PPP Forgiveness Guide: Qualified Expenses, Forgiveness Rules, & How To Apply
The Paycheck Protection Program (PPP) brought some much-needed relief to small business owners affected by the coronavirus. This loan program has provided business funding to help cover payroll and other expenses. If used for qualifying purposes, your PPP loan will be forgiven. On January 6, 2021, the SBA released formal guidance for the new round of PPP loans that subsequently opened up on January 11.
The SBA is making a welcome change to the PPP forgiveness process for those who borrowed $150,000 or less. As of August 4th, 2021, these borrowers can apply for forgiveness directly with the SBA through its new Direct Forgiveness Portal. However, your PPP lender must have opted into the direct forgiveness program in order to do so. If your PPP lender has not done so, or if you borrowed more than $150,000, you’ll need to use one of the three existing forgiveness applications and apply for forgiveness with your PPP lender (not the SBA itself).
Our goal is to help you understand how you can qualify for PPP forgiveness. For small business owners who have received a PPP loan but have not yet spent all the funds, we’ll explore qualified expenses, what you need to track, and even what happens if you spend your funds on non-qualified expenses.
Read on to learn more about PPP loan forgiveness, what expenses these funds can cover, and how to apply for loan forgiveness.
Table of Contents
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 not qualify for loan forgiveness.
One important thing to note is that the original PPP requirements have been modified by the passage of the Paycheck Protection Flexibility Act (enacted June 5, 2020) and the Economic Aid Act (enacted December 27, 2020). Small businesses that received PPP funding before the passage of these bills may still benefit from the resulting changes.
Loan Proceeds Must Be Used 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.
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 spend your loan proceeds within 24 weeks of disbursement. 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 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.
Incurred Costs Can Be Included, 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.
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.
Now, what happens if you had to lay off employees in between applying for your loan and receiving the funds? You can use the 24-week period to rehire and bring your workforce back up to pre-pandemic levels. You will be required to pay back all or some of your loan amount if you fail to maintain your staff based on these guidelines.
There are a few exceptions to this 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.
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.
Qualified Expenses For PPP Loan Forgiveness
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? What are the PPP spending requirements?
PPP eligible expenses include:
Your PPP loan funds can be used to cover payroll expenses so that you can keep your business staffed. You must use at least 60% of your loan to cover payroll costs to qualify for forgiveness. The remaining 40% can be used on mortgage interest, utilities, rent, and other expenses that we’ll detail in this article. If you don’t meet this 60% threshold, you may still be eligible for partial forgiveness.
Various payroll costs are qualified expenses, including:
- Salaries, Wages, Tips & Commissions: Capped at $100,000/annually per employee
- Employee Benefits: Includes costs associated with retirement plans, group health insurance, separation or dismissal, vacation time, sick and medical leave, and parental and family leave
- State and local taxes on compensation
If you’re a sole proprietor or independent contractor, self-employment wages, salaries, and commissions not exceeding $100,000 annually qualify as payroll costs.
These costs will need to be proven by submitting payroll documentation. For small businesses, acceptable documentation includes:
- Tax Forms: Form 941 quarterly tax filings and Form 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 about how they’re handling PPP allowable expenses.
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.
Are you 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.”
You’ll want to have documentation proving that these utilities were paid by keeping account statements, bank statements, canceled checks, and receipts.
The pandemic shifted a lot of business processes online, not only for companies that are now doing remote work but also businesses that have had to start taking and processing orders online that had previously been done in person. Moving processes into the digital space comes with costs.
The terms of the Economic Aid Act allow you to spend the non-payroll part of your PPP on software expenses.
Property Damage Related To Civil Unrest
During periods of political unrest, having a brick-and-mortar location can turn into a liability. Regardless of where your political leanings lie, if you incurred or incur damages related to riots and demonstrations, you can now spend your non-payroll PPP funds on repairing your property so long as said damages were not covered by insurance.
Necessary Supplier Costs
Businesses will have a little more flexibility when it comes to spending their non-payroll expenses. The new bill recognizes the importance of restocking critical supplies to keep your business running. As with the other expenses, you’ll want to keep records of your expenditures here.
COVID-Related Protective Measures
If you’re running an in-person business, you’ve no doubt had some additional expenses pop up, namely the need to keep your employees COVID-compliant with masking and/or personal protective equipment. You may have also erected barriers to reduce the risks of droplet transmissions between customers and staff.
All of these measures can be costly, but you can spend your non-payroll funds on them and still qualify for loan forgiveness.
Additional Documentation For Second Draw Forgiveness
Businesses seeking a second PPP loan (known as a second draw loan) will need to prove, via documentation, that they’ve suffered the requisite 25% loss of income in 2020 relative to 2019. You do this by showing gross receipts from one quarter in 2020 along with receipts from the corresponding quarter in 2019, regardless of whether your loan qualifies for the simplified forgiveness application.
Deadline To Apply For PPP Loan Forgiveness
There are several timelines to keep in mind if you plan to apply for PPP loan forgiveness. You have until your loan’s maturity date (in other words, the date the final payment is due) to submit a PPP loan forgiveness application. If you received your loan funds prior to June 5, 2020, this date will be two years after the origination of the loan. If you received your funds after June 5, you have five years from the origination date to apply for forgiveness.
But there’s a catch. If you don’t apply for loan forgiveness within 10 months of the last date of your covered period, your loan is no longer deferred. That means you will have to make payments on the loan. For example, if your covered period ended on October 30, 2020, you have until August 30, 2021, to apply for loan forgiveness, or else you will need to begin making monthly loan payments.
While you do have time to apply for loan forgiveness, it’s best to get started as early as possible to allow yourself time to gather information and documentation. If you qualify for full forgiveness, submitting your application early also helps prevent you from making any loan payments.
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, a few things 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, mortgage interest, COVID-related safety expenses, property damage due to civil unrest, software expenses, and necessary supplier costs
- Using more than 40% of your loan for rent, utilities, mortgage interest, COVID-related safety expenses, property damage due to civil unrest, software expenses, and/or necessary supplier costs
- 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 five years to repay your loan. Existing borrowers that received funds before the passage of the Paycheck Protection Flexibility Act may extend their loans to five years if the lender agrees. Payments are deferred for six months, although interest will continue to accrue during this time.
When & How To Apply For Forgiveness
Businesses that received PPP loans of $150,000 or less are in luck. As of August 4th, 2021, the SBA is offering these borrowers a Direct Forgiveness Portal through which they can apply for forgiveness directly with the SBA. The SBA has posted a guide to using the Direct Forgiveness Portal which goes through how to navigate the portal and the information you’ll need to have on hand.
There is a caveat, however: your PPP lender must have opted into the direct forgiveness program in order for you to use this portal. While the SBA is encouraging all PPP lenders to opt into the program, not all lenders may do so. If you borrowed $150K or less and your lender hasn’t opted into direct forgiveness, you can still apply to your PPP lender (not the SBA itself) for forgiveness using Form 3508S, the simplest available forgiveness form. To successfully apply through Form 3508S, you’ll need:
- Your business info, including name, address, and contact information
- SBA loan number
- Lender PPP number
- PPP loan amount
- Employees at the time of application
- Employees at the time of a forgiveness application
- PPP loan disbursement date
- Amount of loan spent on payroll costs
- Requested loan forgiveness amount
- Covered period
Those who borrowed more than $150,000 must apply for PPP loan forgiveness through their PPP lender by submitting either SBA Form 3508 or the EZ Loan Forgiveness Application. The EZ option is available to borrowers who meet one of the following conditions:
- Self-employed or have no employees
- Salaries or wages of employees were not reduced by more than 25%, and employee hours were not reduced
- Experienced reduction in business as a result of COVID-19 health directives and did not reduce employee wages by more than 25%
Still not sure which form is right for you? Learn more in our guide to the 3508 vs. the 3508EZ vs. the 3508S form.
Remember, unless you are able to use the SBA’s Direct Forgiveness Portal, you’ll be submitting your loan forgiveness application to your lender, not to the SBA.
At a minimum, you should make sure that you have documentation that shows how you spent your loan funds. 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.
For those of you not using the Direct Forgiveness Portal: Once your lender has received everything, they must decide on your loan forgiveness status within 60 days. Your lender is responsible for informing you how much (if any) forgiveness was paid to them by the SBA and any forgiveness the lender directly applies to the loan. If the lender denies your application in full, they must inform you that they’ve sent a letter to the SBA denying the application. If you want to dispute the decision and directly petition the SBA, you have to notify the lender within 30 days of receiving your rejection letter that you are requesting an SBA review.
PPP Loan Forgiveness FAQs
The coronavirus has impacted all of us, and countless 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. Stay strong!