If you are the owner of a small business that obtained a Paycheck Protection Program (PPP) loan, you are most likely aware that the loan can be partially or totally forgiven if you used the loan proceeds for the required purposes. Loan forgiveness is not automatic and must be applied for. The borrower must submit a request to the lender or, if different, the lender that is servicing the loan, which then must make a decision upon the amount of forgiveness within 60 days.
The request must include documents to verify the number of full-time-equivalent (FTE) employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. The borrower must certify that the documents are true and that the borrower used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments.
The whole process of obtaining a PPP loan and applying for forgiveness has been complicated from the start, with guidance from the Small Business Administration (SBA) and the IRS coming in dribs and drabs; for a while, it seemed that the rules were modified every week. The original forgiveness application provided by the SBA was horrendously complicated, and one almost needed an accounting degree to figure it out. It required the applicant to complete numerous complicated side computations and did not provide any corresponding worksheets.
To clarify the process, Congress stepped in and passed the Paycheck Protection Program Flexibility Act. As part of that legislation, the SBA was required to simplify the forgiveness application. In response, the SBA did somewhat simplify SBA Form 3508, the original forgiveness application, and came up with an easier version: SBA Form 3508EZ.
The 3508EZ is for use by:
Self-employed borrowers with no employees
Generally, borrowers with employees that, during the covered period,
o Did not reduce the annual salary or hourly wages of any employee by more than 25%;
o Did not reduce the number of employees or the average paid hours of employees; and
o Was unable to operate during the covered period at the same level of business activity as it did before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration.
During the week of October 5th, the SBA released yet another simplified application—SBA Form 3508S—along with instructions for its use. This form can only be used if the total PPP loan amount that the borrower received from their lender was $50,000 or less. However, a borrower that, together with its affiliates, received PPP loans totaling $2 million or more cannot use Form 3508S and instead must use either Form 3508 and its instructions or 3508EZ and its instructions (or their lender’s equivalent form).
A borrower that qualifies for and uses SBA Form 3508S (or their lender’s equivalent form) is exempt from any reductions in the borrower’s loan forgiveness amount based on reductions in FTE employees or in employee salaries or wages from the CARES Act that would otherwise apply.
While SBA Form 3508S does not require borrowers to show the calculations they used to determine their loan forgiveness amount, the SBA may request information and documents to review those calculations as part of its loan-review process. Accordingly, the borrower must retain, for 6 years from the date when the loan is forgiven or repaid, all documentation (1) submitted with the loan application, (2) to prove the borrower’s certification of eligibility for the PPP loan and material compliance with the PPP’s requirements, and (3) to back up the loan-forgiveness application.
Keep in mind that the application for forgiveness, which can be submitted electronically, must be submitted within 10 months after the end of the loan-covered period to the borrower’s lender or the lender servicing the borrower’s loan.