This is a guest post from Sam Novick, Senior Editor at Funding Circle.
Paycheck Protection Program (PPP) loans are back and better than ever. With extended coverage periods, higher lending amounts (to qualifying businesses), longer loan terms, and reduced payroll requirements, forgiveness is even more achievable.
Like before, these loans (in their entirety) have the potential to be forgivable. That means you pay nothing. It's essentially free money from the government.
However, there's a lot of fine print that determines a loan's forgiveness eligibility. How and when you use the funds will determine the forgivable amount of your PPP funding.
You don't want to spend your loan only to find out you now have to start making payments to repay the debt.
It's a lot to remember, so we created this handy-dandy PPP Loan 2.0 Forgiveness Checklist to keep you on track.
1. Eligible expenses
Funds from your PPP loan can be used for the following expenses:
Payroll costs. Wages, salary, tips, commissions, bonuses, retirement benefits, paid leave, and group insurance benefits
Rent. Fees for any building, equipment, or vehicles with leased dates signed before February 15, 2020
Utilities. Fees for gas, water, electricity, transportation, internet service, and telephones for any agreements made before February 15, 2020
Mortgage interest. Interest payments on mortgage debts that were made before February 15, 2020
Operations expenditures. Expenses for software, cloud computing, human resources, accounting, and remote-enabling services
Supplier costs. Payments for agreements made to your suppliers — before obtaining a PPP loan — that are necessary to continue operations
Worker protection expenses. Costs to purchase personal protective equipment and adaptive investments to help your business comply with federal health and safety guidelines
Property damage costs. Costs for any damages done due to 2020 public disturbances that your insurance didn't cover.
2. The 60/40 rule
You must spend at least 60% of your PPP loan on payroll costs. The remaining 40% can be spent on other eligible expenses.
If your payroll costs fall under 60% of your loan amount, your forgivable amount will be scaled proportionally.
3. 24-Week Coverage Period
You must spend your PPP loan during the 24-week coverage period for those expenses to be forgivable.
Your coverage period begins on the day your lender provides you with your first payment — not necessarily the day you sign your loan agreement.
4. Employee Staffing Requirements
You need to maintain the number of employees on your payroll to be eligible for full forgiveness.
If you've laid off employees due to COVID-19 financial issues (this doesn't apply if they were fired for cause or voluntarily resigned), then you can rehire them or hire new employees to get your headcount back to previous numbers.
If you attempt to hire back your employees, but they refuse for one reason or another, don't panic. Your forgiveness shouldn't be affected as long as you can prove that you've offered to rehire them with the same salary and have documentation of the employee's rejection.
5. Salary Requirements
You'll need to maintain at least 75% of your salary. If you reduced employee's pay or hours for COVID-19, you'd need to use your PPP loan to improve those wages.
If the amount of your employee's pay doesn't reach 75% over the 24-week period, then the amount of your eligible forgiveness will be reduced proportionately.
Salary requirements are assessed on an individual employee basis—not your entire payroll as a whole. Each employee's wages will need to be at least 75% of their previous total amount.
6. Forgiveness Application Deadline
You'll need to apply for loan forgiveness with your lender within 10 months of the end of your 24-week coverage period.
If you fail to apply for forgiveness (or your loan is unforgivable), then your PPP loan payment deferment will end. You'll need to start making loan payments to your PPP lender with a 1% fixed interest rate and 5-year loan term.
Your PPP loan lender will contact you with future details on how to submit your loan forgiveness application.
7. Necessary Documentation
PPP loans less than $150,000 will only need a one-page certification form that declares your loan's total amount, the number of employees the loan helped you retain, and how much of the loan you spent on payroll costs.
PPP loans exceeding $150,000 will require extensive documentation to verify your eligible expenses. Here is a list of required documents your lender will likely ask for with your PPP loan forgiveness application:
Payroll reports
Payroll tax filings
Documents reporting income, losses, payroll, and unemployment insurance filings
Health insurance invoices
Employer-paid retirement plan receipts
Documentation proving your business was active before February 15, 2020, and the start date for your eligible expenses (rent, utility payments, leases, etc.)
Keep meticulous records of how you spend your PPP loan to not run into any audit hiccups.
8. Mishap Preparation
With all of these rules and regulations, there's a chance that your loan will not be 100% forgivable. Never apply for and use a loan that you won't be able to repay.
Be prepared to begin making payments on a portion of your loan starting 10 months after your covered period ends. Being prepared for any mishaps will prevent surprise loan payment obligations from blindsiding your business.
Remember, if you don't agree with your lender's forgivable amount, you can appeal their decision.
