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PPP forgiveness and repayment: What businesses need to know now


Created in March 2020 by the CARES Act, the Paycheck Protection Program (PPP) enabled many businesses to receive loans during a difficult period. Now, a critical deadline is approaching for those who benefited from the assistance. If the borrowers do not act before the deadline for their loans expires, the loans will become standard loans, and the borrowers could find themselves responsible for repaying the full amount plus 1% interest before the maturity date. Some borrowers may also face audits on the horizon.

PPP basics

Generally, PPP loans are 100% forgivable given the borrower allocates the funds on a 60/40 basis between payroll and eligible nonpayroll costs. Nonpayroll costs originally solely included mortgage interest, rent, utilities, and interest on any other existing debt. However, the Consolidated Appropriations Act (CAA), which was enacted in late 2020, significantly expanded the eligible nonpayroll costs to include other costs the funds can be applied to, such as certain operating expenses and worker protection expenses.

The CAA also withdrew the original requirement that mandated borrowers deduct the amount of any Small Business Administration (SBA) Economic Injury Disaster Loan (EIDL) advance from the forgiveness amount they received from the PPP. A borrower doesn’t need to include any forgiven amounts in its gross income and can deduct otherwise deductible expenses paid for with forgiven PPP proceeds.

Forgiveness filings

Those who borrowed PPP loans can apply for forgiveness at any time before their loans’ maturity date, and loans made before June 5, 2020, generally have a two-year maturity while loans made on or after that date have a five-year maturity. However, if a borrower does not apply for forgiveness within 10 months after the last day of the “covered period” (the eight-to-24 weeks following disbursement during which the funds must be used), the PPP loan payments will no longer be deferred, and payments must begin to be made to the lender.

This 10-month period is ending for many “first-draw” borrowers. If a business applied early in the program, it might have a covered period that ended on October 30, 2020, meaning it would need to apply for forgiveness by August 30, 2021, to avoid loan repayment responsibilities.

To apply for forgiveness, borrowers file forms with their lenders, who will then submit the forms to the SBA. The type of form that must be filed is dependent on both the amount of the loan and whether a business is a sole proprietor, independent contractor, or self-employed individual with no employees.

The borrower will be notified by the lender if the SBA does not forgive a loan or only partially forgives it. Interest accrues during the time from disbursement of the loan proceeds to SBA remittance to the lender of the forgiven amount, and the borrower must pay any interest that has accrued on any amount not forgiven.

To maximize their employee retention tax credits, some businesses may have delayed filing their forgiveness applications. The reason for this stems from the fact that qualified wages paid after March 12, 2020, through December 31, 2021—that are considered for purposes of calculating the credit amount—cannot be included when calculating eligible payroll costs for PPP loan forgiveness. These businesses should pay careful attention to the date their 10-month period expires as to avoid triggering loan repayment.

Audit action

There is the possibility that borrowers will be audited by the SBA’s Office of Inspector General with support from the IRS and other federal agencies. The SBA automatically audits every loan in excess of $2 million after the borrower applies for forgiveness, but it’s possible that smaller loans could be subject to scrutiny too.

Despite the audit safe harbor for loans of $2 million or less established by the SBA, this carveout solely applies to the examination of the borrower’s good faith certification on the loan application that states “the current economic uncertainty makes the loan request necessary to support the ongoing operations” of the business. Those borrowers will also no longer need to complete a burdensome, time-consuming Loan Necessity Questionnaire, as the SBA recently notified lenders that this loan necessity requirement for loans more than $2 million has been eliminated.

However, all borrowers still have the potential to be audited on matters like eligibility (like the number of employees), calculation of the loan amount, how the funds were used, and entitlement to forgiveness. Borrowers that receive poor audit findings may be required to repay their loans and, depending on what kinds of missteps were recovered, could face civil penalties and persecution under the federal False Claims Act.

Those businesses that received loans of more than $2 million should not wait to prepare for their audits. By beginning to work with their CPAs now, they can gather and organize the documents and information auditors are likely to request, including:
• Financial statements,
• Income and employment tax returns,
• Payroll records for all pay periods within the applicable covered period,
• Calculation of full-time equivalent employees, and
• Bank and other records related to how the funds were used (for example, canceled checks, utility bills, leases, and mortgage statements).

It is important to note that some of this documentation will overlap with what is required when filing the application for loan forgiveness.

Act now

Businesses always have their plates full, so it isn’t surprising that many may not have been focused on the various dates that matter to their PPP loans. Now is the time to ensure that you file your forgiveness application promptly with the necessary documentation already gathered to survive any SBA audit that may follow. Contact us for assistance.

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