PPP Loan Forgiveness

What Is PPP Loan Forgiveness?

Paycheck Protection Program (PPP) loans, created under the CARES Act, allow for potential loan forgiveness on eligible costs incurred during a set 24-week period after a borrower’s PPP funds are disbursed, defined under the CARES Act as the “covered period.”

Can You Apply for Loan Forgiveness Directly Through the SBA?

You cannot. Lenders will be responsible for submitting forgiveness applications. The lenders are required, however, to get SBA approval for those applications.

How Do You Apply for Loan Forgiveness?

You must submit an application for forgiveness through the lender that is servicing the loan. If required to provide documentation, items will include:

• Documentation verifying the number of employees on payroll and pay rates, including IRS payroll tax filings and state income, payroll and unemployment insurance filings

• Documentation verifying payments on covered mortgage obligations, lease obligations and utilities

• Certification that documentation is true and correct, and that the amount that is being considered for forgiven was used in accordance with the Paycheck Protection Program’s  guidelines for use

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The lender has 60 days from receipt of a completed application to submit a decision to the SBA.

Eligible Costs for Loan Forgiveness

Eligible expenses were originally limited to payroll and operating costs, but the coronavirus relief bill passed in December 2020 expanded the list to include supplier costs, expenses related to health and safety enhancements and some property damage. These eligible costs now include:

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• Payroll costs: This includes all wages paid, including tips, commissions and bonuses as well employer-paid benefits such as insurance, sick leave and retirement contributions. Compensation for employees earning more than $100,000 per year aren't eligible for forgiveness.

• Operating costs: This includes utilities, business software, rent, mortgage payments and interest and accounting services.

• Supplier costs: The cost of goods essential to operating your business is eligible for forgiveness if the purchase order or contract was in place before the covered period. Purchase orders for perishable goods made during the covered period are also eligible.

• Property damage: This is for repairs for damage or loss due to looting, specifically related to public disturbances in 2020. Costs covered by insurance aren't eligible.

• Worker protection: This includes personal protective equipment and other costs related to health and safety requirements, such as health screenings, installation of barriers or expansion of outdoor dining.

Note about timing: costs incurred before the covered period, but paid during the covered period, are eligible for forgiveness. Also eligible - costs incurred during the covered period but paid after it ends, provided they are paid on or before the next regular payroll or billing date.

Payroll Changes That Affect PPP Loan Forgiveness

If a borrower has reduced the number of employees employed by the business or nonprofit or if salary has been reduced for employees, that will affect a borrower’s loan forgiveness eligibility.

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What to Know if You Have Laid Off Employees

Under the Paycheck Protection Program Flexibility Act (PPPFA), the deadline for rehiring all full-time employees has been extended until December 31, 2020. The PPPFA also provided the following exceptions for rehiring employees by that date:

• If your business/nonprofit was unable to rehire an individual included as an employee as of February 15, 2020.

• If your business/nonprofit was able to demonstrate that you were unable to hire similarly qualified employees on or before February 15, 2020.

• If your business/nonprofit was able to demonstrate an inability to return to the same level of business activity at which your business was operating before February 15, 2020.

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What to Know if You’ve Reduced Employee Salary

Reductions in employee salary may also affect your eligible forgiveness amount. The SBA has indicated that a reduction of 25% or more in the annual salary for employees who make less than $100k/year will reduce the loan forgiveness amount.

Payroll Limits for PPP Loan Forgiveness

When applying for a PPP loan, borrowers were only able to use a maximum annual salary of $100k for each employee. The SBA has indicated similar restrictions will be put into place for loan forgiveness. It is likely that a maximum payroll amount of $15k per employee will be eligible for loan forgiveness.

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That amount is calculated based on 8 weeks of pay for an employee with the $100k salary cap. While the SBA has extended the length of time that borrowers may use the funds to 24 weeks under the PPPFA, the 8-week payroll cap for forgiveness eligibility remains intact. If use of the $15k cap is drawn out over 24 weeks due to a reduction in employee salary for employees earning $100k and above, it may affect forgiveness eligibility. More clarity on both of these points is needed from the SBA. We will update this page when they provide further guidance.

Do Payments for Payroll and Utilities Have to Be Made During the Covered Period to Count?

Not necessarily. The SBA guidance provides some leeway for borrowers, allowing for payments made outside of the covered period to be eligible for forgiveness as long as they’re incurred during the covered period.

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For payroll expenses, costs are considered to be incurred the day the employee earns the pay. So if the earnings are incurred during the covered period but not paid until after the covered period, these costs may still be included in the application for forgiveness.

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For eligible non-payroll expenses, you can include costs incurred during the covered period, even if the next billing date is not within the covered period.

How Much of Your PPP Loan Can Be Used for Non-Payroll Costs and Still Be Forgiven?

Eligible non-payroll costs must be limited to 40% or less of the total forgiveness amount.

How to Apply for Loan Forgiveness

Borrowers must apply for PPP loan forgiveness through the lender that made the PPP loan.

What Happens if You’re Not Approved for Loan Forgiveness?

If you’re not approved for loan forgiveness, your lender may request additional documentation. Otherwise, you will be required to repay the loan. The outstanding balance will continue to accrue interest at 1% over a 2-year or 5-year loan term. If you decide to repay early, you can do so without incurring any early payment penalties or fees.

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All payments (principal, interest and fees) are deferred for 10 months after your loan is disbursed; however, interest will continue to accrue over this period.