With the end of the year approaching, and with most business’ covered periods completed, PPP loan recipients have turned their attention to the loan forgiveness process. There are a few issues borrowers should be paying attention to regarding their loan forgiveness.
When should borrowers apply for forgiveness?
For most borrowers, the focus should be on making sure the loan forgiveness application has been submitted within ten (10) months after the last day of their covered period. Waiting any longer and borrowers may have to start making payments on their loan. However, even if borrowers have started making payments on their loan, PPP recipients can still apply for loan forgiveness at any point until the loan matures.
Since borrowers have some flexibility regarding when they apply for loan forgiveness, some have started to consider the benefits of waiting. There is still a lot of uncertainty with the program, and lawmakers are even now negotiating whether to approve another round of stimulus under the CARES Act. Many trade groups have also called on the government to make several tweaks to the loan forgiveness process that would make it easier for borrowers to apply and offer more benefits to businesses, e.g. there is some bipartisan support for permitting PPP recipients to deduct certain costs covered by their loans.
It may be worthwhile to some borrowers to delay applying for loan forgiveness in case this latest round of negotiations and lobbying yields beneficial changes. If nothing comes of the negotiations, and no changes to the current forgiveness process are adopted, then borrowers would be in the same position they are now.
If borrowers wish to apply for forgiveness now, what is the best way to maximize forgiveness?
Understandably, many PPP recipients would simply rather be done with the loan forgiveness process and all of the uncertainty it entails. In that case, there are a few simple steps borrowers should take in order to make the whole process smoother.
Review the loan forgiveness application. The SBA has posted its standard loan forgiveness application forms. Some lenders may have their own equivalent form. Borrowers should familiarize themselves with the form their lender is using, including what documentation it calls for, the calculations required to be made and any other necessary items.
This is also a good opportunity to ensure open lines of communication with your lender. In most cases, the lender will be completing the forgiveness review, so it may be helpful for borrowers to discuss with their banker how the lender has been handling forgiveness applications and ways to make their review easier.
Verify your expenses. Recall that there was a limited set of expenses (called “eligible expenses”) that PPP recipients were permitted to spend their funds on in order to qualify for loan forgiveness. These were, generally, certain payroll costs (which should comprise at least 60 percent of the eligible expenses), interest on mortgages in place prior to Feb. 15, 2020, certain utilities, and rent under lease agreements in place before Feb. 15, 2020.
Before applying for loan forgiveness, it’s important to have all of this information easily at hand, including any supporting documentation. Borrowers will need to demonstrate to their lenders how the PPP funds were spent. Lenders may require borrowers to submit certain records—e.g., canceled checks, account transcripts, payment receipts, etc.—along with the forgiveness application.
Verify your employment figures. While gathering documents that verify what expenses the PPP funds were used on, also gather relevant employment records. Borrowers will have to show their full-time equivalent employee figures during the relevant periods so that their lender and the SBA can determine how much forgiveness the borrower is eligible for. This will include demonstrating the number of full-time equivalent employees, as well as their pay rates.
Avoid potential pitfalls and satisfy the safe harbor criteria. Recall that borrowers can have their loan forgiveness amount reduced for two (2) reasons: (i) a decrease in full-time equivalent employees, and (ii) a reduction in the salaries or wages by more than 25 percent for employees making less than $100,000 annually. Borrowers that did either of those things during the period from Feb. 15 to April 26, 2020 can still receive 100 percent loan forgiveness if they eliminate those reductions before Dec. 31, 2020.
Note that in certain circumstances, some borrowers may also not be penalized if they can document that they were unable to rehire employees laid off during that period, and could not hire similarly qualified individuals prior to Dec. 31, 2020, or that the borrower could not operate at the same level of business activity as a result of sanitation or social distancing guidance issued by the Federal government.
What to expect after applying for loan forgiveness?
Generally, lenders have sixty (60) days from receipt of the complete forgiveness application in which to render a decision to the SBA, and the SBA has up to ninety (90) days after that in which to remit funds to the lender (subject to the SBA’s further review of the application). The lender is responsible for notifying borrowers of the final loan forgiveness amount. Note that the SBA will automatically review any loan over $2 million and may choose to review any other loan in its discretion.
Bottom Line It may be beneficial for borrowers to wait to apply for forgiveness in case favorable legislation is passed. For borrowers that determine it is in their best interest to apply for forgiveness now, the first priority should be to avoid forgiveness pitfalls and qualify for the safe harbor provisions that end on Dec. 31, 2020 (if necessary). After that, borrowers should gather all relevant documentation and carefully and thoroughly complete the loan forgiveness application used by their lender, making sure to discuss any issues with the lender and professional advisors.