortization schedule and receipts or cancelled checks that verify eligible payments from the Covered Period; or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments.
Business rent or lease payments: You’ll have to provide either a copy of your current lease agreement and receipts or cancelled checks verifying eligible payments from the Covered Period; or lessor account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments.
Business utility payments: Gather all the invoices you’ve paid since February 2020 through the Covered Period and receipts, cancelled checks, or account statements verifying those eligible payments.
The advantages and disadvantages of applying now
Depending on your bank and your covered period, you may be able to apply for forgiveness now, but should you? The process will vary slightly from bank to bank, and like all elements of the PPP program, the rules may change. In general, if you are eligible and can get your funds forgiven now, you may want to get started as soon as possible. With so much uncertainty surrounding the economy and next administration, locking in loan forgiveness is attractive. Of course, that’s assuming you know you’re entitled to total forgiveness within the shorter time frame.
But, on the other hand, with so much up in the air, it may be more advantageous to wait until the Congress finalizes the forgiveness rules. Legislators have floated proposals that would make forgiveness for those with loans under $150,000 as easy as signing an affidavit. If you borrowed less thank $150,000, think about how long it will take you to gather documents and complete the EZ application. I’ve already had one client start the application only to get tied up with the bank that is asking for information that doesn’t even apply to her.
Remember, too, that there’s still a lot we don’t know and you only get one shot at forgiveness. If you’re not absolutely sure you qualify for the full amount of forgiveness, it may make more sense to wait the longest covered period and see where we are then. There’s no deadline for the forgiveness application itself (beyond applying before the loan matures). Just keep in mind that you have to start making payments on the loan 10 months after the end of your covered period.