Important PPP update for 2021
On December 22, 2020, Congress passed a bill renewing funding under the CARES Act, including an additional $284 billion earmarked for America’s struggling small businesses. The rules and application process for PPP loans and forgiveness have been modified, with more businesses eligible for PPP loans, more expenses forgivable, and a simplified application process.
In this 2-minute read:
- How much of the loan can be forgiven?
- What can cause a PPP loan’s forgiveness amount to be reduced?
- Is PPP loan forgiveness automatic or do I need to do something?
- For 2021, PPP loans will cover additional expenses, including operations expenditures, property damage costs, supplier costs, and worker protection expenditures
As businesses are receiving their PPP loans to help them through the COVID-19 crisis, it’s important to know how to allocate and document the funds you get in order to have your loan forgiven.
The Paycheck Protection Program’s primary purpose is to help businesses maintain their employee wages and payroll expenses, so the rules for loan forgiveness favor its use for maintaining your payroll.
PPP FORGIVENESS UPDATE AS OF JUNE 17, 2020
The Treasury released a new IFR and an “easy” version of the PPP loan forgiveness application on June 17, 2020. Please read the full details here.
See all the new PPP application and forgiveness forms here.
Here’s how borrowers decide which forgiveness application to use. You may use Form 3508EZ if:
- You are self-employed and have no employees; OR
- You did not reduce the salaries or wages of employees by more than 25%, and did not reduce the number or hours of employees; OR
- You experienced reductions in business activity as a result of health directives related to COVID-19, and did not reduce the salaries or wages of employees by more than 25%.
If you don’t fit into any of the above conditions, you will need to complete and submit the full PPP loan forgiveness application.
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How much of my PPP loan can be forgiven?
You have the potential to have your entire PPP loan forgiven, which is a huge motivator for small businesses to use it properly. Your loan forgiveness depends on what you use the funds for. If you use your PPP loan for anything other than payroll costs and approved business expenses like mortgage payments, rent, and utilities over the 8 weeks (or up to 24 weeks; see “important update” above) after you receive your funds, you will have to pay at least part of it back. For 2021, PPP loans will cover additional expenses, including operations expenditures, property damage costs, supplier costs, and worker protection expenditures.
Initially, no more than 25% of the forgiven amount could be used to cover non-payroll costs if you wanted your PPP loan completely forgiven. That has been changed to 40% as of June 5, 2020. (60% of PPP funds must be spent on payroll costs to achieve full loan forgiveness.)
What can cause a reduction in my PPP loan forgiveness amount?
The following items can cause you to have your loan forgiveness amount reduced:
- Decreasing your full-time employee headcount after February 15, 2020 (see below for important conditions/exceptions to this rule for 2021)
- Decreasing employee salaries and wages by more than 25% if they made under $100,000 in 2019
- Spending less than 60% of your PPP funds on approved payroll costs
If you have done any of these things, your loan may not be fully forgiven.
Note for 2021: there are exceptions to the “maintain payroll and headcount” rule
There are new exceptions for 2021 to the requirement that you maintain employee and compensation levels in order to achieve full loan forgiveness, including:
A borrower received a PPP loan of $50,000 or less
If you received a PPP loan that was $50,000 or less, you are exempt from having to maintain your employee and compensation levels in order to receive loan forgiveness. Your loan must still be spent on approved costs and maintain that 60% will go towards payroll.
You’ll also have an alternative loan forgiveness form than businesses with larger loan amounts.
An employee quit, retired, or was fired (with just cause)
If you couldn’t maintain employee levels due to someone quitting or being fired with just cause, then you can still qualify for your full loan forgiveness. But, it’s very important that you document each of these instances so that you can verify this when you apply for loan forgiveness.
You’ll need documentation to explain why your employee was fired or other supporting documents to verify an employee’s termination.
Do I still need to restore payroll or headcount to previous levels in order to receive forgiveness if I get my PPP loan after 12/27/20?
No. Businesses and eligible organizations and individuals that receive PPP loans after December 27th, 2020 are not required to “rehire” any employees in order to receive forgiveness. You will, however, need to maintain current payroll levels during the forgiveness period. (Exceptions to this would include employees who resign or are terminated with cause).
If you’ve kept those requirements for the 8 (or 24) weeks after you received your PPP loan, at that point you may apply for loan forgiveness through the lender that serviced your loan.
In order to request any amount of forgiveness on your loan, you will need to verify that your loan was used for the required expenses, which means you’ll need documented proof.
Have more questions? Here are some other helpful articles about PPP loan forgiveness:
- What is the covered period for PPP loan forgiveness? When does it start?
- What do I need to do to get my Paycheck Protection Program loan forgiven?
- Do I have to pay back my PPP loan? Here’s how to get your loan forgiven
- What happens if my PPP loan isn’t forgiven? Repayment and next steps
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