Personal Finance

How Long To Repay PPP Loan

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 10 minute read

The Paycheck Protection Program (PPP) was one of the most high-profile coronavirus-related financial aid and stimulus measures passed by the United States Congress in the early months of the COVID-19 pandemic, and on June 5, 2020, former President Donald Trump signed a law altering key provisions of the PPP.

Fox Business reports that the Paycheck Protection Program Flexibility Act (PPPFA) allows loan recipients to use up to 40% of their loan proceeds for certain non-payroll-related expenses cash compensation without jeopardizing their eligibility for full loan forgiveness.

These expenses include rent/lease payments, mortgage interest, and utilities.

Good Improvements to the PPP Loan Program

The federal agency responsible for PPP is the Small Business Administration (SBA), which subsequently issued a rule making it clear that loan recipients do not need to meet the 60 percent payroll threshold to qualify for partial loan forgiveness, so long as they used at least 60 percent of the forgiven amount for payroll expenses.

According to Forbes, the SBA is even more generous with self-employed borrowers, forgiving loan that sums up to $20,833 regardless of the purpose of the cash.

However, other qualifying limits, such as those imposed on borrowers who got EIDL relief through the SBA loan program, remained in place.

Additional improvements to the PPP loan program were announced by President Biden shortly after his inauguration, simplifying the application process for self-employed individuals seeking PPP loans. 

The most consequential of these alterations was the requirement that applicants for the PPP who file a Schedule C used by taxpayers to declare business income use their gross income rather than their net income in calculating their eligibility.

Recipients of PPP loans can now get reimbursement for a broader range of expenditures, including those incurred due to looting or vandalism and certain supplier costs.

When borrowers who have already received PPP loans request a second loan, known as a second draw, they will be subject to the aforementioned enlarged expenditure categories whether or not those loans were forgiven.

The small business community in the United States was quite happy with the PPPFA, the SBA’s follow-up action, and the later modifications made by President Biden.

Many sole proprietors, small company owners, and independent contractors who earn revenue from their businesses or contracts may be qualified for PPP, but they still have questions.

Common Questions Regarding PPP Loan Forgiveness (FAQs)

The original idea behind the PPP was to protect business payrolls from a widespread decline in consumer demand.

Thus, the forgiveness portion of the program was and is extremely generous to enterprises that set aside the vast bulk of loan earnings for payroll costs.

However, a pardon is not a certainty, therefore it is important to study the terms of the program before shelling out any cash.

How long do I have to use the money from my loan before I may be forgiven?

All PPP borrowers have until 24 weeks after their loan’s issuance to submit a request for forgiveness under the PPPFA, provided the money was used to cover qualified expenditures.

This time frame is referred to as either the payroll covered period or the alternative payroll covered period, depending on whether the borrower decides to commence it on the date of the actual loan disbursement or the date of the first pay run after disbursement.

This becomes complicated, but in the end, borrowers have 24 weeks from the time they get their loans to spend the money they want to be forgiven.

There shouldn’t be a problem with this if the loan amount was determined properly and the company functioned as planned.

For loans originated prior to June 5, 2020, borrowers have the option of limiting their eligibility for loan forgiveness to the time frame mandated under the CARES Act, which implemented the PPP. Eight weeks after the loan was disbursed, the original qualifying period ended.

What Business Documents Do I Need to Apply for Pardon?

Although each lender has its own specific requirements for PPP debt forgiveness applications, you can generally count on having to submit the following records and paperwork in support of your loan cancellation request:

  • Each of your full-time workers or FTEs on your payroll must have their full-time status verified.
  • Salary or wage rates for each full-time employee or FTE
  • Mortgage Paperwork
  • Property leases
  • Proof of rent payment
  • Expense receipts from any relevant providers or vendors
  • Bills or records of payments for relevant utilities
  • Invoices for property damage that meet the criteria for cancellation

What paperwork must I provide to request forgiveness?

That will be determined by the kind and scale of your company. Form 3508S also known as SBA Form 3508 is the standard application for PPP debt forgiveness, and should be used by businesses that borrowed less than $2 million through the program.

PPP Loan Forgiveness Application Form 3508EZ, on the other hand, is substantially easier to fill out for borrowers who fit one of three criteria:

  1. At the time of applying for the PPP loan, the borrower was either self-employed, an independent contractor, or a sole owner with no other workers.
  2. The borrower did not lower any employee’s compensation or wages by more than 25% during the Covered Period AND the Borrower did not reduce the headcount number of workers or the average paid hours of employees between January 1, 2020, and the end of the Covered Period.
  3. The borrower did not reduce any employee’s annual salary or hourly wages by more than 25% during the covered period AND the Borrower was unable to operate during the covered period at the same level of pre-pandemic business activity due to COVID-related requirements or guidance issued at any point in 2020 by certain recognized health or labor authorities such as the Centers for Disease Control and Prevention.

How long do I have to wait for my lender to approve my request for forgiveness?

Within 60 days of receiving your PPP loan forgiveness application, your lender must make a decision on whether or not to forgive the debt, as mandated by the SBA.

What Expenses Arise from PPP Loans Are Eligible for Forgiveness in Any Amount?

There are four categories of costs that are entirely deductible from taxable income and so eligible for forgiveness forgivable in their entirety:

  • Payroll costs
  • Rent
  • Mortgage interest
  • Utilities

While PPP’s payroll expense forgiveness procedure is the most generous, it, like with the other three types, is subject to limitations.

What Are the Maximum Payroll Expenses That Can Be Forgiven?

Payroll expenses that qualify for debt cancellation according to the Small Business Administration include:

  • Up to a yearly sum of $100,000 in salary, plus other benefits like tips and commissions.
  • Benefits provided to employees may include paid time off, vacation pay, health insurance, unemployment compensation, and retirement plans.
  • Official government agency
  • Made payroll tax deposits
  • Income earned through sole proprietorships and independent contracting up to $100,000 per worker per year.

Outside of these parameters, the whole principle of any PPP loan used to pay for payroll costs is forgiven.

This means that you can apply for full debt forgiveness if you utilize the full amount of your loan to pay for qualified payroll expenditures for employees with annual salaries of less than $100,000.

Loans made to self-employed borrowers after June 5, 2020, are forgivable up to a maximum 

of $20,833 in the event of the borrower’s death or permanent disability. A maximum of $15,835 in loans taken out by self-employed debtors prior to June 5, 2020, will be forgiven.

How Much Can Nonpayroll Expenses Be Forgiven?

Loan profits used for nonpayroll costs including rent, mortgage interest, and utility payments are eligible for forgiveness of up to 40% of the loan amount under the PPPFA.

The following scenarios would make you eligible for debt forgiveness on $9,000 of a $10,000 loan:

  • The beneficiary of a PPP loan of $10,000
  • Spend $2,500 on non-payroll costs that qualify throughout the coverage period.
  • 50 percent of the remaining $5,000 must be used for payroll costs that qualify for coverage during the covered period.

The $1,000 in non-payroll expenses that can’t be written off is the amount above the write-off threshold for such costs.

If throughout the qualifying period, you only spent $4,000 on acceptable nonpayroll costs and $6,000 on payroll expenses, you would be eligible for full loan forgiveness.

What Will Happen If I Don’t Use at least 60% of the Loan Proceeds for Payroll Expenses?

The full of your payroll spending during the covered time is eligible for forgiveness, together with up to 40% of your nonpayroll expenditure.

In the event that your payroll expenditures are less than 60% of your total expenses, you will still be eligible for a partial waiver of your student loans; however, you will be required to refund any non-payroll expenses that were reimbursed in error.

I received an advance from the EIDL Economic Injury Disaster Loan Program, but am I still eligible for forgiveness?

Very likely. Before sending out PPP forgiveness monies, the SBA deducts the amount of an Economic Injury Disaster Loan Program (EIDL) loan.

Getting an EIDL advance will lower the amount of forgiveness you are eligible for, but you should still get some money back.

During the Covered Period, Am I Still Eligible for Forgiveness if I Laid Off Employees or Reduced Salaries Instituted Wage Reductions?

If you lay off workers within the covered period and don’t perform one of the following before the end of the covered period, you won’t be eligible for PPP debt forgiveness.

  • Re-employ those who were let go.
  • If laid-off workers decline to return to work, replace them with others who are just as qualified.

There are several rather broad exceptions to the rehiring requirement, though, and you may be able to use them to your advantage:

  • Attempted in good faith to rehire terminated employees or recruit and hire new employees with equivalent skills but was unsuccessful in doing so
  • Due to government health and safety standards, such as social distancing laws, you have been unable to resume operations at full capacity as of February 15, 2020, the day before the pandemic.

If one of these applies to your company, you may still be able to get your debts forgiven, albeit it is by no means certain.

Taxability of PPP Loan Forgiveness

Pay-as-you-go plan (PPP) loan amounts that are forgiven are not taxable. While the U.S. Treasury (via the IRS) would not make any attempt to collect taxes on forgiven sums, initially, around half of all states did.

If you are a recipient of a PPP loan and have already paid taxes on the amount forgiven, certain state legislatures are attempting to establish laws that will either waive these tax obligations or allow you to get a tax credit equal to the amount of taxes you have already paid.

To make sure you’re in compliance with all local tax responsibilities, it’s advisable to consult with a certified public accountant and the revenue authorities in the state(s) where your firm operates.

Questions and Answers Regarding PPP Loan Repayment

If you are a borrower with issues regarding repaying a PPP loan, the date the loan was issued is the most crucial factor to consider.

Before June 5, 2020, businesses and single owners that took out PPP loans will need to return the whole amount they borrowed, plus interest.

After June 5th, 2020, borrowers will be given a five-year grace period to repay their loans.

What Interest Do I Owe on Funds from Forgiven Loans?

The annual percentage rate (APR) for all outstanding PPP loan amounts is 1%. That comes to an annual interest payment of $100 on a debt of $10,000 that is not repaid.

How long may I put off paying back the money from my forgiven loans?

If you qualify for loan forgiveness under the PPPFA, your lender will receive the forgiven amount from the SBA before you have to start making payments again.

Forbearance applicants are eligible to delay loan payments for up to 10 months from their loan funding date.

How long do I have once the forbearance period has ended to repay my loan?

All remaining amounts principal plus interest and fees on loans made before June 5, 2020, must be paid in full within 24 months of the loan’s maturity date.

All unforgiven amounts on loans issued on or after June 5, 2020, have a maturity date that is five years from the date of origination of 60 months.

Is My Loan Prepayable?

If you’re in a position to do so, yes, and you should do so despite the historically low-interest rate. Lenders participating in a PPP cannot impose prepayment fees or penalties for principal repayments done ahead of time.

Bottom Line

In retrospect, the full extent of the economic toll of the COVID-19 epidemic will become clear.

However, the soaring unemployment rate, the near-total suspension of overseas travel, and the fall in demand at U.S. restaurants and stores all offered vivid views of its breadth.

Although PPP undoubtedly helped thousands of enterprises and spared many from failure, it was not enough to alter the tide on its own.

During the first several months of the epidemic, PPP wasn’t the only safety net thrown to failing firms.

In particular, the U.S. Federal Reserve Bank removed a worst-case scenario by making plain that it is willing to do all in its power to stave off a full-blown financial catastrophe, allowing big U.S. lenders the certainty they needed to continue making loans.

Although the stated fiscal plans and stimulus programs have been helpful, few believe they will be sufficient to restore economic growth.

Comprehensive measures to further stimulate the economy and assist people and companies are included in the Biden Administration’s tax package.

The $1 trillion bipartisan infrastructure bill and the much more ambitious package of human infrastructure initiatives that Biden and the Democrats want to achieve without Republican support later in 2021 are both examples of this approach in action.

No doubt, the federal government will continue to meddle in the economy in the wake of the COVID pandemic, even if no further PPP cash ever materializes.

Curated posts

Someone from Tucson, AZ just viewed Best Online Colleges for Veterans