Guide To PPP Forgiveness Rules, Qualified Expenses, & How To Apply For Loan Forgiveness [Updated Oct. 2020]
The Paycheck Protection Program (PPP) brought some much-needed relief to small business owners affected by the coronavirus. This loan program — which closed to new applicants on August 8, 2020 — has provided business funding to help cover payroll and other expenses. If used for qualifying purposes, your PPP loan will be forgiven.
However, you’ll first have to apply to your lender for forgiveness. While there currently exists bipartisan legislation in Congress that would, if passed and signed into law, make forgiveness of PPP loans under $150,000 near-automatic (business owners would only need to fill out a one-page form), this legislation is not yet law, and there’s no guarantee that it will become law anytime soon. That’s why we’ve posted this guide.
We intend to help you understand how you can qualify for PPP loan 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.
On August 10, 2020, the SBA began accepting PPP forgiveness applications from lenders. Read on to learn more about PPP loan forgiveness, what expenses these funds can cover, and how to apply for loan forgiveness.
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Requirements For PPP Loan Forgiveness (Updated Due To The PPP Flexibility Act)
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 under the Paycheck Protection Flexibility Act. Small businesses that have already received PPP funding prior to this bill’s passage may also benefit and should take note of these 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 meant to help you pay and retain your employees if your business has been affected by the coronavirus.
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. However, the covered period cannot extend past December 30, 2020. 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 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, costs incurred during the 24-week period are also eligible for loan forgiveness.
For example, let’s say that you’ll pay your employees on November 13 for work completed November 1 through November 7. Your 24-week deadline falls on November 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 loan 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. Again, the 24-week period can’t extend beyond December 31, 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.
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. The 24-week period can’t extend past December 31, 2020.
Qualified Expenses For PPP Loans
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 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.
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.
One last thing to note is that at least 60% of your loan must be used to cover payroll costs to be forgiven. The remaining 40% can be used to pay mortgage interest, utilities, and rent.
Before the passage of the Paycheck Protection Flexibility Act, borrowers were required to use at least 75% of loan funds for payroll costs. Failure to meet this requirement would result in a reduction in the portion of the loan that is forgiven. Now, only 60% of funding must be used toward payroll costs. If you don’t meet this threshold, you may still be eligible for partial forgiveness.
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, or mortgage interest
- Using more than 40% 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 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
You will apply for PPP loan forgiveness through the lender that serviced your PPP loan. You must submit SBA Form 3508; some borrowers may also be eligible to submit 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%
As of October 2020, the US Small Business Administration now offers a simplified loan forgiveness application for businesses that received PPP loans of $50,000 or less. Form 3508S (the new form) requires fewer calculations and less documentation. 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
- Forgiveness amount
- EIDL info (if applicable)
Not sure which form is right for you? Learn more in our guide to the 3508 vs. the 3508EZ vs. the 3508S form.
Note that you submit your loan forgiveness application to your lender, not to the SBA. The lender is responsible for all forgiveness action and ultimately will be the entity compensated by 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.
Once your lender has received everything, they must decide on your loan forgiveness status within 60 days. Your lender is responsible for informing you of 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. Good luck!