The end of the principal and interest payment deferral period is rapidly approaching for many businesses that received first-draw loans under the Paycheck Protection Program (PPP1). To avoid having to make payments, if you have not filed for your PPP1 forgiveness, you should do so now.
The good news is that the SBA announced a streamlined process where borrowers with loans under $150,000 can apply for forgiveness directly with the SBA. This new change will help some 6.5 million small businesses with loans under $150,000. At the beginning of the year, the SBA released a streamlined application for borrowers, Form 3508S, for the smaller loans that make up the majority of PPP financing.
In addition, if you do have to start making principal and interest payments due to timing, you still have up to the maturity date of your loan to apply for forgiveness. If the loan is forgiven, then any principal or interest payments made will be refunded.
PPP basics
PPP loans generally are 100% forgivable if the borrower allocates the funds on a 60/40 basis between payroll and eligible non-payroll costs. Non-payroll costs initially included only mortgage interest, rent, utilities and interest on any other existing debt, but the Consolidated Appropriations Act (CAA), enacted in late 2020, significantly expanded eligible non-payroll costs. For example, the funds can be applied to certain operating expenses and worker protection expenses.
The CAA also withdrew the original requirement that borrowers deduct the amount of any Small Business Administration (SBA) Economic Injury Disaster Loan (EIDL) advance from their PPP forgiveness amount. And it provides that a borrower doesn’t need to include any forgiven amounts in its gross income and can deduct otherwise deductible expenses paid for with forgiven PPP proceeds.
Forgiveness filings
PPP borrowers can apply for forgiveness at any time before their loans’ maturity date (loans made before June 5, 2020, generally have a two-year maturity, while loans made on or after that date have a five-year maturity). But, if a borrower doesn’t apply for forgiveness within 10 months after the last day of the “covered period” — the eight-to-24 weeks following disbursement during which the funds must be used — PPP loan payments will no longer be deferred and principal and interest payments will begin
That 10-month period is coming to an end for many “first-draw” borrowers. For example, a business that applied early in the program might have a covered period that ended on October 30, 2020. It would need to apply for forgiveness by August 30, 2021, to avoid loan repayment responsibilities.
New SBA streamlined forgiveness for loans under $150,000
The SBA announced a streamlined application portal to allow borrowers with Paycheck Protection Program (PPP) loans of $150,000 or less through participating lenders to apply for forgiveness directly through the SBA.
This new change will help some 6.5 million small businesses with loans under $150,000. At the beginning of the year, the SBA released a streamlined application for borrowers, Form 3508S, for the smaller loans that make up the majority of PPP financing.
The new forgiveness platform will begin accepting applications from borrowers on August 4, 2021. Lenders are required to opt-in to this program through https://directforgiveness.sba.gov. According to the SBA, over 600 banks have opted into direct forgiveness, enabling over 2.17mm borrowers to apply through the portal. These banks represent 30% of loans $150,000 or less that have not yet been submitted for forgiveness.
In addition to the technology platform, the SBA established a PPP customer service team to answer questions and assist borrowers with their forgiveness applications. Borrowers that need assistance or have questions should call (877) 552-2692, Monday – Friday, 8 a.m. – 8 p.m. EST.
Borrowers whose lenders choose not to participate or those with loans greater than $150,000 will still need to apply for forgiveness by filing forms with their lenders, who’ll then submit the forms to the SBA.
If the SBA doesn’t forgive a loan or forgives only part of it, the lender will notify the borrower when the first payment is due. Interest accrues during the time from disbursement of the loan proceeds to SBA remittance to the lender of the forgiven amount, and the borrower must pay the accrued interest on any amount not forgiven.
Audit action
Borrowers also should be aware of the possibility that they may be audited by the SBA’s Office of Inspector General, with support from the IRS and other federal agencies. The SBA will automatically audit every loan that’s more than $2 million after the borrower applies for forgiveness, but smaller loans may be subject to scrutiny, too.
Although the SBA has established an audit safe harbor for loans of $2 million or less, that carve-out applies only to the examination of the borrower’s good faith certification on the loan application that the “current economic uncertainty makes the loan request necessary to support the ongoing operations” of the business.
The SBA also recently notified lenders that it’s eliminating the loan necessity requirement for loans of more than $2 million. Those borrowers will no longer need to complete a burdensome Loan Necessity Questionnaire.
All borrowers, however, still might be audited on matters such as eligibility (for example, the number of employees), calculation of the loan amount, how the funds were used and entitlement to forgiveness. Borrowers that receive adverse audit findings may be required to repay their loans and, depending on the missteps uncovered, could face civil penalties and prosecution under the federal False Claims Act.
Act now
Business owners always have a lot on their plates, so it’s understandable that some may not have focused on the various dates relevant to their PPP loans. Now is the time to ensure that you file your PPP1 forgiveness application in a timely manner. The W&D team is here to help. Please contact us with your questions at 847-267-9600; info@waradydavis.com. You can also visit the Warady & Davis LLP COVID-19 Resource Center for a wealth of information on stimulus assistance, new legislation and much more. This information is updated regularly.