The Paycheck Protection Program (PPP) is one of the most powerful stimulus programs to come out of the CARES Act. The PPP is a loan that can be forgiven if a small business follows certain criteria.
Let's look at the criteria required for a PPP loan to be forgiven. If you have received a PPP loan, you should feel really happy because you have potentially won 100% free money if used appropriately.
How To Get The PPP Loan Forgiven
It's important to note that you will NOT have your PPP loan automatically forgiven. You must submit a request to the bank who sent you the PPP loan to get your loan forgiven.
For example, if you work with Citibank, you will need to submit a request to Citibank Retail Business Banking. Please be sure to document the use of your loan proceeds and be ready to present evidence of how you spent your loan.
Citibank and other banks will be reaching out to you with additional details on the loan forgiveness application process, so please continue to check your email and your bank's website for updates.
Covered Expenses For PPP Forgiveness
Your PPP loan may be forgiven to the extent you use the proceeds for the expenses below in the eight-week period beginning on the date your loan was funded:
- Payroll costs, including benefits as defined by the SBA
- Interest on mortgage obligations, incurred before February 15, 2020
- Rent, under lease agreements in force before February 15, 2020
- Utilities, for which service began before February 15, 2020
Please note that no more than 25% of the loan forgiveness amount can come from non-payroll costs.
Staffing Requirements For PPP Loan Forgiveness
Your loan forgiveness will be reduced if you:
- Decrease your full-time employee headcount; you have until June 30th, 2020, to restore your full-time headcount for any changes made between February 15, 2020 and April 26, 2020.
- Decrease salaries and wages by more than 25% for any employee who made less than $100,000 annualized in 2019. You have until June 30th, 2020, to restore employee salaries or wages that were reduced by more than 25%.
After the loan forgiveness period for your PPP loan ends, your loan’s principal amount will be calculated as the original loan amount less any expenses that qualified for forgiveness.
Following a 6-month payment deferral period (which begins on the loan’s approval date), the principal amount of the loan, along with accrued interest at 1% per annum, must be repaid over the following 18 months.
You may pay off your loan sooner than 2 years: there are no prepayment penalties or fees.
PPP Loan Forgiveness Will Come
It is imperative for all small business who received a PPP loan to follow the rules and keep good track of how the PPP money is spent. The last thing a small business owner wants is to spent the PPP loan money, see revenue not recover, and have more debt on the books because the government denies forgiveness.
One strategy small business owners should consider is holding out on spending any PPP loan money or only part of the PPP money until June 30, 2020 when small businesses are required to hire back employees. By June 30, small businesses will have a better idea how how the economy and its business is fairing. More time provides for better business decisions.
There will be a lot of questions on how the PPP loan is forgiven for sole proprietors given salaries are not set as business revenue and expenses are often variable each month. Further, what happens if you get a PPP loan based on 2018 schedule C, but you have no revenue in 2020? Hopefully the PPP loan will still be forgiven given what you got is basically your monthly net profit times 2.5.
If you have further questions, review the detailed information available on the Paycheck Protection Program at sba.gov or www.treasury.gov/cares.
If you're looking to start a different type of business, I highly recommend starting an online business with low overhead, like this website. No matter if there is a global coronavirus pandemic or forced lockdowns, a website cannot be shut down.
Take a look at the articles for more insights on building an online business:
About the Author: Sam worked in investment banking for 13 years. He received his undergraduate degree in Economics from The College of William & Mary and got his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He spends time playing tennis, taking care of his family, and writing online to help others achieve financial freedom too. He started Financial Samurai in 2009 and has grown it to be one of the largest independently owned personal finance sites in the world. You can sign up for his private newsletter here.