You may need to repay some of your PPP money even though your business is fully eligible for forgiveness.
This is what could happen if you make a mistake with your PPP forgiveness papers. If there’s ever been a time to point the I’s and cross the T’s, it’s with the PPP forgiveness app.
How to Avoid PPP Loan Remission Mistakes
Let’s start with the basics, then take a look at common mistakes to avoid when canceling a PPP loan.
Terms of the first and second draw of the PPP
The terms are the same. The covered period begins on the day the PPP funds are paid to you by the lender.
The period covered can range from 8 to 24 weeks, or 168 days. There is another covered period for borrowers who received PPP money before June 5, 2020. These borrowers have the option of using an 8 week (56 day) covered period.
There are two main qualifiers for forgiveness. First, you must have maintained the number of employees and their pay levels. And second, the PPP money must have been spent on salaries and other eligible expenses.
What if you couldn’t maintain the number of employees?
This could have happened in two ways. You couldn’t rehire an individual employee, or you couldn’t hire someone with the same qualifications.
You will need documents to prove that this happened. If you are unable to rehire an employee, you will need a written job offer and a written refusal response from the employee. If you are unable to find someone with similar qualifications to replace an employee, you will need documentation for this – documents that prove the efforts made to hire a replacement employee.
Changes in Economic Impact Disaster (EIDL) Factoring
As originally designed, under the PPP rebate program, borrowers who had secured both EIDL and PPP funds had to subtract the EIDL loan amount from the PPP funds when calculating the rebate. In other words, if you got an EIDL loan of $ 10,000 and a PPP loan of $ 100,000, you can only request a rebate of $ 90,000 of the PPP money.
This requirement has been changed by new legislation.
“The EIDL advance will no longer be deducted from the PPP loan forgiveness amount,” said Rohit Arora, CEO of Biz2Credit, a FinTech pioneer and leading expert in small business lending.
What if you sent in your PPP pardon request before EIDL law changed? Arora said the SBA is working on processes to correct this for borrowers who were previously subject to the deduction.
Get the right PPP loan forgiveness form
You get the form from your lender. Most small businesses will use the SBA 3508 form.
There are shortened versions of this form, such as 3508EZ and 3508S. These are PPP loan cancellation requests for specific types of businesses, such as sole proprietors, independent contractors, and other independent business owners.
Small businesses can also check if they are eligible to use the SBA’s new PPP Loan Forgiveness Portal to help apply for a full forgiveness of that loan.
The timing of the PPP pardon request
What is the PPP pardon request deadline? When can you apply?
You can claim the PPP waiver after all the money has been used AND within ten months of the last day of the period covered. NOT before the end of the period covered.
“A major mistake would be either to ask for a pardon too early – before the end of the period covered,” said Arora. “A premature application can lead to an early end of the period covered by the company. Borrowers need to be sure that it is optimal for them to apply at a time of their choosing to ask for forgiveness.
Do not let this 10 month deadline pass to apply. If you do, the PPP loan payments will no longer be deferred. You will need to start paying the lender. You will need to repay the money before the due date of your loan. Your loan maturity date would be two or five years, depending on the terms.
It is easy to determine the date of your PPP loan forgiveness request. Assume that your covered period ended on October 30, 2020. You have six months, or until August 30, 2021, to apply for a pardon.
What costs qualify for PPP forgiveness?
The short answer is that the payroll and other eligible expenses are eligible for PPP loan cancellation.
To qualify for the P3 waiver, your salary costs had to be 60% of the P3 loan money you spent. The dollar figure for the payroll is based on the gross salary and not the net. You can also include health benefits and pension contributions, as long as this money has been paid by the employer.
Other types of compensation may also be included, such as tips, commissions, bonuses, and risk bonuses. There is a limit, however. These other types of compensation will be annualized. In other words, the indemnity would be calculated on what it would have totaled during a year, on the basis of the total during the period covered. The annualized calculation cannot exceed $ 100,000.
“The classification of non-monetary compensation is a common omission,” Arora said. “This mistake can cause the borrower to end up with a residual amount – if they haven’t used the funds to pay for benefits such as health insurance premiums or 401k contributions.”
Let’s say you pay your employees every two weeks. What about pay periods that started or ended outside of the covered period timeline?
Its good. Salary costs can still be covered if they were incurred during the period covered but paid after the end of the period. Staff costs incurred before the period covered and paid during it are also eligible.
What if a company cuts the wages of one or more employees, either by the hour or by the wage?
If an employee’s hourly or salaried amount has been reduced by more than 25%, this will reduce the eligible rebate amount. UNLESS this reduction has been corrected by December 31, 2021.
If an employee’s salary has been reduced due to reduced hours, then all is well. In other words, if you have an employee who was making $ 20 an hour for a 40 hour week, but you had to cut their hours by $ 20 an hour for a 15 hour week, that wouldn’t is not serious. The hours have been cut, but not the salary.
This part of the PPP forgiveness request can be tricky.
“Classifying employees according to the SBA’s definitions of full-time employees (FTEs) can be quite complex,” said Arora. “There are mixed numbers of employees based on hours worked and some unique SBA rules and standards for calculating a single FTE. “
Documentation needed to prove that payroll is part of the PPP pardon request
Here are some examples of documents you might need:
- Bank statements or statements from third-party payroll service providers
- Tax forms that show tax returns that have been or will be filed. Most often, this is IRS Form 941.
- Indicate the quarterly declarations of wages of companies and self-employed workers, as well as the declarations of unemployment insurance income, which have been or will be declared.
- Payment receipts such as canceled checks or account statements that show employer contributions to health insurance and pension plans.
Non-salary costs eligible for PPP loan cancellation
A common mistake is to submit the cost of a mortgage payment. You can only include the cost of paying interest on the mortgage.
Rent or lease payments on commercial space are eligible.
Utility payments for the business are eligible, such as electricity, gas, water, transportation, telephone, or Internet access. However, these services must have been contracted before February 15, 2020.
What if you are an independent contractor or a sole proprietor? You can only claim such expenses if you claimed them as deductions when you filed a Schedule C in 2019.
Pay special attention when completing the PPP forgiveness request section regarding non-salary costs.
“Another common / simple mistake could be simply misclassifying the different types of expenses,” Arora said. “There are different categories of eligible expenses.
PPP Loan Forgiveness Request Completed – What Now?
One final check before submitting to the lender.
“A simple mistake could be entering the wrong SBA or lender number,” Arora said. “We saw this trip increase many candidates in the first round of the PPP. “
Submit the request to your lender. The lender will submit your application to the SBA.
What if your request is online, but you haven’t heard anything? It is the responsibility of the lender to inform the borrower of any response. You can always follow up with your lender.
You do not have to make a PPP loan repayment until the SBA remits the full or partial forgiveness amount to the lender. If a balance is owed, you must pay it off, plus interest, before your loan maturity date.