Update 1/8/21: As part of a larger relief bill, Congress has approved more than $284 billion in new Paycheck Protection Program funding. The types of businesses and industries that are eligible for PPP loans have been expanded under the new bill. Additionally, businesses that can demonstrate at least 25% reduction in gross receipts year over year and meet other requirements may be eligible for a second PPP loan.
The new PPP round opens on Jan. 11, with exclusive access for first-draw loans issued by community financial institutions (CFIs) focused on underserved communities. On Jan. 13, CFIs will start offering second-draw PPP loans to qualified applicants. All other lenders will be able to submit applications later in the week.
How to Apply for PPP Loan Forgiveness
The Small Business Administration and the Department of the Treasury released the official Paycheck Protection Program forgiveness application form on May 15. This form, also known as SBA Form 3508, is what small business borrowers will submit to their PPP lender when it’s time to have their loan partially or entirely forgiven.
Although small businesses have been applying for PPP loans since the program was created passage of the CARES Act, information on forgiveness has been lacking. With this new form, business owners should have a better sense of what expenses are forgivable, as well as how the general guidelines of the loan program can apply to their specific business.
If you’re a small business owner who has received a PPP loan, or you’re thinking about applying due to the impact the coronavirus pandemic has had on your business, here’s what you should know about the new PPP forgiveness application.
Where Is the Official PPP Forgiveness Application?
The SBA released the official PPP forgiveness application on its website. You can access the application yourself here, though your PPP lender may have a digital copy of this document for you to fill out when it’s time to begin the forgiveness process.
In the SBA’s press release announcing the application, the department noted that additional regulations and guidance “to further assist borrowers as they complete their applications, and to provide lenders with guidance on their responsibilities” is forthcoming.
On June 16, 2020, the SBA also released a shorter, easier version of this form, called SBA Form 3508EZ. This form is a much shorter version of the application which can apply to the following borrowers:
- Self-employed workers with no employees.
- Business owners that did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or the hours of their employees, OR
- Business owners that experienced reductions in business activity as a result of health directives related to the pandemic, and did not reduce the salaries or wages of their employees by more than 25%.
This “EZ” version of the application is simple and light on guidance.
An even easier form to navigate is the SBA Form 3508S that the SBA released on October 8, 2020. This form is only for borrowers who received a PPP loan of $50,000 or less, and requires less paperwork and calculations than the previous two forms.
For in-depth information on filling out the full SBA Form 3508, see below.
How to Fill Out SBA Form 3508
When you first open up the PPP forgiveness application, the 11-page document can feel a little daunting. Let’s walk through how to actually fill out SBA Form 3508 when the time comes.
The official PPP forgiveness application document comes with four sections:
- The PPP Loan Forgiveness Calculation Form
- PPP Schedule A
- The PPP Schedule A Worksheet
- PPP Borrower Demographic Information Form (optional)
All borrowers will submit the PPP Loan Forgiveness Calculation Form and the PPP Schedule A to their lender for approval.
Filling Out the PPP Loan Forgiveness Calculation Form
Here are the steps you need to take to fill out the forgiveness calculation form.
Step 1: Provide basic business and loan information
In order to successfully fill out Form 3508, you’ll need the following information:
- Your business’s legal name, DBA or trade name, and your business EIN or personal Social Security Number
- Your business address, phone number, primary contact, and email address
- Your SBA PPP Loan Number
- The lender’s PPP Loan Number
- The total number of employees you had when you applied for your PPP loan
- The total number of employees you have when applying for PPP loan forgiveness
- Your PPP loan disbursement date
- EIDL advance amount and application number (if applicable)
Step 2: Confirm your payroll schedule
Next, you’ll need to provide your payroll schedule. How frequently do you pay your employees? Choose between weekly, biweekly (every other week), twice a monthly, monthly, or other.
Step 3: Determine your covered period
The “covered period” refers to the eight weeks after you receive your PPP loan when you are expected to use your loan to cover payroll and pay for other eligible expenses. In order to receive full PPP loan forgiveness, you must use your loan entirely during this period.
Your covered period, therefore, will likely be from the day you receive your loan to eight weeks, or 56 days, later.
There is an exception, which we’ll discuss in detail below, which is an “alternative payroll covered period.” You can utilize this option to better align your existing payroll schedule with the disbursement of your loan. For example, if you receive your loan on April 20, but your next pay day isn’t until April 25, you can elect to begin your covered period (specifically for your payroll, not for other expenses) on April 25 instead.
Input the dates of your covered period, as well as your alternative payroll covered period, if necessary.
Step 4: Confirm whether your loan amount was above $2 million
The federal government plans to audit PPP loans in excess of $2 million, to ensure that businesses that received these loans truly needed them due to the coronavirus pandemic. Check the box on the application if this applies to you.
Step 5: Perform forgiveness amount calculations
The rest of the form requires you to input calculations that will add up to your forgiveness amount. You will use the included PPP Schedule A form (as well as the Schedule A form worksheet) to make some of these calculations. The application has a breakdown of each requested amount, line by line.
- Line 1: Payroll costs (this should equal the amount from PPP Schedule A, Line 10)
- Line 2: Business mortgage interest payments
- Line 3: Business rent or lease payments
- Line 4: Business utility payments
- Line 5: Total salary/hourly wage reduction (this should equal the amount from PPP Schedule A, Line 3)
- Line 6: The sum of Lines 1-4, minus Line 5
- Line 7: FTE Reduction Quotient (this should equal the amount from PPP Schedule A, Line 13)
- Line 8: Your modified total (multiply Line 6 by Line 7)
- Line 9: Your PPP Loan amount
- Line 10: Payroll cost 75% requirement (divide Line 1 by 0.75)
- Line 11: Your forgiveness amount (the smallest of Lines 8, 9, and 10)
Step 6: Certify your forgiveness request
Filling Out the PPP Schedule A and Schedule A Worksheet
Although you’ll only submit the PPP Schedule A (along with the Calculation Form, above) to your lender, you can use the included Schedule A Worksheet to make your calculations. You can also use an equivalent report from your payroll system or payroll processor.
Step 1: Complete Schedule A Worksheet
Most of the Schedule A form will ask you to reference responses that can be calculated using the Schedule A Worksheet, or payroll reports that produce similar information. Assuming you will fill out your Schedule A Worksheet manually, start with this page to streamline the process.
The Schedule A Worksheet asks you to fill out:
- Table 1: A list of employees employed by the borrower at any point during the covered period (or alternative payroll covered period) whose principal place of residence is in the U.S., and received compensation from the borrower at an annualized rate of less than or equal to $100,000 for all pay periods in 2019, or were not employed by the borrower in 2019.
- Table 2: A list of employees similar to Table 1, except they received compensation at an annualized rate of more than $100,000 for any pay period in 2019.
- FTE Reduction Safe Harbor: This five-step process will show whether you are still eligible for full PPP loan forgiveness if you reduced your FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and then restored FTE employee levels by not later than June 30, 2020.
Step 2: Complete Schedule A
Using responses from the Schedule A Worksheet, information on non-cash compensation payroll costs during the covered period, information on compensation paid to owner-employees/self-employed individual/general partners, fill out the Schedule A form.
Note that If you did not reduce the number of employees or the average paid hours of your employees between January 1, 2020 and the end of your covered period, you can skip Lines 11 and 12 and simply enter “1.0” on Line 13.
Other Documents Needed When Submitting Form 3508
When it’s time to apply for PPP loan forgiveness, business owners must submit the PPP Loan Forgiveness Calculation Form, PPP Schedule A, and the following supporting documents:
To verify payroll expenses, borrowers will submit corroborating documents, including bank accounts or third-party payroll service reports, tax forms that overlap with the covered period, and payment receipts, canceled checks, or account statements showing the amount of employer contributions to employee health insurance and retirement plans.
Full-Time Equivalent Employees
To verify the number of full-time equivalent (FTE) employees, borrowers will submit documentation showing the average number of FTE employees on payroll per month employed by the borrower between February 15, 2019 and June 30, 2019; the average number of FTE employees on payroll per month employed by the borrower between January 1, 2020 and February 29, 2020; or in the case of a seasonal employer, the average number of FTE employees on payroll per month employed between February 15, 2019 and June 30, 2019; between January 1, 2020 and February 29, 2020; or any consecutive 12-week period between May 1, 2019 and September 15, 2019. See below for an explainer of what constitutes an FTE employee under “Calculating Full-Time Employees.”
Documents may include payroll tax filings (typically Form 941) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported or that will be reported to the relevant state. Documents submitted may cover periods longer than the specific time period.
Documents to Maintain (Not Submit) During Application Process
The SBA asks that you maintain the following documentation related to your loan for at least six years after it is forgiven or repaid in full:
- The PPP Schedule A Worksheet along with documentation supporting the listing of each employee in Tables 1 and 2; documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule; documentation supporting the “FTE Reduction Safe Harbor.”
- All records relating to the borrower’s PPP loan, including documentation submitted with its PPP loan application, documentation supporting the Borrower’s certifications as to the necessity of the loan request and its eligibility for a PPP loan, documentation necessary to support the borrower’s loan forgiveness application, and documentation demonstrating the borrower’s material compliance with PPP requirements.
What New Information Should Business Owners Know?
As mentioned above, not all the guidance surrounding PPP loan forgiveness was unveiled with the release of this form. There were, however, some important clarifications made, including:
Alternate Payroll Covered PeriodA major tenet of the PPP as it was introduced under the CARES Act is that borrowers must use their loan within an eight-week “covered period” in order for their loan to be forgiven entirely. This covered period is supposed to start the day that the loan is disbursed.
In practice, however, this was impractical: If borrowers intended to use the loan to cover their payroll, but their payroll schedule didn’t align perfectly with the day PPP loan proceeds hit their bank account, they may not have been able to use the loan as intended before the covered period expired.
Therefore, with this form, the federal government introduced the concept of an “alternative payroll covered period.”
The form cites this example:
“For example, if the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20.”
This alternative period only applies to payroll costs—all other forgivable expenses (rent, mortgage interest, utilities) must be made within the original covered period.
If payroll costs are incurred under any covered period (meaning an employee works and earns their pay that day), but not paid by the time that period ends, the business can still achieve full forgiveness if those costs are paid out by the next scheduled payday.
Definitions of Eligible Forgivable ExpensesAs mentioned above, other forgivable expenses for your PPP loan (though not for more than 25% of your proceeds) are mortgage interest, rent, and utilities.
The form includes more specific definitions of these expenses:
- Covered mortgage obligations: Payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020.
- Covered rent obligations: Business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020 (“business rent or lease payments”);
- Covered utility payments: Business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
Calculating Full-Time EmployeesThe SBA has now officially defined “full-time” equivalent employees as someone who works 40 hours a week.
Keep in mind: There are two ways that businesses may have forgiveness amounts reduced: either by reducing total full-time equivalent employees or reducing employees’ salary or wage rates beyond a 25% threshold. Therefore, knowing exactly what constitutes an FTE employee is crucial.
To calculate average full-time equivalency, the borrower enters the average number of hours paid per week per employee, divides by 40, and rounds to the nearest tenth. Each employee is capped at 1.0. The borrower would then divide the average FTE employees in the covered period by those in the reference period to determine a percentage to apply to the potential forgiveness amount.
There is also an option to use a simplified calculation. This option assigns 1.0 for employees who work 40 hours or more per week, and 0.5 for employees who work fewer than 40 hours. In the event you have reduced the average salary or hourly wage level of certain employees during the covered period as compared to the reference period, your forgiveness amount may be reduced by a dollar amount calculation based on a sum of amounts for each impacted employee. This reduction is triggered if the average salary or wages were reduced by 25% or more when comparing the two periods.
For each of the two potential reduction conditions there is the applicable Safe Harbor Rule, which reverses any reduction if FTEs or if salary or wages are restored by June 30, 2020.
What About the Length of the Covered Period?Regardless of whether you use an alternative payroll covered period to align with your pay schedule or not, for now, the length of that period is now 24 weeks, thanks to the PPP Flexibility Act.
The bottom line is that, while the PPP forgiveness process still has some details that need to be worked out, we are now gaining more clarity by the day. Review the application now, before it’s time to apply, so you’re familiar with everything you’ll need to do to receive full or partial forgiveness as soon as possible.