When Should You Apply for PPP Loan Forgiveness? Eight Weeks vs. 24 Weeks
If you applied for a Paycheck Protection Program Loan, you’ve probably been scrambling as the rules surrounding these loans have changed over the past few months. The good news is that the rules for PPP loan forgiveness have relaxed, so you have a better chance of having your loan fully forgiven.
PPP loans were designed to help businesses struggling to stay afloat in the first wave of the pandemic. They’ve provided small businesses with the necessary cash on hand to continue paying their employees and try to stay in business in a time of uncertainty. Self-employed persons and contractors could also take advantage of these loans, which are backed by the Small Business Administration (SBA).
Now that we’re nearing the end of the funding opportunity, what’s the next step? For most borrowers, the exceptionally low-interest rate of 1% was appealing. However, for the majority, the idea of a free loan or a loan forgiven with virtually no payback was the ultimate deal. The next step for loan recipients is getting the maximum loan forgiveness. However, SBA continues to release new details, which raises many questions for business owners. The main question asked: When do you (the borrower) apply for PPP loan forgiveness?
When to apply for PPP loan forgiveness
Many small businesses wonder when to apply for forgiveness. Fortunately, the PPP Flexibility Act has made things a bit easier. The best time to apply depends on your business details:
- Whether your company chose the eight-week forgiveness covered period or the 24-week covered period
- How many full-time employees (FTE) you have now in comparison to the same period last year
- How much you reduced individual employee wages
- How much your employees were making before
If you spent all funding on forgivable expenses and have the correct documentation to submit to your lender, you can apply for loan forgiveness at any time, even before your covered period expires. However, filing for forgiveness too early may cause you to miss out on the full loan forgiveness amount,, if you made certain reductions to your employee workforce or salaries and wages, and only qualify for partial loan forgiveness.
If you reduced salaries or wages and are struggling to stay in business or retain employees, an FTE safe-harbor reduction provision exists for borrowers until December 31, 2020. The extension helps give time to restore employees’ salaries or wages or rehire the number of employees at the time of filing. Using the extension period to pull together final documentation may help avoid a reduction in loan forgiveness. Other safe harbor provisions and exceptions to reductions in your forgiveness amount may apply. You should review the SBA Application Instructions and related guidance for details.
If you apply for loan forgiveness before the end of the covered period and reduce the salaries or wages of any of your employees earning less than $100,000 (on an annualized basis in 2019) by more than 25%, you may forfeit this safe-harbor reduction provision. You’ll have to account for the excess salary reduction over the entire period that applies to your loan, whether it’s an eight-week or 24-week covered period. Even if you plan on salary or wage restoration by December 31, 2020, the amount of loan that is qualified for forgiveness could be reduced, if you apply too early.
PPP loan forgiveness: eight weeks vs. 24 weeks
The Paycheck Protection Program Flexibility Act made some significant changes to PPP loans. One of the most significant changes was the eight-week forgiveness period. You now have a choice: If your loan was issued on or before June 5, 2020, you can opt to take advantage of a 24- week period to spend the funds. Borrowers are no longer locked into the eight weeks.
The PPP Flexibility Act states that borrowers with loan numbers after June 5, 2020, automatically have the forgiveness period of 24 weeks or until December 31, 2020.
At first, having more time to spend your loan proceeds seems to make more sense. However, there are a few advantages and disadvantages with each approach.
Eight-week forgiveness period advantages
- If you qualify for full loan forgiveness after the 8-week period, typically you can have the forgiveness process finished this year.
- It’s easier to maintain payroll and the number of employees you have during a shorter period of time.
- PPP calculation rules and guidelines are still changing and in flux. It may be beneficial to take advantage of applying now when the rules are well known vs. taking a chance of the rules and qualifications changing at a later date.
24-week forgiveness period advantages
- Under the new rules, you only have to spend 60% of the PPP loan on payroll costs vs. 75% to potentially qualify for 100% forgiveness. This increases the chances of businesses being able to qualify for full forgiveness regardless of whether they choose an 8-week or 24-week covered period, but using a 24-week covered period may help a borrower meet the 60% threshold if it wouldn’t be able to do so in 8 weeks.
- With the extended time, it gives businesses longer to plan and make well-informed decisions regarding how to file for loan forgiveness.
What documentation is needed for PPP loan forgiveness?
The key to complete PPP loan forgiveness is careful and thorough documentation. When you fill out your application, you’ll be provided with guidance on what documents you need to submit to your lender. Remember that you’ll need to track and prove each FTE’s wages and any reduction and subsequent restoration accurately.
Once you have submitted your completed application to your lender, they have 60 days to approve it. Then you still have two to five years (depending on when your loan was approved) to pay off any unforgiven funding at a low rate of 1%. By carefully following all PPP loan forgiveness guidelines, you should be able to qualify all or most of your loan for forgiveness.
Rules that have changed regarding PPP loans
PPP funding available
The funding first made available through the PPP (which is part of the CARES Act) was $349 billion. However, when those funds were swiftly claimed by the end of just two weeks, an additional $310 billion in funding was made available. Businesses had up until June 30, 2020 to apply for PPP funding.
Funding percentage split
At first, 75% of any PPP funding had to be proven to be spent solely on payroll-related expenses, including:
- Employee salaries
- Healthcare and retirement benefits
- Vacation and sick leave
- State and local taxes on employee compensation
The remaining 25% had to be spent on other approved expenses relating to running the businesses, such as rent, mortgage interest, and utility costs. Any loan funds not allocated according to these guidelines will not be eligible for forgiveness.
This percentage split was later adjusted to 60% for payroll costs and 40% for other business costs, making it easier for companies with higher business-related costs and lower payroll costs to qualify for PPP loan forgiveness.
PPP covered periods
Businesses originally had just eight weeks from the date of PPP loan disbursement to spend their funds to qualify for loan forgiveness. That was adjusted to 24 weeks to give businesses time to rehire full-time employees (FTEs to reach their former FTE headcount and to reimburse employees who had wages cut by more than the allowable 25%).
Employers are also now able to take advantage of an alternative payroll covered period that aligns with their regular payroll cycle. This means the alternative period starts the first day of the first pay period after payment, rather than the day you receive your funds.
The new rule also allows companies to count all payroll costs incurred during the period, not only those paid out. Overall, the extended covered period is the end of the payment cycle after the time worked for any employee during that period.
PPP loan terms
Businesses that acquired their PPP loans before June 5, 2020, had two years to pay off any unforgiven loan proceeds. Businesses approved for funding later were given five years to pay off unforgiven amounts, and businesses with loans already in place were allowed to request an extension from two to five years, with lender approval.
Unforgiven funding converts to a 1% loan with no prepayment penalties or fees, and payments are deferred until:
- The date that the SBA remits the approved forgiveness amount to the lender
- The SBA determines that a loan is not eligible for forgiveness
- Your time to seek forgiveness lapses (although interest will accrue).
However, if you follow all of the guidelines for PPP loan forgiveness, you should be able to qualify your entire loan and not have to pay any of it back.