Many of the thousands of small businesses that received a Paycheck Protection Program (PPP) loan up to $2 million through the Small Business Administration (SBA) are concerned with applying for forgiveness so the loan and interest accrued can be waived.

While the SBA is still outlining guidelines for business owners in advance of the anticipated Aug. 10 launch of the forgiveness application platform, it recently released a helpful FAQ to answer and clarify some questions.

The basics and changes to PPP loans

The PPP funds must be used within an eight- or 24-week period for expenses such as rent, utilities, interest on secured loans and, most of all, payroll, which must account for 60% of the use of the funds.

PPP loan proceeds used for payments of interest on unsecured loans, such as lines of credit or credit cards, are not included in the forgiveness guidelines. However, loans for equipment, mortgages and other real property are eligible for the interest to be forgiven.

The SBA is allowing payroll periods be included that straddled the PPP forgiveness window, Lane Rhodes, financial adviser with Pinnacle Financial Partners, said during a webinar on Aug. 5.

The covered period starts the day the funds were dispersed to a business.

“Initially, we had an eight-week window period,” Rhodes said. “If you didn’t have your funds used during that eight-week window, you can now use them over a 24-week window.”

Rhodes said this helps businesses that were not running at full capacity.

Businesses who choose to use the funds over a 24-week period simply need to note it on the forgiveness application; they do not need to visit a bank or discuss the change with their financial adviser.

For each employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000. This does not mean an employer cannot pay an employee more than $100,000; it simply means anything over that amount will not be forgiven by the SBA.

The new FAQ document also provides guidance for business owners who own multiple businesses. A business owner can only receive the maximum for PPP forgiveness for one entity.

“You can’t get the forgiveness for each business. You may have received the max for each business, but you can’t hit the owner’s salary for each one of those individual businesses that you own.”

For individuals who have multiple businesses with PPP loans, they are capped at $20,833 in owner compensation replacement across all loans obtained by all businesses.

The forgiveness guidelines also include retirement and health benefits paid by the employer, but not by the employee. For instance, if an employer contributes to an employee’s retirement fund, that amount can be included in the PPP forgiveness application. However, if an employee contributes individually, that amount is excluded.

PPP small business loans more likely to be forgiven under new guidelines

It also addresses what “transportation” fees are — a utility fee that is assessed by the government. It’s different from paying gas or mileage expense, but still remains a bit unclear.

“It’s not the clarification we were hoping for there,” Rhodes said.

The SBA extended the period during which the PPP loans must be repaid. Initially, it was two years, and now it has been extended to five years.

If a business chooses the five-year option, the owner must contact the bank that originated the loan to obtain a note modification.

“Once you apply for forgiveness, and if there’s a portion you have to pay back, you need to get with your financial adviser and let them know (that you want to extend to five years), and we will go through the process of doing a note modification to pay it back over the five-year window instead of a two-year window,” Rhodes said.

Forgiveness application details and process

 There are two different forgiveness applications: EZ and full. The EZ application is much shorter and easier to complete and is helpful for sole proprietors or contractors who had no additional employees at the time of the application.

The full application is longer, more complicated and includes more forms and schedules to complete. Businesses will use one or the other depending on how the business has been affected by the pandemic and the decisions that have been made around staffing levels and wages.

There’s a possibility that a third application will be released, which would be a “super EZ” application for loans under a certain amount.

If a business receives full forgiveness for the PPP loan, it receives forgiveness for the principal and the interest. Because some details have not been ironed out, Pinnacle recommends that customers hold off on making a payment until their forgiveness application has been reviewed and processed.

“There’s really no need to pay for your PPP loan right now until you know you didn’t use the money appropriately. If you feel like you will receive full forgiveness, there’s no reason to make a payment now,” Rhodes said.

Once a business is ready to apply for PPP forgiveness, the first step is to compile all necessary documentation. This will vary by the type of business it is — LLC, sole proprietorship, nonprofit, etc.

Rhodes said third-party payroll records are best, if available, to show how the funds were used. The SBA will also accept canceled checks and bank account statements.

With contractors or partnerships, a 2019 tax return with a K-1 or Schedule C may be required.

For lease agreements and utilities, both had to have been in effect by Feb. 15, 2020. Businesses will need to supply the lease agreement, utility statement for February 2020 and canceled checks or ACH debit documentation to show the lease and utilities as well as the payments.

Rhodes reiterated that, while the funding period for PPP loans was “fast and furious,” the forgiveness process will be much longer.

Once a business submits its forgiveness application to a bank, the bank has a 60-day window to review it. Once the SBA receives the application, it has an additional 90 days to review it.

“We’re really advising people to wait until maybe the end of August to see how the forgiveness process goes,” Rhodes said. “If you can wait, there’s really no rush.”

To make the process easier, financial institutions such as Pinnacle have online calculators to help with the application process. Business owners should check with the bank that originated the PPP loan for helpful resources and assistance.

The last day to apply for forgiveness is 10 months after the last day of the covered period, but no later than Oct. 31, 2021.

You can access the FAQ document here.