Paycheck Protection Loan Forgiveness

Many churches applied for and received a Paycheck Protection Program (“PPP”) Loan through the Small Business Administration to assist in retaining employees and paying other expenses during the COVID-19 pandemic.

It is important to follow the appropriate steps in order to ensure that the loan is forgiven to avoid paying interest and to ensure the principal amount of the loan becomes, in essence, a grant to the church.

In order to obtain forgiveness, a church must complete a forgiveness application through the lending institution that provided the loan. Some banks are requiring the use of an online forgiveness application portal. The application must be submitted within ten months of the end of the covered period of the loan. A church should check with its lender to find out the exact process that will be required to obtain forgiveness.

For loans that do not exceed certain threshold amounts, borrowers may obtain forgiveness through a streamlined application process that merely requires certain affirmations of compliance, with requires less burdensome documentation requirements.

The amount of loan proceeds eligible for forgiveness may be reduced for three different reasons:

First, the amount eligible for forgiveness will be reduced if the number of full-time equivalent employees goes down. This is measured by comparing the number of eligible employees between the date you receive your loan funds, and a specific past reference period used for comparison.  

Second, the amount eligible for forgiveness will be reduced if any employee’s average pay is reduced by more than the threshold percentage between the date the church receives its loan funds and a specific past reference period used for comparison.  

Third, the amount eligible for forgiveness will be reduced if less than threshold amounts of the loan funds are used for qualifying expenses.

The church will be required to submit certain documents to show compliance with the forgiveness requirements. The exact documents required will vary depending on the amount of the loan and the specific requirements of each lending institution.  The church should also retain any documents, whether required to be submitted or not, that may be needed later to prove its qualification for forgiveness. 

Any amount not forgiven will remain a loan, with a low-interest rate. However, the church should be aware that the interest will have already begun to accrue before the date that repayments become due.

While the steps outlined above provide a general roadmap for obtaining PPP loan forgiveness, the practical reality is that the church’s lending institution is the source for the exact steps required to obtain forgiveness through that particular lender. Requirements vary greatly from lender to lender. The church should consult with an accounting professional if assistance is needing in obtaining forgiveness for its PPP loan.

Further, once loan forgiveness is obtained, the church should make the appropriate adjustments to its financial reports to show that the loan is no longer a liability on the balance sheet and that the cash received from the loan is shown as revenue.

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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.

This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.

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