The Paycheck Protection Program (PPP) offers borrowers the opportunity to have their loans forgiven without incurring taxable discharge of debt income. For businesses that received PPP loans, owners and tax practitioners are now focusing the loan forgiveness process, including:
- the steps borrowers must take to ensure that their loans are forgiven; and
- the required loan forgiveness forms.
Taking Steps to Ensure Loan Is Forgiven
To receive loan forgiveness, a PPP borrower/employer generally must maintain its workforce. The IRS and Small Business Administration (SBA) have modified PPP loan forgiveness requirements since the onset of the PPP loan program. The modifications to workforce reduction rules are generally favorable to borrowers. A borrower that reduced its workforce may still be eligible for full loan forgiveness in certain situations.
Caution: The IRS and SBA continue to update and modify the PPP loan forgiveness rules. The borrower or practitioner should consult the most recent information before applying for PPP loan forgiveness.
Generally if a borrower reduces full-time equivalent employees (FTEs) during the Covered Period, the amount of loan forgiveness must be reduced. However, in the following situations, an FTE reduction does not reduce the borrower’s loan forgiveness amount:
- The borrower made a good-faith, written offer to rehire an individual who was an employee on February 15, 2020 and the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020.
- The borrower made a good-faith, written offer to restore any reduction in hours, at the same salary or wages, during the Covered Period or the Alternative Covered Period and the employee rejected the offer.
- The reduction is due to employees who, during the Covered Period or the Alternative Payroll Covered Period, (1) were fired for cause, (2) voluntarily resigned, or (3) voluntarily requested and received a reduction of hours.
In addition, the borrower is exempt from the reduction in loan forgiveness based on a reduction in FTE employees if the borrower, in good faith, is able to document that it was unable to operate between February 15, 2020, and the end of the covered period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020, 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, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
Finally, the borrower is exempt from the reduction in loan forgiveness based on a reduction in FTE employees if the borrower meets both of the following conditions:
(1) the borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and
(2) the borrower restored its FTE employee levels by December 31, 2020 to its FTE employee levels in the borrower’s pay period that included February 15, 2020.
Comment: Thus, some borrowers who reduced workforce, but are unable to meet the other exclusions, may still be eligible for loan forgiveness if, by the end of the year, they bring their FTE count back to the February 15, 2020 level.
Applying for Loan Forgiveness
Form 3508EZ is a simplified form for:
- self employed individuals, independent contractors, or sole proprietors with no employees;
- borrowers who did not reduce an employee’s wages by more than 25 percent during the covered period and with certain exceptions did not reduce the number of employees and average paid hours; or
- borrowers who did not reduce an employee’s wages by more than 25 percent during the covered period and were unable to operate during the covered period at the same level of business activity due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 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, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.
Form 3508 requests additional information. Form 3508 contains a Schedule A with calculations, and the Form 3508 instructions include a worksheet that borrowers use to determine whether they must reduce the amount of loan forgiveness. In lieu of the worksheet, borrowers may provide an equivalent report from the borrower’s payroll system or payroll processor.
Submitting the form
The borrower submits the form (and PPP Schedule A if not using Form 3508EZ) to the lender. Borrowers may also complete their application electronically through the lender.
Lenders may accept scanned copies of signed loan forgiveness applications and documents containing the information and certifications required by Form 3508, 3508EZ, or lender equivalent. Lenders may accept an E-consent or E-signature.
Lender Determines Loan Forgiveness Amount
The lender has 60 days from receipt of a complete application to issue a decision on loan forgiveness to the SBA and, if the lender determines that the borrower is entitled to forgiveness, request payment from the SBA. The SBA may review the loan or loan application. It will, subject to any review, remit the forgiveness amount to the lender, plus any interest accrued through the date of payment, within 90 days after the lender issues its decision to the SBA.
Robert Recchia, J.D., M.B.A., C.P.A.