Do Small Businesses Have to Pay Back PPP Loans?
The Paycheck Protection Program (PPP) is a business loan program established in 2020 by the U.S. Federal government as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The PPP provides U.S. businesses, self-employed workers, sole proprietors, certain non-profit organizations, and tribal businesses with funding for certain business expenses.
The goal of the PPP loan was to ensure businesses could continue paying workers and other essential expenses during the COVID-19 pandemic. Businesses that prove they spent the funds on allowable expenses could have the entire loan forgiven. However, changing rules regarding PPP loan forgiveness have created a lot of confusion, especially for small businesses and sole proprietors. Although we’ve provided some guidance on PPP loan forgiveness below, business owners are strongly encouraged to contact an experienced financial advisor for assistance.
PPP Loan Forgiveness Changes
Since it’s introduction, there have been several updates to the original PPP loan terms. Originally, in order to qualify for forgiveness, businesses had to use at least 75% of the loan on payroll expenses and 25% on other allowable expenses like rent, mortgage payment interest, and utilities. The PPP Flexibility Act (PPPFA) enacted in June, 2020 allows businesses to use 60% of PPP funds on payroll expenses and 40% on other allowable expenses. New rules allow recipients to take advantage of even more eligible expenses.
In 2021, businesses and sole proprietors that receive PPP funding can use the funds for:
- Payments made towards software, cloud computing, human resources, and accounting needs
- Costs incurred as a result of property damage in 2020 that wasn’t covered by insurance
- Payments to supplier(s) in accordance with a contract, purchase order, or order for goods that was in effect before funding was received, provided these payments were essential to the recipient’s operations at the time of the expenditure
- Purchases of personal protective equipment (PPE) and adaptive investments to help a loan recipient comply with federal health and safety guidelines or any equivalent State or local guidance regarding COVID-19
The new bill allows previous recipients of PPP funds to utilize the updated forgivable expenses as long as they have not already had their loan forgiven. In addition to expanded forgivable expenses, the new bill allows recipients to select their covered period between 8- and 24-weeks following receipt of funds.
Can My Loan Be Forgiven?
With so many changes, a lot of small business owners have questions about whether or not they can have their loan forgiven. This is of special concern right now, as many organizations attempt to regain their footing in a struggling economy. Fortunately, many small businesses will not have to pay back their PPP loan.
Small businesses that maintain levels of employment and compensation and spend their PPP loan on approved expenses should receive full forgiveness. While business owners have the freedom to use PPP funds for legitimate business expenses, spending this loan on anything outside of the allowable expenses will lead to part or all of the loan not being forgiven. Borrowers must pay back the full amount of the non-forgiven principal and any interest within five years.
In order to receive loan forgiveness, businesses must meet two conditions:
- They must use the loan to cover payroll costs, mortgage interest payments, rent, utilities, software, cloud computing, human resources and accounting needs within 8-24 weeks following receipt of funds (60% of the loan must be used to cover payroll costs)
- The business must maintain employee headcount and compensation levels
PPP Loan Assistance
Many small businesses have questions and concerns about obtaining PPP loans and ensuring full forgiveness. TMDL provides financial advice to small businesses and large organizations. We help business owners make sense of complicated PPP rules. Please contact us for information or to schedule a consultation.