How Does Loan Forgiveness Work

How Does Loan Forgiveness Work

The U.S. Small Business Administration issued a one-page application form aimed at simplifying the application process for forgiveness of Paycheck Protection Program loans, together with revised and updated forms to comply with the most recent stimulus legislation. 

The COVID-19 aid package Congress approved last month renewed the PPP with $284 billion in financing for small-scale businesses looking for forgiven loans to help cope with the economic fallout from the coronavirus pandemic. The legislation required that the SBA provide simplified forms within the first 24 hours after the bill’s passage into law. This is to simplify the process of applying for forgiveness. It also included conditions to encourage community banks to make more loans, especially to minority-owned businesses who had a difficult time getting loans in the past.

How Does Loan Forgiveness Work

“The Small Business Administration met the requirements to release the one page form for loan forgiveness under the PPP within 24 days of the date of the enactment of 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 published new forms.”

Forgiveness terms for the initial draw of PPP loans

How Does Loan Forgiveness Work – For eligible borrowers, First Draw PPP loans can be suitable to forgive loans. This is when the loan payment is made within an 8 to 24 week period.

  • It’s the same for pay and benefits for employees.
  • The loan proceeds are used on payroll expenses and other expenses that are eligible and
  • At least 60% of profits go towards the cost of payroll

Second Draw PPP Loan forgiveness terms

Second Draw PPP loans granted to eligible borrowers qualify for full loan forgiveness if during the 8to 24-week covered period following loan payment:

  • The First Draw PPP loan requires that the compensation and employee levels be maintained in the exactly the same manner.
  • The loan proceeds are spent on payroll expenses and other expenses that are eligible and
  • A minimum of 60% of proceeds are spent on payroll costs
  • How do I apply for loan forgiveness and the time to apply

A borrower can apply for forgiveness only after the loan’s proceeds for which the borrower wants forgiveness have been used. The borrower can apply for forgiveness at any time up to the loan’s maturity date. If borrowers do not apply for forgiveness within 10 months after the end of the period covered, then PPP loan payments are not deferred any longer, and borrowers will begin making loan payments to their PPP lender.

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