When the coronavirus pandemic hit, businesses across the country found themselves struggling to meet their payroll and keep their businesses running. In response, the Small Business Administration began to offer a few different types of business loans to help small business owners maintain their businesses while they waited for the global situation to begin to improve.
The prospect of borrowers securing loan forgiveness for some of these loans has also sparked the interest of many people. We will review some of the most frequently asked questions (FAQs) that we have encountered in response to the loan forgiveness programs offered through SBA.gov.
Let's explore what loan forgiveness options are available for struggling business owners. The targeted professionals are those who need a little help to keep their businesses open and the forgiveness options can help them find greater economic security.
What Is the Paycheck Protection Program?
The Paycheck Protection Program (PPP) was established as a part of the CARES Act in 2020 to help provide worker protection. Small businesses could apply for loans that would then help them keep paying their employees, even during the slow times caused by the pandemic closures. The SBA initiated this loan program, through which qualifying small businesses could apply for loans from private lenders to help them secure PPP funds to pay for expenses such as covering their payroll.
When businesses use their PPP funds to help them pay for certain expenses related to protecting their workers' jobs and keeping their businesses open, these loans are also forgivable. Business owners can apply to have their loan forgiven following their covered period and their use of the funds.
We will discuss further down the types of approved expenses that could be covered with the funds from the PPP program and the important criteria that those interested in securing the loan forgiveness option should meet.
What Is the COVID-19 Economic Injury Disaster Loan (EIDL)?
In addition to the PPP program, the COVID-19 Economic Injury Disaster Loan (EIDL) was also administered by the Small Business Administration. It was designed for small businesses and nonprofits to help them with the chaos caused by the coronavirus pandemic.
The EIDL offers two programs for businesses. The first consists of loan options. The EIDL loan is not forgivable and comes with an interest rate of 3.75% for businesses and 2.75% for nonprofits. However, a second related program, the EIDL Advance, is available specifically for businesses that have been hit hard by the coronavirus pandemic in lower-income communities.
While the funds available through this program have already been fully distributed, those who received the EIDL Advance are eligible for forgiveness. This advance can be likened to a grant program. In other words, if you were considered eligible to receive the advance, you do not need to do anything specific to gain forgiveness. The money instead will be forgiven automatically.
What Is PPP Loan Forgiveness?
Those who received pandemic relief through the PPP program can receive PPP loan forgiveness. This remains true for both the first draw PPP loans and the second draw PPP loans. The PPP loan forgiveness application looks at how the business that received the funds used the money to determine eligibility.
If a business gets their application for loan forgiveness accepted, then they do not have to worry about repaying the loan. For those who struggled to keep their businesses afloat during the pandemic, not having to worry about loan repayment can be a welcomed relief for many struggling business owners. We will explore the types of expenses that business owners can spend the PPP program funds on and receive loan forgiveness.
What Expenses Are Eligible for Payment Loan Forgiveness?
The goal of the Payment Protection Program Loan is to help business owners continue to pay their workers so they can keep people employed. This would ideally result in fewer employees losing their jobs and having to file for unemployment. Therefore, the lenders like to see most of the money spent on payroll expenses. However, eligibility was expanded to include various non-payroll uses so that PPP borrowers could manage a wider variety of expenses related to keeping the business open. Here are the types of expenses that borrowers can use their loan proceeds to cover and still expect to receive loan forgiveness.
- Expenses related to their payroll costs. The SBA loan will cover costs related to payroll, including employee salaries and benefits packages — such as health care and sick leave. Keep in mind that the salary amount used for the loan calculation does not deduct payroll taxes, such as the amount withheld for federal taxes.
- The cost of mortgages, including mortgage interest, provided that the mortgage was signed before Feb. 15, 2020. In other words, the SBA classifies this as one of the eligible expenses because they want to help small business owners maintain their physical location so that they can better position themselves to succeed.
- The costs associated with property damage that occurred because of the various public disturbances that happened throughout 2020. Of course, any damage already paid by insurance companies will not be eligible for forgiveness, as well.
- The cost of a variety of factors associated with utilities. Utility payments for services that were also started before Feb. 15, 2020, can be paid with the loan proceeds. It helps businesses keep their lights on so they can serve customers.
- The expenses for suppliers. Supplier costs can also be covered by this loan. This allows businesses to buy what they need to continue running their organization.
Many recipients of this loan will be happy to hear that this loan forgiveness program does not influence their tax filings. In other words, the IRS will not be tracking the forgiveness received by different businesses and it will not be counted as income. Additionally, any expenses that the PPP loan program helped to cover can still be counted as tax-deductible. Combined, these two factors can help businesses get the most possible relief during their tax season.
What Is the Forgiveness Process?
To get forgiveness for your paycheck protection program loans, you will need to fill out a PPP loan forgiveness form. You will also need to provide documentation for how you spent your loan funds, as this will impact your loan forgiveness amount. You will have to show that you met a few important qualifications.
- You will need to demonstrate that you maintained about the same number of employees as you had before the pandemic. While you can have some leniency for losing or gaining an employee, you have to demonstrate that your loan met its goal of helping to reduce unemployment needs during the pandemic.
- You will also need to show that you maintained your employees' salary within 75% of their prior salary that you used to calculate your loan amount. If you did not maintain this amount, then you will have a smaller amount of money eligible for loan forgiveness. Since loan payments are dictated by what you stated your employees' salary to be, you will not receive the full amount in forgiveness if you do not pay that amount toward employee compensation as intended.
- You will also need to show that you spent at least 60% of the funds you received as a part of the loan program on costs related to payroll expenses. You cannot spend the bulk of your loan, for example, on mortgages or suppliers. The purpose of the loan is to help maintain worker salaries, so maintaining this standard helps to force the issue.
Track Your Business Finances With Skynova
As small businesses navigate the challenges of the pandemic and begin to set their courses toward the future, small business accounting software can help. Designed for businesses just like yours, this accounting software can make it easier for you to monitor your expenses, such as employee salaries and benefits. It will allow you to quickly monitor where funds from programs, such as the PPP loan program, go so that you can provide the necessary documentation to your lender regarding how you spent your funds.
Skynova offers small businesses a wealth of resources to help them navigate the challenges of accounting for their small business. From a learning center of resources to break down complicated accounting ideas into simple terms to free templates that can help them manage invoicing, Skynova helps businesses improve their ability to serve their customers.
Notice to the Reader
The content within this article is meant to be used as general guidelines and may not apply to your specific situation. Always consult with a professional accountant to ensure that you're meeting accounting standards.