Your Guide To PPP Forgiveness Rules, Qualified Expenses, & How To Apply For PPP Loan Forgiveness
The Paycheck Protection Program (PPP) is bringing much-needed relief to small business owners affected by the coronavirus. Not only does this loan program provide funding to help cover payroll and other expenses, but if used for qualifying purposes, your loan will be forgiven.
Yes, you read that correctly. A PPP loan can help your business right now without throwing you into debt further down the road. Are you thinking to yourself, “What’s the catch?” There is a catch, but fortunately, it’s a small one. You must spend your PPP loan funds on qualified expenses. That’s it.
If it sounds simple, that’s because it is. In this post, we’re going to help you understand how you can qualify for PPP loan forgiveness. We’ll explore qualified expenses, what you need to track, and even what happens if you spend your funds on non-qualified expenses. Whether your funds have already hit your bank account or you’ve just started the application process, read on to learn more about PPP loan forgiveness and what expenses can be covered using these funds.
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Requirements 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 requirements. Otherwise, you will be required to pay back all or part of your loan.
Loan Proceeds Must Be Used For A Qualifying Purpose
If you receive a PPP loan, you are limited in how you use your funds. We’ll go into the specifics in the next section. For now, just understand that this loan is meant to help you pay and retain your employees if your business has been affected by the coronavirus.
Funds Must Be Spent Within 8 Weeks
Your loan is calculated to provide you with eight weeks of capital to pay employees and cover other qualified costs. To be forgiven, loan proceeds must be spent within eight weeks of receiving the loan. What if you can’t spend all of your funds during this period? You can still claim forgiveness on any portion that meets all other requirements. However, any funds that aren’t spent during the eight week period will not be forgiven.
Incurred Costs Can Be Included, Too
In addition to costs that have already been paid, costs that are incurred during the eight-week period are also eligible for loan forgiveness.
For example, let’s say that your employees will be paid on May 29 for work completed May 18 through May 22. Your eight-week deadline is May 25. Even though this payday will fall after the eight-week period, payroll costs were incurred and therefore are eligible for forgiveness.
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 loan forgiveness is that you must maintain the headcount of your full-time employees. If you had five employees at the time of applying for your loan, you should continue to have at least five full-time employees on your payroll.
Now, what happens if you had to lay off employees in between applying for your loan and receiving the funds? This loan gives you a short amount of time to rehire. You will have until June 30, 2020, to restore staff as a result of any changes made from February 15, 2020, to April 26, 2020. You will be required to pay back all or some of your loan if you fail to maintain your staff based on these guidelines.
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/yearly by more than 25%.
If you had to cut salaries or wages as a result of financial challenges caused by the coronavirus from February 15, 2020, to April 26, 2020, you have until June 30, 2020, to restore these salaries and wages.
Qualified Expenses For PPP Loans
As mentioned in the previous section, PPP loans can only be used for certain expenses. If you use your loan for anything other than these expenses, you will not qualify for full loan forgiveness. So how exactly can you use your funds?
Your PPP loan funds can be used to cover payroll expenses so that you can keep your business staffed. Various payroll costs are qualified expenses, including:
- Salaries, Wages, Tips & Commissions: Capped at $100,000/annually per employee.
- State and local taxes on compensation
- Employee Benefits: This includes costs associated with retirement plans, group health insurance, separation or dismissal, vacation time, sick and medical leave, and parental and family leave.
If you’re a sole proprietor or independent contractor, self-employment wages, salaries, and commissions not exceeding $100,000/annually also qualify as payroll costs.
These costs will need to be proven by submitting payroll documentation. For small businesses, acceptable documentation includes:
- Tax Forms: 941 Quarterly Tax Filings and 944 Annual Tax Filings
- Payroll Registers: Should be from the last 12 months
- Business Bank Statements: Should be from the last 12 months
If you’re an independent contractor or sole proprietor, documentation proving payroll costs include:
- Tax Forms: 1040 Schedule C and 1099s
- Income and expense reports
Other documentation may be acceptable — ask your chosen lender for additional details.
Your PPP loan can be used to pay mortgage interest. Mortgage interest obligations must have been incurred before February 15, 2020, to be a qualified expense.
Make sure to have documentation showing the mortgage interest that was paid. Acceptable documentation includes receipts, bank statements, account statements, and canceled checks.
If you rent your commercial space, you can use a portion of your funds to cover rent over the next two months. To be considered a qualified expense, a lease agreement for the property must have been in effect before February 15, 2020.
Again, you need to keep all documentation proving your funds were spent toward this qualified expense. So don’t forget to hang onto your account statements, receipts, bank statements, and canceled checks.
Struggling to keep the lights on at your business? Good news — you can use a portion of your loan to cover your utilities. The SBA defines utilities as “electricity, gas, water, transportation, telephone or internet access, for which service began before February 15, 2020.”
Once again, you’ll want to have documentation proving that these utilities were paid by keeping account statements, bank statements, canceled checks, and receipts.
One last thing to note is that at least 75% of your loan must be used to cover payroll costs. The remaining 25% can be used to pay mortgage interest, utilities, and rent.
What Happens If I Don’t Qualify For Forgiveness?
If you use your loan for qualified expenses, your loan will be forgiven. But what if you make a purchase that isn’t a qualified expense or fail to meet other requirements? If this is the case, you will be required to repay at least a portion of your loan.
As previously mentioned, there are a few things that can prevent you from receiving 100% forgiveness on your PPP loan. As a quick reminder, those are:
- Using your loan funds for another debt obligation that isn’t your payroll, rent, utilities, or mortgage interest
- Using more than 25% of your loan for rent, utilities, and/or mortgage interest
- Reducing your employee headcount
- Reducing the wages, salaries, or commissions of employees
If you don’t qualify for full loan forgiveness, you will be required to pay back loan funds plus interest. The interest rate for PPP loans is 1%, and you will have two years to repay your loan. Payments are deferred for six months, although interest will continue to accrue during this time.
When & How To Apply For Forgiveness
You will apply for PPP loan forgiveness through the lender that serviced your PPP loan. You must submit the Paycheck Protection Program Loan Forgiveness Application.
At a minimum, you should make sure that you have documentation that shows how your loan was spent. You may be required to submit payroll documentation, bank statements, account statements, tax forms, receipts, and canceled checks depending on how loan funds were sent. The application outlines acceptable documentation.
Once your lender has received everything, they must make a decision on the status of your loan forgiveness within 60 days.
The coronavirus has affected all of us, and many small business owners have been hit hard by the pandemic. If your business is suffering financially, don’t give up hope — there are some great resources to help you through this time of economic uncertainty. We’ve been doing our research and have created a number of posts dedicated to coronavirus relief. Check out our COVID-19 hub to learn more about the EIDL program, read industry-specific survival guides, and access our other small business resources. Good luck!