Whether you’re a dance business with employees or a freelance dancer or solopreneur, here’s what you need to know about applying for PPP loan forgiveness.
If you were one of the 4.9 million small businesses that obtained a loan under the Paycheck Protection Program, one of its main attractions was likely the possibility of converting it into a grant. Whether you’re a dance retailer or studio owner with employees or a freelance dancer who’s an independent contractor or a sole proprietor, it’s now time to think about applying to get the loan forgiven. Here’s the who, what, when, where and how to go about applying for PPP loan forgiveness.
Who qualifies for forgiveness?
If you obtained a PPP loan for a business with employees and spent at least 60 percent of the proceeds on payroll costs during the “covered period” (within 24 weeks of the disbursement of loan proceeds), you are eligible for forgiveness. “Payroll costs” include cash compensation, as well as health insurance coverage and retirement plan contributions made for employees. You must follow the process explained next to receive the grant of forgiveness; it is not automatically given to you.
For self-employed individuals with no employees, in determining eligibility for loan forgiveness payroll costs cover the owner’s compensation and are capped at $20,833 for a 24-week covered period (see the “Loan Forgiveness Payroll Costs” section, Question 8, of the Small Business Administration’s “FAQs on PPP Loan Forgiveness”).
Where do I apply?
You apply for forgiveness with your original lender, not the SBA. The bank then obtains approval from the SBA to grant forgiveness.
When do I apply?
The period for asking for loan forgiveness is now underway. Technically, the deadline for making a request is any time before the maturity date of the loan (either two years or five years from the loan’s origination, depending on the date of the loan). But in reality, the application should be made before loan repayment must begin, which is generally 10 months after the end of the covered period. (The covered period is 24 weeks from the date the PPP loan proceeds were disbursed. If the disbursement was before June 5, 2020, you can elect to choose 8 weeks or 24 weeks as your covered period.) The SBA gives this example: A business obtains a loan with a covered period ending October 30, 2020. Loan repayments begin on August 30, 2021, so this is effectively the deadline for requesting forgiveness.
Note: The fact that the forgiveness application form has a date (e.g., October 31, 2020) has no impact on the time for asking for forgiveness.
What form should I use?
There are currently three different PPP loan forgiveness application forms. The one you need to use depends on the size of the loan and certain other factors. (Many lenders have their own online versions of these forms that they will use for their customers requesting PPP forgiveness.)
- Form 3508S The vast majority of PPP loans were no more than $50,000. Whether you’re a business with employees or an independent contractor or sole proprietor without employees, if you received $50,000 or less you can use this simplified form.
- Form 3508EZ is another simplified form—for loans greater than $50,000. Essentially, it’s used if Form 3508S can’t be used, but you did not reduce employee compensation during the covered period by more than 25 percent. Self-employed individuals and sole proprietors who had no employees at the time of their PPP loan application can also use it.
- Form 3508. Businesses with loans that cannot use either of the simplified forms (e.g., larger loans) must use this form.
How do I complete the form?
The information required by each form is self-explanatory, such as your PPP loan number and loan amount, the lender PPP loan number and disbursement date and the number of employees at the time of the loan application. For the simplified Form 3508S you merely check each question to indicate that you meet the requirements, such as the fact that the amount of loan forgiveness requested does not exceed the principal amount of the PPP loan and that you meet forgiveness requirements.
If you have employees, along with the form, you must submit payroll documentation: (1) bank account statements or payroll service provider reports documenting cash compensation paid to employees (bank statements show canceled checks payable for compensation to employees), (2) tax forms (federal quarterly Form 941 and state quarterly wage and unemployment tax reporting), and (3) payroll receipts, cancelled checks or account statements showing employer contributions to health insurance and retirement. If you use QuickBooks, you can create an Excel document listing who was paid, how much and when. You also have to submit nonpayroll documentation for other expenses, such as business mortgage interest payments or rent and business utility payments.
If you are self-employed with no employees, forgiveness is based in part on “owner compensation replacement,” which is 2.5 months of net profit (net income reported on the 2019 Schedule C, line 31, multiplied by 0.208); it’s capped at $20,833. You need to provide a copy of this tax form (if you did not submit it when you initially applied for the loan). For loan forgiveness for other eligible expenses (e.g., rent, utilities), you need documentation as explained above.
While the form for loan forgiveness may be simple—you only need to show a few small calculations, if any—you must retain documentation of the calculations and all documents submitted with the PPP loan application. The SBA may review (“audit”) the loan, although it has said it would only routinely audit loans over $2 million. Retain this information for six years after the date the loan is forgiven or repaid in full.
What can I expect once I’ve applied for loan forgiveness?
Your lender has 60 days to review your forgiveness request. The SBA has 90 days to approve your lender’s okay on the loan forgiveness. Even if you submit a loan forgiveness application now, you likely won’t receive final approval until after the end of the year.
If you also received the SBA’s Economic Injury Disaster Loan (EIDL) advance of up to $10,000, and you then seek forgiveness of a PPP loan, you must repay the EIDL advance; the funds will simply be subtracted from the forgiveness amount (i.e., the SBA deducts the EIDL advance from funds it remits to the lender).
What can I expect on tax treatment?
Under the CARES Act, the forgiveness of a PPP loan is not taxable income to you, even though cancellation of debt typically is taxable. However, the IRS ruled that you cannot deduct expenses, such as payroll, rent and utilities, incurred during the period for which you are asking loan forgiveness. The IRS also said that if you haven’t received loan forgiveness by the end of 2020 but reasonably expect to get it in 2021, you can’t deduct expenses in 2020 that will be covered by loan forgiveness. There is a proposal in Congress to change this non-deductibility rule, but there is no indication if or when such a measure will be enacted.
What if I don’t obtain loan forgiveness?
Repayment of the loan begins 10 months after the covered period. This means you must begin to repay the loan 16 months after it was received if you have a 24-week covered period and complete repayment in two years. However, you can ask your banker for a repayment period of up to five years. The interest rate on the repaid principal is a very low 1 percent, should you need to repay any of your PPP loan.
Because there’s still time to apply for loan forgiveness, and you aren’t yet making payments, many experts suggest that you wait to submit your request. The SBA may provide more guidance or further ease forgiveness procedures. Congress may make changes, too. Monitor what’s happening…but keep your eye on the calendar so you don’t miss this loan forgiveness opportunity.
Barbara Weltman, an attorney and small-business expert, is the author of J.K. Lasser’s Small Business Taxes 2020: Your Complete Guide to a Better Bottom Line and publisher of “Idea of the Day” at bigideasforsmallbusiness.com.