Your Paycheck Protection Program (PPP) loan proceeds were likely spent some time ago, so now it’s time to focus on applying for loan forgiveness. Unfortunately, the SBA and Congress have continued to change the rules making the forgiveness process complex and difficult. Here’s how to qualify for maximum loan forgiveness under the latest rules.

5.2 million borrowers received $525 billion in forgivable loans through the PPP thus far. 96% of our members reported receiving funding and now want to make sure their loans are 100% forgiven under the constantly-changing rules.

In order to have your full loan amount forgiven, your practice must spend at least 60% of the loan proceeds on payroll costs and the remainder for other eligible costs, such as mortgage interest, rent, and utilities. While the amount of forgiveness may be lowered if your practice reduced its employee headcount or cut salaries and wages, this cutback won’t apply if prior to December 31, 2020 you re-hire staff to pre-COVID-19 levels, or you can show you were prevented from doing so due to compliance with governmental requirements stemming from COVID-19.

Below are five application tips to help maximize your PPP loan forgiveness.

1. Select the right application form – Your practice must apply for forgiveness through the same bank that provided your PPP loan and that bank will submit your application to the SBA for final approval. The SBA and Treasury Department have issued three different forgiveness application forms. Which one you should use depends on the size of your PPP loan and whether you reduced employee headcount or salaries and wages. If your CPA/financial advisor is assisting you with your application, you’ll need to inform her of any staffing and/or pay changes you made to ensure you complete the correct application form.

Earlier this month, the SBA unveiled a new simplified Form 3508S, which can be used to request forgiveness if your PPP loan amount was $50,000 or less. Unfortunately, proposed legislation allowing borrowers of $150,000 or less to use this form has not yet been approved. This simplified one-page form requires that you list the loan forgiveness amount, but not the calculations used to determine it, along with a certification that you complied with the PPP rules.

The slightly more complex 2-page SBA Form 3508EZ can be used if you satisfy one of the following requirements: (1) you operate as a self-employed individual, independent contractor, or sole proprietor with no employees, (2) you did not reduce the annual salary or hourly wages of any employee by more than 25%, and either (a) did not reduce the number of employees or their average paid hours or (b) you reduced staffing and/or hours due to required compliance with COVID-19 governmental mandates. This streamlined form includes one page showing your calculation of the loan forgiveness amount and a second certifying that you complied with the PPP rules.

If your practice isn’t eligible to use either of these simplified forms, you’ll have to use the standard 5-page loan forgiveness application (SBA Form 3508). According to the General Accounting Office (GAO) this loan forgiveness application could take up to 15 hours to complete. So, make sure you’ve gathered all the necessary documents and have an accurate accounting of how you spent your PPP loan proceeds before you begin the process.

2. Select the 24-week forgiveness period – Under the original SBA rules, your practice had only 8 weeks from the date of loan disbursement to spend your PPP funds. Fortunately, the PPP Flexibility Act allows you to triple the time period over which you have to spend these funds from 8 weeks to 24 weeks. Since this time period extension is not automatic, you should elect to use the 24-week period in most cases.

3. Jump over the hurdles to achieve full forgiveness – Over the past 6 months there’s been a series of SBA rule changes restricting the expenses that qualify for loan forgiveness. Under the initial rules, the maximum wages eligible for forgiveness over the original 8-week payment period was capped at $15,385 (8 weeks/52 weeks x $100,000 maximum compensation) which applied to all employees (doctors and staff). The PPP Flexibility Act increased the payment period from 8 weeks to 24 weeks and most assumed the cap on wages eligible for forgiveness would triple to $46,155 as well. While that’s the case for all non-owner employees (associates and staff), the new limit for owner-employee wages eligible for forgiveness was increased from $15,385 to only $20,833 by the SBA.

Moreover, another revision stipulated group health insurance premiums paid on behalf of self-employed (Schedule C) doctors, those operating in a partnership (Form 1065), or as an S corporation (Form 1120S) are not eligible to be included in the loan forgiveness amount.

Finally, in late August, the SBA reduced the amount of rent eligible for forgiveness for the 80% of doctors who own their office building and rent it to their practice. Under this rule, if you own any interest in both the practice and the office building, you’re considered a related party, and the rent eligible for forgiveness is limited to only the building mortgage interest paid during the 24-week forgiveness period.

We recommend working around these new rules to achieve full (100%) loan forgiveness by reallocating the disallowed amounts (owner compensation, rent, and health insurance) to staff payroll costs which remain fully qualifying.

4. File on time with your lender – Your 24-week covered payment period begins on the date the PPP loan was funded. You have 10 months following the completion of the 24-week period to submit your loan forgiveness application to your lender. For example, if your PPP loan was funded on May 1, 2020, your 24-week period would expire on October 16, 2020. You would have until August 16, 2021 to file your PPP loan forgiveness application.

But don’t delay filing too long, since you’ll need to know how much of your loan is forgiven in order to file an accurate 2020 practice tax return. PPP loan proceeds are tax-free to the extent your loan is forgiven; however, current IRS rules don’t allow a tax deduction for expenses paid with the forgiven proceeds. To the extent the PPP loan is not forgiven, you must repay it, but the related expenses paid are tax-deductible.

Incorporated practices have until March 15, 2021 to file their 2020 return, or September 15, 2021 if they file an extension. Your bank has 60 days to review your forgiveness application before sending it to the SBA. Furthermore, the SBA can take up to an additional 90 days after receiving your application to render a decision. So, make sure you file your PPP loan forgiveness application on or before March 15, 2021 to ensure you know the tax consequences of your PPP loan before filing your 2020 corporate tax return.

5. Provide the required documentation – In addition to filing your PPP loan forgiveness application, you’ll also need to submit all backup documentation requested by your bank. Some CPAs and payroll processing firms offer reports customized to provide the information needed for the forgiveness application, so take advantage of this if it’s available.

If you don’t use a third-party payroll provider, you’ll need to submit federal (Form 941) and state payroll tax returns for the payroll periods for which you are requesting forgiveness, as well as bank statements to prove you paid the payroll expenses.

You’ll also need to provide proof of obligation and payment for all non-payroll expenses considered for forgiveness, including lease agreements, utility statements, interest paid, etc. If you paid rent to a related party (yourself), you can only request forgiveness for the amount of interest paid on the bank mortgage you pay, so you’ll need to provide the mortgage statements and canceled checks paid to the bank, as well as a copy of the Lease Agreement in place on February 15, 2020.

Stay Tuned for Further Changes

In our prior article, New SBA Rules Curb PPP Loan Forgiveness For Owner-Related Payments, we indicated Congress may provide additional PPP funding through a second COVID-19 financial stimulus package. Unfortunately, election year politics has stymied those efforts thus far, and it’s unclear if, or when, additional financial stimulus will be approved. If additional PPP funding is approved, or further changes are made in the forgiveness process, we’ll keep you up to date.