PPP Loan Forgiveness: Rules & Guidelines
The SBA will forgive most PPP loans if the funds were used to cover approved payroll costs and some other costs of running a business. Find out if you qualify for forgiveness and how to apply.
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.
Table of Contents
- The Six Rules To Follow For PPP Loan Forgiveness
- Qualifying Expenses For PPP Loan Forgiveness
- Second Draw PPP Loan Forgiveness
- PPP Forgiveness For Sole Proprietorship
- Deadline To Apply For PPP Loan Forgiveness
- What Happens If I Don’t Qualify For Forgiveness?
- When & How To Apply For Forgiveness
- PPP Loan Forgiveness FAQs
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.
Qualifying Expenses For PPP Loan Forgiveness
To receive forgiveness for your PPP loan, you must spend the funds on qualifying expenses. Any portion of your loan spent on other expenses will not be forgiven and will need to be repaid. Eligible expenses include the following:
|Payroll Costs||Salaries, wages, tips, commissions, benefits|
|Mortgage Interest||Must have incurred before February 15, 2020|
|Rent||Must have been in effect before February 15, 2020|
|Utilities||Agreements must have been in place before February 15, 2020|
|Software & Operational Expenses||None|
|Property Damage Related To Civil Unrest||Can be used for damages not covered by insurance|
|Necessary Supplier Costs||Must be essential to business operations|
|COVID-Related Protective Measures||None|
|EIDL Refinancing||Applies to loans received between January 31 and April 3, 2020|
Documentation is needed to verify all expenses. This includes but is not limited to payroll records, bank statements, receipts, financial statements, and tax forms. Talk to your lender to learn more about specific documentation requirements.
Your PPP loan funds can be used to cover payroll expenses so that you can keep your business staffed. Remember, you must use at least 60% of your loan to cover payroll costs to qualify for forgiveness. The remaining 40% can be used on other qualifying expenses. If you don’t meet this 60% threshold, you may still be eligible for partial forgiveness.
Qualifying payroll costs include:
- 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.
A portion of your loan can be used to cover your utilities. The SBA defines utilities as:
- Transportation costs
- Internet access
Software & Operational Expenses
There are a number of operational expenditures that can be paid for using PPP funds, including:
- Business software
- Cloud computing services
- Payroll & accounting services
- Human resources
Necessary Supplier Costs
Necessary supplier costs can be paid for using PPP funds assuming that both of these conditions are met:
- The supplies are essential to business operations.
- The purchase order was in effect bef0re the covered period OR the purchase order was in effect prior to the end of the covered period for perishable goods.
COVID-Related Protective Measures
COVID-related protective measures implemented by your business can be paid for using PPP funds. This includes:
- Personal protection equipment for workers
- Ventilation & filtration systems
- Physical barriers
- Health screening facilities & equipment
- Additional business space required for social distancing
PPP borrowers that also received an Economic Injury Disaster Loan (EIDL) may choose or even be required to refinance their EIDL loans using PPP proceeds. The following conditions apply:
- EIDL loans can not be refinanced using PPP funds if the EIDL was received before January 31, 2020, or after April 3, 2020.
- Borrowers can choose to refinance EIDL loans using PPP funds if the EIDL was received from January 31, 2020, through April 3, 2020, AND EIDL funds were used for purposes other than payroll costs.
- EIDL loans must be refinanced using PPP funds if the EIDL was received from January 31, 2020, through April 3, 2020, AND EIDL funds were used for payroll costs.
Second Draw PPP Loan Forgiveness
Businesses that received a Second Draw PPP 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.
PPP Forgiveness For Sole Proprietorship
Sole proprietors were also eligible to receive PPP loans. Here are a few things to keep in mind for seeking PPP loan forgiveness as a sole proprietor:
- Salary Replacement: Income (including wages, tips, and commissions) listed on a Schedule C or Schedule F can be replaced using PPP funds. However, the maximum salary cap for PPP funds is $100,000.
- 60/40 Rule: The 60/40 rule also applies to sole proprietors. At least 60% of PPP funds must be used for payroll, although some borrowers may opt to use 100% of loan proceeds to replace their salaries.
- Health Insurance Premiums & Retirement Plans: If you’re a sole proprietor, health insurance premiums and retirement contributions for yourself or your family are ineligible for PPP forgiveness. If you have employees, expenses paid for those employees may be eligible for forgiveness.
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 May 30, 2021, you have until March 30, 2022, to apply for loan forgiveness, or else you will need to begin making monthly 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.
When & How To Apply For Forgiveness
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.
To apply for forgiveness, you will need to submit the proper loan forgiveness form and documentation to your lender.
|Form 3508S||For loans $150K or less; the lender hasn’t opted into the Direct Forgiveness Portal|
|Form 3508||For loans over $150K|
|Form 3508EZ||For loans over $150K and the borrower must be self-employed, sole proprietor, or IC with no employees; salaries & wages of employees were not reduced by more than 25% & employee hours were not reduced; OR experienced reduction in business due to health directives and did not reduce employee wages by more than 25%|
The SBA has also opened a Direct Forgiveness Portal through which borrowers of PPP loans of $150,000 or less 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.
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.
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.