How Do Forgivable Loans Work

The U.S. Small Business Administration released a one-page form designed to make it easier for applicants to complete the application process to forgive Paycheck Protection Program loans, together with updated and revised forms that comply with the most recent stimulus legislation. 

The COVID-19 relief plan that Congress adopted last month revived the PPP with $284 billion in financing for small-scale businesses looking for forgiveness loans to help them to deal with the effects of economic collapse from the coronavirus outbreak. The legislation required that the SBA issue simplified forms within the first 24 hours of the signing into law. This was to simplify the process of applying for forgiveness. The legislation also contained conditions that would encourage community banks to lend more, especially to minority-owned businesses who were unable to obtain loans last year.

How Do Forgivable Loans Work

“The Small Business Administration met the requirement to issue the one page form for loan forgiveness under the PPP by 24 days after the date of enactment the Consolidated Appropriations Act, 2021,” wrote Ed Zollars, a partner with Thomas, Zollars & Lynch CPAs on his Current Federal Tax Developments blog for Kaplan Financial Education. “The agency also released new forms that were updated.”

First Draw PPP Terms of loan forgiveness

How Do Forgivable Loans Work – For those who qualify First Draw PPP loans can be eligible to forgive loans. This is when the loan is disbursed within an 8 to 24-week timeframe.

  • It’s the same for pay and benefits for employees.
  • The loan proceeds are used on payroll and other expenses that are eligible and
  • A minimum of 60% of the funds go to the cost of payroll

Second Draw PPP Terms of Loan Forgiveness

Second Draw PPP loans given to borrowers who are eligible can be granted total loan forgiveness if they do so during the 8– to 24-week time period after loan disbursement:

  • Employee and compensation levels are kept in the same way as is required for the First Draw PPP loan
  • The loan funds can be used to pay payroll costs or other expenses that are eligible.
  • At least 60% of the profits are spent on payroll costs
  • What is the best time to apply for loan forgiveness

When all of the loan proceeds have been used, a borrower can apply for forgiveness. The borrower can apply for forgiveness at any time up to the date at which the loan matures. If they do not file for forgiveness within 10 months after the end of the period covered the PPP loan payments can no longer deferred, and borrowers will begin making payment to their PPP lender.

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