PPP Loan Forgiveness: Rules & Guidelines

The Small Business Administration’s Paycheck Protection Program (PPP) brought much-needed relief to small business owners affected by the COVID-19 pandemic. Some business owners qualified for a single loan (First Draw), while many others also qualified for an additional loan (Second Draw). Billions of dollars were distributed before the program officially closed on May 31, 2021.

Now that funds have been depleted, borrowers need to take action to determine if their loans are eligible for forgiveness, how to apply for forgiveness, and what to do if all or part of the loan needs to be repaid. In this post, we’re going to address PPP loan forgiveness, including what expenses qualify, what to do if you don’t qualify, and how to cruise through the application process.

The Six Rules To Follow For PPP Loan Forgiveness

The requirements for having your PPP loan forgiven are surprisingly lenient. It is, however, vital that you understand and follow these five requirements to qualify for loan forgiveness.

1. You Must Use Funds For A Qualifying Purpose

If you receive a PPP loan, you are limited in how you can use your funds. We’ll go into the specifics in the next section. For now, just understand that this loan is primarily meant to help you pay and retain your employees if your business has been affected by the coronavirus pandemic.

2. Funds Must Be Spent Within 24 Weeks

Your loan is calculated to provide you with eight weeks of capital to pay employees and cover other qualified costs. To be forgiven, you must meet these requirements:

• Loan proceeds must be spent within 24 weeks of disbursement.
• If all loan proceeds aren’t spent within 24 weeks, any portion of the loan that meets all other requirements can still be forgiven.
• Any portion of funds not spent within the 24-week period will not be forgiven.
• Borrowers that received funding before the passage of the Paycheck Protection Flexibility Act on June 5, 2020, can stick with the original eight-week period or extend the covered period an additional 16 weeks.

3. Incurred Costs Can Be Forgiven, Too

In addition to costs that have already been paid, expenses incurred during the 24-week period are also eligible for loan forgiveness.

For example, let’s say that you’ll pay your employees on March 13 for work completed March 1 through March 7. Your 24-week deadline falls on March 7. Even though this payday will fall after the 24-week period, payroll costs were incurred and therefore are eligible for forgiveness.

4. You Must Maintain Your Full-Time Staff

Because this loan should be used to help you pay your staff, it makes sense that one requirement for PPP forgiveness is that you must maintain the headcount of your full-time employees. If you had five employees when applying for your loan, you should continue to have at least five full-time employees on your payroll.

If you had to lay off employees in between applying for your PPP loan and receiving the funds, here’s what you need to know about loan forgiveness:

• The 24-week period can be used to rehire to bring your staff to pre-pandemic levels.
• Failure to maintain staff will result in repaying all or a portion of your loan.

However, there are a few exceptions to this staffing rule:

• Employees that turned down a good faith offer to return to their jobs with the same rate of pay and hours can be excluded from forgiveness calculations.
• Businesses that could not find qualified employees or have not restored operations due to coronavirus-related restrictions may also qualify for full or partial forgiveness.

5. You Must Maintain Your Payroll

Your payroll costs must remain the same as they were when you applied for funding. If you decrease salaries or wages, you may be required to pay back a portion of your loan. To be eligible for loan forgiveness, you can’t reduce the salary of any full-time employee earning less than $100,000/year by more than 25%.

If you had to cut salaries or wages due to financial challenges caused by the coronavirus, you have 24 weeks to restore these salaries and wages.

6. Follow The 60/40 Rule

We’ve already established that PPP funds can be used to cover payroll expenses and other qualifying costs. However, to achieve full forgiveness, you must follow the 60/40 rule. This means:

• At least 60% of PPP funds must be spent on qualifying payroll expenses
• The remaining 40% (or less) of funds can be spent on other qualifying expenses

If you fail to follow the 60/40 rule, you will be required to repay all or part of your PPP loan.