According to the National Federation of Independent Business (NFIB), about 85% of all the approved Paycheck Protection Program (PPP) loans were for less than $150,000. Those loan amounts might seem small. However, they add up to about 4.2 million individual loans. That’s 4.2 million out of the 5.2 million total loans. That’s a lot of paperwork when it’s time for loan forgiveness. Does it make sense to have millions of people go through a rigorous forgiveness process for a small loan amount?
Paycheck Protection Program Updates
As of August, 84% of PPP borrowers used up all of the funds from their PPP loans. About 44% of borrowers say they would apply for a second PPP loan if eligible. That’s not surprising.
40% of small businesses who got the PPP loan say they will shut down within 7 to 12 months without additional funding. These are the small businesses most in need of the additional financial relief. The relief proposed in the next round of COVID-19 relief funding. Hopefully included in the next round is U.S. Senate Bill 4117. The bipartisan bill holds the intention of automatically forgiving loans of less than $150,000. It will reduce the requirement for burdensome paperwork down to a one-page form. In brief summary, the purpose of the pending Paycheck Protection Small Business Forgiveness Act is:
“This bill modifies loan forgiveness under the Paycheck Protection Program established to support small businesses in response to COVID-19 (i.e., coronavirus disease 2019).
“Specifically, the bill provides for automatic forgiveness of a paycheck protection loan that is not more than $150,000 if the recipient submits a one-page form. Further, it prohibits any enforcement or other action against a lender relating to loan origination, forgiveness, or guarantee based on the lender’s reliance on certifications or documentation submitted by a loan applicant or recipient.”
Where PPP Forgiveness Stands Today
As of August 8, the Paycheck Protection Program closed to new applications. Although the automatic loan forgiveness program is still pending in Congress, applications for loan forgiveness have been available since June 16. Many were eligible to be submitted starting in early August.
There’s some perks in the current forgiveness rules for sole proprietors, independent contractors, and self-employed individuals who had no employees at the time of the PPP loan application. If these businesses did not include any employee salaries in the computation of average monthly payroll, they automatically qualify to use the Loan Forgiveness Application Form 3508EZ. Additionally, these business owners can complete that application (or lender equivalent). (Click here for the long-form version).
What is the Covered Period for the PPP?
The borrower must submit his or her loan forgiveness application within ten months of the completion of the Covered Period. The Covered Period varies depending on original date of the loan. The first Covered period is the 24-week (168-day) period beginning on the PPP loan disbursement date. The second Covered Period is if the borrower received funds before June 5, 2020. If so, the borrower may elect to use an eight-week (56-day) Covered Period. In essence, the borrower chooses the Covered Period when he has to use funds.
When the SBA fully forgives the loan, the borrower doesn’t have to make any payments. However, it’s possible for the SBA to forgive only a portion of the loan. Alternatively, the SBA can deny the forgiveness application. In the two cases of denial, any remaining balance due on the loan is repaid by the borrower. The borrower makes payment on or before the maturity date of the loan. Interest accrues during the time between the disbursement of the loan and SBA remittance to the lender of the forgiven amount.
Why Automatic Forgiveness of $150,000 and Under Makes Sense
When and if the bill for automatic PPP forgiveness passes, the application form will only be one page. Small business owners will only need to state that the loan is eligible for forgiveness and that the business complied with the requirements of the PPP found in the CARES Act. It’s intended to eliminate all additional documentation requirements. Additionally, this avoids the need for a micro-business owner to engage the outside services on an accountant, attorney, or other business professional to complete and submit the loan forgiveness application.
Such forgiveness will also save taxpayers money. Those 4.2 million individual loans amount to only 26% of the money loaned through the program. By not requiring the SBA to review and validate those loans, the SBA can focus on bigger businesses with bigger loan amounts. As currently written, the bill requires the SBA use resources to establish a system to review every loan for more than $1.5 million. It’s estimated that $7.5 billion in loans could be automatically forgiven. $525 billion would be subject to a possible review. But that $525 billion is only spread over about 1 million loans. That’s much less paperwork to deal with.
Open Issues Might be Reasons to Delay Applying for Forgiveness
New changes continue to come to light with the PPP. As recently as August 11, dental benefits that are considered group health-care benefits were added to payroll costs. Therefore, these costs may be eligible for forgiveness. A big issue still outstanding is whether or not the covered expenses will be considered tax-deductible. That’s because deductions if not paid with a forgiven loan. Currently, the IRS and several members of congress are in disagreement about this based on the way the original legislation was written. Generally, there is bipartisan congressional support to make the expenses tax deductible. However, the IRS says they are not. Very likely, new legislation will clarify this in favor of becoming tax-deductible expenses.
PPP loan forgiveness protocols heavily impact lenders (banks). Many are hopeful forgiveness is automatic. If not, bankers will have to process and verify millions of PPP loan forgiveness applications. Small businesses, the American Bankers Association, all state bankers’ associations, and many others support the pending bill.
Things are almost certain to change. Do you want to be a test case? What if you apply for partial forgiveness and the SBA forgives part of the loan? What’s the rule if full forgiveness becomes automatic?
The PPP Loan forgiveness portal to submit applications is officially open. However, many small business accountants and other professionals suggest companies think twice before rushing in. You may also want to review these previous blogs: