The Salary Protection Program (PPP), regulated by the Coronavirus Relief and Economic Security (CARES) Act, was intended to provide funds to small and medium-sized businesses to preserve their workforce and wage levels, reinstate laid-off workers, and restore wages to previous levels. PPP loans guaranteed by the U.S. Small Business Administration (SBA) can be fully forgiven if spent in accordance with the PPP Loan Forgiveness conditions as described earlier.
The Covered Period during which PPP funds can be spent is 24 weeks (168 days). However, for loans taken before June 5, 2020, when the PPP Flexibility Law came into force, an 8-week (56 days) or 24-week (168 days) Covered Period can be selected. In any case, the Covered Period ends on December 31, 2020. Therefore, for loans disbursed after July 16, 2020, the Covered Period will be less than 24 weeks (168 days).
Normally, the Covered Period begins on the date the PPP loan is disbursed to the Borrowing Business, regardless of the date the loan agreement is signed. However, for administrative convenience, businesses that pay their employees every 2 weeks or more frequently may choose to use the Alternate Covered Salary Period, which begins on the first payday after the day of the PPP loan disbursement.
The maturity (repayment period) of PPP Loans was initially set at 2 years, but was increased to 5 years with the PPP Flexibility Law. PPP Loans obtained before June 5, 2020 (with a loan number from the SBA) with a repayment period of 2 years can be extended to 5 years if the Borrower and the Lending Bank agree.
However, the actual loan amount to be repaid and when payments will start will be determined after the PPP Loan Forgiveness application is finalized.
Application Deadline
Borrowers can apply for loan forgiveness from the time the loan funds are fully utilized until the maturity of the loan (2 or 5 years from the date of the loan). All PPP Loan payments are automatically deferred until 10 months after the Covered Period. If the borrower does not apply for PPP Loan Forgiveness within 10 months after the Covered Period, there is no further deferment of loan repayments and the borrower must start repaying the loan immediately. However, if the borrower applies for PPP Loan Forgiveness within 10 months after the Covered Period, the borrower is not required to make any payments until the PPP Loan Forgiveness application is finalized.
Although it is possible to apply for PPP Loan Forgiveness immediately after the end of the Covered Period, if the criteria for the average number of employees and employee wages have not been met, the borrower will be able to benefit from the safe harbor provisions if the borrower brings the number of employees and employee wages to the required level by December 31, 2020. In such a case, it would make more sense to hold off on applying for PPP Loan Forgiveness for a while after the Covered Period.
PPP Loan Forgiveness Application Forms
The borrower will apply for PPP Loan Forgiveness to the bank from which the loan was obtained. For the loan application, the appropriate form prepared by the SBA (or an equivalent form prepared by the bank where the application is made) must be used. The standard application form prepared by the SBA is the SBA 3508 form. If certain conditions are met, it is possible for borrowers to use an easier and simpler application form (SBA 3508EZ form). Recently, the SBA has issued a much simpler form (SBA 3508S form) that can be used by businesses receiving PPP loans of $50,000 or less.
Standard PPP Loan Forgiveness Application Form (SBA 3508 Form)
The Standard PPP Loan Forgiveness Application Form(SBA Form 3508) is a 5-page form consisting of the following sections
- PPP Loan Forgiveness Calculation Form
- PPP Schedule A
- PPP Schedule A Worksheet
- (optional) PPP Borrower Demographic Information Form
Calculation of Amnesty Amount
The loan forgiveness amounts in the PPP Loan Forgiveness Calculation Form are calculated using PPP Schedule A and the PPP Schedule A Worksheet. All employees who were employed by the borrower during the Covered Period (or Alternate Covered Period) and whose primary residence is the United States of America (USA) must be listed in Table 1 and Table 2 on the PPP Schedule A Worksheet. The total wages paid, average workforce equivalent (FTE) and salary/hourly wage reductions calculated using the PPP Schedule A Worksheet (page 4) will be used to populate the relevant fields in the PPP Schedule A (Page 3). Likewise, the amounts calculated in PPP Schedule A (Page 3) will be used to populate the relevant fields in the Adjustments for Salary Expenditures and Equivalent Workforce and Salary/Hourly Wage Reductions sections of the PPP Loan Forgiveness Calculation Form (Page 1).
As part of the PPP Loan Forgiveness Calculation Form, an authorized representative of the borrower must certify that the amount requested for PPP Loan Forgiveness is in accordance with the terms of the loan forgiveness and that the documents submitted with the application and other documents on which the application is based are true and correct in all material respects (Page 2).
Documents Related to the Application
All borrowing businesses are required to submit the following documents in their PPP Loan Forgiveness applications:
- PPP Loan Forgiveness Calculation Form (SBA 3508 form page 1-2)
- PPP Schedule A (SBA 3508 form page 3)
- Documentation showing cash and non-cash salary payments made to employees in accordance with the conditions during the Covered Period (or Alternative Covered Period)
- Documentation showing that obligations/services for other payments made in accordance with the conditions during the Covered Period (or Alternative Covered Period) commenced prior to February 15, 2020
Other documents associated with the PPP Loan Forgiveness application do not need to be submitted with the application but must be retained by the borrower.
- PPP Schedule A Worksheet or equivalent
- (If applicable) Documents related to FTE Drawdown Safe Harbor Rule 2 in the PPP Schedule A Worksheet
- PPP Schedule A Worksheet Documents relating to each employee listed in Table 1 and Table 2
- Documentation of offers to rehire employees and their rejection, documentary evidence of rejection of offers to increase working hours to the previous level, documentary evidence that employees were dismissed for valid reasons or left voluntarily, documentary evidence that employees requested a reduction in working hours in writing, documentary evidence that similarly qualified persons could not be recruited for vacant positions until December 31, 2020.
- If the borrower has declared a partial or complete cessation of operations between February 15, 2020 and the Covered Period due to regulations and guidelines issued by the Ministry of Health, the Center for Disease Control and Prevention and the Occupational Safety and Health Administration between March 1, 2020 and December 31, 2020 for the protection of sanitation standards, social distancing or employees and customers due to COVID.
Easy PPP Loan Forgiveness Form (SBA 3508EZ Form)
Borrowers may use the simpler SBA form 3508EZ (or an equivalent form prepared by the borrowing Bank) if at least one of the following categories applies
- If the borrower is self-employed, independent contractor or sole proprietor and has no employees, the average monthly salary in the Loan Application Form is not included in the calculation of employee salaries when applying for a PPP loan.
- The borrower has not reduced the salary or hourly rate of any of its employees by more than 25% during the Covered Period (or Alternative Covered Period) and the borrower has not reduced the number of employees or the average working hours of employees between January 1, 2020 and the Covered Period
- The borrower has not reduced the salary or hourly wage of any of its employees by more than 25% during the Covered Period (or Alternative Covered Period) and the borrower's operations have ceased in whole or in part between February 15, 2020 and the Covered Period due to compliance with regulations and guidelines established by public authorities for health and public safety purposes
In all of these cases, either the borrower is not subject to a reduction in the amount of PPP Loan Forgiveness due to a reduction in the equivalent workforce or employee salaries, or the borrower is exempt from the workforce reduction requirement due to the safe harbor provisions. Therefore, the SBA 3508EZ form does not include the PPP Schedule A and PPP Schedule A Worksheet. Otherwise, the SBA 3508EZ form and the SBA 3508 form are equivalent.
Streamlined PPP Loan Forgiveness Form (SBA Form 3508S)
The Salary Protection Program made 5.2 million loans totaling $525 billion to American small and medium-sized businesses. Of these loans totaling $525 billion, approximately 3.57 million loans (two-thirds of all loans) totaling $62 billion had loan amounts of $50,000 or less. In addition, about 1.71 million loans of $50,000 or less (one-third of all loans) were made to businesses that reported having no employees or one employee (presumably because business owners are not considered employees).
To expedite the PPP Loan Forgiveness process for borrowers in this situation, the SBA has issued a simpler application form(SBA Form 3508S). Borrowers will be able to use SBA Form 3508S to apply for PPP Loan Forgiveness if the total PPP loan amount is $50,000 or less and the total PPP loan amount with affiliated businesses is less than $2 million.
The SBA 3508S form requires far fewer calculations and documentation for covered borrower businesses. The form consists of only 2 pages: The first page is for basic PPP loan and loan forgiveness information and the optional second page is for demographic information.
For PPP borrowers who are eligible to use the SBA Form 3508S (or an equivalent form prepared by the lending bank), it will be much easier for the PPP loan to be forgiven in full:
- Businesses receiving loans will be exempt from the rule to reduce the amount of PPP Loan Forgiveness due to reductions in the level of the equivalent workforce (FTE) or a reduction in the salaries or wages of employees.
- Borrowers do not have to show the calculations they have made to determine the amount of loan forgiveness. It is the borrower's responsibility to accurately calculate the amount of loan forgiveness, and the borrower certifies in the PPP Loan Forgiveness application that the information and calculations contained in the application are accurate. However, SBA may request information and documentation from the borrower to verify these calculations as part of the loan forgiveness application review process.
- Businesses that receive a loan need only apply with a 1-page PPP Loan Forgiveness Application form and documents showing the salary and non-salary expenses specified in the form.
Retention of Loan Documents
Borrowers are required to retain documentation related to PPP loans until 6 years after the loan is forgiven or fully repaid:
- Documents submitted with the PPP loan application
- Documentation supporting the borrower's statement of need for and eligibility for a PPP loan
- Documents supporting the borrower's application for loan forgiveness
- Documentation demonstrating that the borrower has complied with the terms of the Salary Protection Program without material default
Although the SBA has stated that its supervisory activities will focus primarily on large loans (especially loans of more than $2 million), the SBA is authorized to request and review PPP loan documentation for all borrowers over a 6-year period.
PPP Loan Forgiveness Assessment Process
In order to apply for PPP Loan Forgiveness, the borrowing business must complete the appropriate form from the SBA application forms (or equivalent form prepared by the bank where the application is made) and other required documentation and submit it to the bank where the loan was obtained (or the bank processing the loan).
Borrowers may submit PPP Loan Forgiveness applications to lending banks electronically. Banks considering PPP Loan Forgiveness applications may accept scanned electronic copies of signed loan forgiveness applications and scanned electronic copies of documents relating to statements and information made on the SBA form (or equivalent provided by the lending bank). Lending banks may accept e-confirmations and e-signatures submitted in accordance with applicable legislation.
Responsibilities of Lending Banks
For all PPP Loan Forgiveness applications, each lending bank is responsible for carrying out the following checks:
- Confirmation that the certification statements in the loan forgiveness application form have been made
- Confirmation of receipt of the documents submitted by the borrower to prove salary and non-salary expenditures
- Confirmation of the accuracy of the borrower's calculations to determine the amount of PPP loan forgiveness
- Confirmation that at least 60% of the requested loan forgiveness amount has been used for eligible salary expenses
If the borrower submits documents supporting the loan forgiveness request and makes a statement confirming that the information and calculations in the loan application form are correct, the bank evaluating the loan forgiveness application is not obliged to check the information in the loan application externally. The correct calculation of the loan forgiveness amount is the responsibility of the borrower. It is the responsibility of the bank considering the loan forgiveness application to conduct a good faith review of the calculations of the amount that may be subject to PPP loan forgiveness and the documents submitted in connection therewith within a reasonable time.
Evaluation of a Loan Forgiveness Application
The bank receiving the loan forgiveness application is required to evaluate the application and forward the results to the SBA within 60 days of receipt of the complete application. If the bank evaluating the application determines that the loan forgiveness application contains errors in calculations or missing supporting documentation, the bank is expected to cooperate with the loan forgiveness applicant to resolve the issues.
As a result of the bank's evaluation of the loan forgiveness application, the decision on the application may be acceptance (full or partial), rejection or rejection without loss of rights.
- If the bank evaluating the loan application decides to forgive the borrower's loan debt in whole or in part, it notifies the SBA of this decision. Within 90 days, the SBA transfers the approved loan forgiveness amount and the interest accrued up to that time to the lending bank, without prejudice to its right to conduct any kind of review of the loan or loan application. The bank is obligated to notify the borrower of the amount of loan forgiveness paid by the SBA. If the bank evaluating the loan application partially approves the loan forgiveness application and the SBA makes a partial payment, there is no appeal process for the borrower.
- If the bank evaluating the loan application decides to reject the borrower's application for loan forgiveness in its entirety, it will communicate its decision to the SBA and notify the borrower in writing. The SBA reserves the right to review this decision at its discretion. In addition, the borrower has the right to apply to the bank that evaluated the loan application within 30 days to request a review of this decision by the SBA. The bank must forward this request to the SBA within 5 days. If the SBA accepts the request for review, the SBA will notify the bank and the borrower of the outcome of the review. If the review results in a denial, the borrower has 30 days to file an appeal with the SBA Office of Appeals.
- A loan forgiveness application may be rejected without loss of rights if the SBA notifies the bank evaluating the loan forgiveness application that the loan is under review. If the SBA determines that the borrower does not qualify for a PPP loan, it may instruct the bank evaluating the loan forgiveness application to reject the application. If the SBA loan review does not determine that the borrower does not qualify for a PPP loan, the borrower whose loan forgiveness application has been rejected without loss of rights may apply to the lending bank for reconsideration of the loan forgiveness application.
PPP Loan Repayments
When the SBA transfers to the lending bank the amount of the approved loan forgiveness and the interest accrued up to that time, or notifies the lending bank that the loan forgiveness application has been rejected, the lending bank is obliged to notify the borrower. If the entire PPP loan has not been forgiven, the lending bank is also obliged to inform the borrower when payments will begin on the remaining loan amount.
If the loan is forgiven in full, the borrower is not obliged to make any payments. In cases where the loan forgiveness application is rejected in full or only part of the loan is forgiven, the remaining loan balance must be paid by the loan maturity date. Since interest starts to accrue from the moment the loan is taken out, the borrower must also pay interest on the unforgiven amount until the loan forgiveness application is finalized.
If you would like to get information about PPP Loan Forgiveness or get professional support during the application process, you can contact us.