- How to Qualify and Apply for PPP Forgiveness
- Overview: What is PPP forgiveness?
- PPP forgiveness requirements
- You spent PPP funds in 8 or 24 weeks
- You met the 60% rule
- You kept employees on the payroll
- You didn’t reduce salaries and wages by more than 25%
- How PPP forgiveness guidelines work
- 1. Gather accounting records
- 2. Submit a forgiveness application to your lender
- 3. Wait for your lender’s decision
- 4. Begin repaying your loan
- Best practices when applying for PPP loan forgiveness
- For smaller loans, wait to apply for forgiveness
- Consult a professional
- Stay informed
- Forgive the chaos
- 7 ways small businesses can maximize PPP loan forgiveness
- 1. Don’t short yourself on allowable payroll costs
- 2. But don’t go beyond PPP payroll boundaries.
- 3. Maintain your staffing
- Here's how it works:
- 4. Avoid drastic pay cuts
- 5. Focus most of your PPP loan on payroll
- 6. Stay within allowable expenses for the rest of your PPP loan amount
- 7. If necessary, forge ahead without loan forgiveness
How to Qualify and Apply for PPP Forgiveness
If you’re reading this, congratulations: You’ve made it to the point where you need to start thinking about how to get your Paycheck Protection Program (PPP) loan forgiven.
After the tumult that 2020 brought to small businesses, you’d think there’d be a Candyland- path to getting the government-provided loan off your books. Unfortunately, it’s more San Francisco’s Lombard Street (think steep hills and sharp turns).
Recent legislation, however, made it easier to apply for forgiveness on PPP loans of $150,000 or less. Here’s the latest.
Overview: What is PPP forgiveness?
When the global economy halted in early 2020 due to the COVID-19 pandemic, the U.S. government stood up the PPP so small businesses could keep the lights on and employees on the payroll.
The Small Business Administration (SBA) deployed PPP loans equal to 2.5 times a company’s allowable monthly payroll costs, up to $10 million. When your business uses PPP funds to cover qualifying expenses, you can apply for forgiveness to essentially turn the PPP loan into a nontaxable grant.
In December, Congress passed another stimulus package that re-ups the PPP, making a few changes in the process. PPP2 loans are limited to $2 million, and some businesses qualify for an additional forgivable loan, called a second draw.
Businesses must meet several criteria for 100% PPP forgiveness. When you use PPP funds on anything except specific allowable business expenses, you’re responsible for repaying some or all of the loan at a 1% interest rate. Check with your lender for more specific PPP repayment terms.
It’s best to talk to a tax professional when applying for SBA PPP loans and forgiveness. The rules are tricky and transient, and you don’t want to be surprised with a bill you didn’t realize you had accepted.
PPP forgiveness requirements
You’re poised for PPP forgiveness when your small business meets the following requirements.
You spent PPP funds in 8 or 24 weeks
You need to account for where and when you spent each dollar in the forgiveness application. The December COVID-19 relief package allows PPP borrowers to choose to have their loan period cover eight or 24 weeks.
PPP recipients are asking themselves: Which is better? Since you don’t have to decide until you apply for forgiveness, run the forgiveness calculation using both periods. Choose whichever results in the higher forgiveness amount.
You met the 60% rule
PPP allows for full forgiveness when at least 60% of the PPP funds go toward eligible payroll costs (it had previously been 75%).
For full forgiveness, the remaining 40% must go toward:
- Additional payroll costs
- Mortgage interest
- Personal protective equipment and facility modification to help you comply with COVID-19 federal health and safety guidelines
- Operating expenses for software, cloud computing services, and accounting
- Essential payments to suppliers for your business’s operations
You might not recognize the last three items on the list above; the December stimulus package added them to the list of non-payroll-covered expenses.
Say your business received a $200,000 PPP loan; at least $120,000 must have gone toward eligible payroll costs. Simple enough, right? Wrong. The word “eligible” creates some mess.
If you’re a pass-through business owner, PPP loans are calculated your business’s 2019 net profits — to account for owner compensation — and average monthly employee payroll costs. The catch is earnings above $100,000 on an annualized basis were reduced to $100,000 for the calculation.
Say that one of your employees earns $125,000 annually. You could only count 80% of her wages toward the 60% payroll cost requirement ($100,000 limit ÷ $125,000 salary = 80% of total wages eligible for forgiveness).
Businesses that don’t pass the 60% rule can still apply for partial forgiveness. If you spend just $100,000 on payroll costs using the $200,000 PPP loan, the maximum forgiveness becomes $166,667 ($200,000 total loan ✕ [$100,000 used on payroll ÷ $120,000 allocated for payroll]).
You kept employees on the payroll
Legislators implemented the PPP to keep people employed during the pandemic. You need to bring your employee headcount back to pre-pandemic levels to receive full loan forgiveness.
The SBA calculates employee headcount using full-time equivalents (FTE), where a person who works 40 or more hours per week counts as one FTE. Someone who works 10 hours per week is 0.25 FTE (10 hours worked ÷ 40-hour workweek). Or you can opt for the SBA’s simplified FTE method by counting any part-time employee, regardless of hours worked, at 0.5 FTE.
Compare your FTE during the loan period to the average FTE during one of the following periods. If your FTE is the same as or higher than one of the periods below, you qualify for full payroll forgiveness:
- Feb. 15, 2019, to June 30, 2019
- Jan. 1, 2020, to Feb. 29, 2020
Your loan forgiveness drops when you don’t bring your FTE back to its pre-pandemic levels. For example, if you only rehire three of your four employees, your maximum forgiveness becomes 75% of the total loan amount.
You might qualify for full forgiveness if:
- Safety requirements prevent you from returning to pre-pandemic operating levels.
- Your headcount declines because of employees who are justifiably fired or voluntarily resign.
The SBA also cuts slack on rehiring employees:
- You have until Dec. 31 to rehire employees laid off between Feb. 15 and April 26 due to the pandemic.
- Employees who formally reject your written re-employment offer at the same pay and hours don’t count as staff reductions.
- Your headcount isn’t affected by employees who ask for and are granted a reduction in working hours.
You didn’t reduce salaries and wages by more than 25%
For full forgiveness, employee salary and wages can’t fall below 75% of what they were when applying for the PPP. Any further reduction lowers the forgiveness amount. The wage reduction rule applies to employees whose annualized salaries are less than $100,000.
Say you were paying an employee $5,000 per month when you applied for the PPP loan. Financial circumstances led you to reduce his pay to $3,500 per month, a 30% decrease. The maximum wage reduction without penalty is 25%, which would’ve left him with $3,750 monthly.
Your forgiveness amount is reduced by $250 multiplied by your PPP loan period. If your PPP period is 24 weeks, the forgiveness amount is reduced by $1,500 ($250 additional monthly reduction ✕ 6-month PPP period).
How PPP forgiveness guidelines work
Here’s what you have to look forward to once you’re ready to apply for forgiveness.
1. Gather accounting records
For loans above $150,000, the PPP forgiveness application will ask for the following documents:
- Payroll reports for the loan period
- Quarterly federal tax return Form 941
- Utility, rent, and mortgage proof of payment (bank statements or receipts)
- Photo identification (passport or ID)
- Form 1040 Schedule C for sole proprietors
You’ll also need the following information:
- SBA loan number, listed on your loan promissory note
- Employer identification number (EIN)
Thanks to a simplified forgiveness application for smaller loans, those with loans of $150,000 or less won’t submit all these documents. However, you’re still required to retain employment records for four years and other related documents for three years.
Having updated accounting records is crucial to a smooth PPP forgiveness process. Should the SBA or your lender inquire about the use of PPP funds, you’ll want your records in order.
2. Submit a forgiveness application to your lender
Apply for forgiveness through your loan provider. Wherever you got the PPP loan — either a traditional bank, payroll provider, or online service PayPal — you need to return there to apply for forgiveness. If you still have a balance on your PPP loan, you’ll start making payments starting 10 months after the loan period.
The December stimulus package created a simplified path for forgiveness for PPP loans of $150,000 or less. Source: sba.gov.
The late December stimulus package, signed by President Donald Trump, streamlines the forgiveness process for loans of $150,000 or less. Rather than filling out a pages-long application with dozens of attached records, you’ll fill out a one-page form certifying your loan amount, employee headcount retention, and estimated amount spent on payroll costs.
Borrowers with smaller loans should still consider filling out the longer forgiveness application to ensure they qualify for full forgiveness. Though the one-page application is simpler, you’re still required to meet the forgiveness rules.
You have 10 months from the end of the loan period to apply for forgiveness. If you wait too long, loan payments will start coming due at a 1% interest rate.
3. Wait for your lender’s decision
Within 60 days, your lender will decide on the forgiveness amount. You might get full, partial, or no forgiveness. Whatever the decision, it goes directly to the SBA, requiring no action on your part.
You’ll be notified of the loan forgiveness amount as your case moves to the SBA. If you don’t the answer — maybe you only got partial forgiveness when you expected 100% — you have 30 days from receiving your lender’s decision to request the SBA review your case again.
The SBA will render its own final decision within 90 days. They might reach out and ask for additional information.
The SBA’s final decision is, well, final. If you want to appeal your lender’s PPP forgiveness decision, talk to a CPA for guidance.
4. Begin repaying your loan
If there’s a balance left, PPP loan repayment starts 10 months after the loan period. You were done in the last step if your lender and the SBA decided to forgive the entire loan.
Best practices when applying for PPP loan forgiveness
PPP forgiveness rules have changed a few times in the past nine months, so my best advice is to wait for lenders and the SBA to catch up with the newest legislation before applying for forgiveness.
For smaller loans, wait to apply for forgiveness
A shorter forgiveness application is on the way for most PPP loans. If you received a PPP loan for $150,000 or less, wait until your lender and the SBA are ready to accept your application.
The December stimulus package also repealed a deduction to reduce a company’s PPP loan forgiveness amount by the amount of its EIDL Advance grant, which provided struggling businesses up to $10,000 in grant funding. The SBA has yet to update its applications, so you’ll need to wait until the application reflects that change.
Those applying for other small business loans might not have the luxury of time. If you need to clear the PPP debt from your books, go ahead and apply for forgiveness. You could be waiting weeks before lenders update loan forgiveness procedures.
Consult a professional
If there’s any year to hire a tax professional, it’s this year.
The PPP is a loan program, meaning you promised to repay a given amount unless you meet specific conditions. Making a small mistake on your forgiveness application can lead to owing thousands back to the government.
Though you can patch up any small error you let slip through, it’s best to get your application done correctly the first time. For that, you’ll at least want a tax professional to look over your application before submitting it.
The PPP rules have changed a few times since the program launched in March. It’s important to keep up with the latest PPP loan guidance to ensure you’re maximizing your forgiveness amount and small business tax deductions.
For example, the December COVID-19 stimulus package added new forgivable expenses to its list of non-payroll costs, potentially increasing your forgiveness amount.
The relief bill further clarified Congress’s stance on deducting expenses covered by PPP funds. Directly refuting the IRS’s and Treasury Department's guidance, legislators say you may fully deduct any business expense you paid with a PPP loan. In other words, deductions are business as usual for the 2020 tax year.
Forgive the chaos
Tax experts, tax software companies, and small business owners might be feeling whiplash with all of the PPP rule changes. Stay up to date on all the PPP forgiveness news here at The Blueprint.
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7 ways small businesses can maximize PPP loan forgiveness
Updated March 17, 2021
As a business owner, you may have already taken advantage of the Paycheck Protection Program (PPP) created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
If you haven’t, the deadline to apply is March 31, 2021.
Sole proprietors and independent contractors filing a Schedule C who haven’t yet applied can now receive a higher loan than before—using gross income, rather than (generally lower) net income, to calculate the loan amount.
In addition, a second loan is available for smaller, harder-hit businesses until March 31, 2021. “Second draw” PPP loans of up to $2 million are targeted for businesses that have fewer than 300 employees and suffered economic harm.
If you’ve secured a loan, you ly used the funds to keep your employees working and business open—all while trying to understand how the “forgiveness” part of the loan works.
There are a number of forgiveness applications depending on the loan size and other requirements, including a detailed forgiveness application (Form 3503) and two simplified versions—Form 3508EZ and Form 3508S (for loans $150,000 or less). To use these simplified forms, you must meet certain requirements outlined in this PPP overview (PDF).
Use our PPP expense tracker (Excel) to document your expenses along the way.
To help you navigate the ever-changing landscape, we’ve compiled seven strategies to maximize loan forgiveness business owners’ top concerns.
1. Don’t short yourself on allowable payroll costs
In addition to making many business expenses eligible for forgiveness, the PPP loan is primarily intended to help business owners keep employees on payroll. And, what qualifies as payroll during the forgiveness period following the loan is broader than you might think.
First, select the forgiveness period you will use (any length between 8 and 24 weeks from when you received your loan). Then, consider what you pay for all the following expenses during that time. The forgiveness amount is not limited to salary, wages, commissions, and tips.
It also includes:
- payments for leave (vacation, parental, family, medical, and sick leave),
- employer contributions to group health care benefits (including group life, disability, dental, and vision insurance premiums) for employees,
- employer contributions to defined benefit or defined contribution qualified retirement plans for employees, and
- employer -paid state and local taxes assessed on compensation.
2. But don’t go beyond PPP payroll boundaries.
The most employee payroll expense you can count toward forgiveness is $100,000 annually per employee or:
- $8,333 monthly,
- $1,923 weekly.
However, owner compensation is limited to a prorated portion of the owner's 2019 or 2020 compensation, or $100,000—whichever is less, up to $20,833. For details, see Frequently Asked Questions, A-15 (PDF).
Employer contributions for group health, life, disability, dental and vision insurance, retirement, and other benefits for employees are in addition to this cap. For details about group health and retirement benefits for owners, see Frequently Asked Questions A-17 and A-18 (PDF).
PPP payroll excludes:
- employees living outside the United States,
- the employer portion of Social Security payroll taxes,
- wages where the company receives a Families First Coronavirus Response Act payroll tax credit, and
- independent contractors who’ve worked for your business.
3. Maintain your staffing
Maximize your PPP loan forgiveness by retaining your full-time and full-time equivalent employees.*
“It’s not the entrepreneur protection program,” says Kimberly Weisul, editor-at-large for Inc.com and Inc. Magazine.
“If you’re an entrepreneur and don’t want to bring your employees back until right before you think you’ll reopen, that makes sense from a financial point of view. But that’s not what this program is for.
It's to take employees back earlier than that, even if you don’t have anything for them to do, so they remain employed.”
Here's how it works:
Your staffing level during the forgiveness period following the loan will be compared to one of two prior periods (you can choose which):
- February 15–June 30, 2019, or
- January 1–February 29, 2020.
To maximize forgiveness, the deadline to rehire or replace employees who were let go between February 15 and April 26, 2020, is December 31, 2020 for loans made before December 27, 2020, or the end of the selected forgiveness period for loans made after that date.
For the forgiveness calculation, if you offer to rehire an employee for the same hours and wages, your head count will not be reduced, even if they decline. The percentage of your loan forgiveness may decline by the same amount as any staff reduction.
For additional clarification, see frequently asked questions A-19 (PDF).
If your loan amount is $50,000 or less, you are exempt from having your forgiveness reduced any reductions in head count and/or salary and wages under the de minimis exemption. For more information about this and other exceptions, see this PPP overview (PDF).
4. Avoid drastic pay cuts
For employees earning less than $100,000, loan forgiveness is reduced dollar for dollar for any amount of employee salary cut more than 25%, unless an exception applies.
For additional clarification, see frequently asked questions A-20 (PDF).
However, if your loan amount is $50,000 or less, you are exempt from having your forgiveness reduced any reductions in head count and/or salary and wages under the de minimis exemption.
5. Focus most of your PPP loan on payroll
Payroll expenses must make up at least 60% of your PPP spending to maximize loan forgiveness. For additional clarification, see frequently asked questions A-22 (PDF).
6. Stay within allowable expenses for the rest of your PPP loan amount
Paychecks are the main concern of PPP loan forgiveness, but up to 40% can be spent on rent or lease payments, mortgage interest, and utilities, covered operations expenses and supplier costs, worker protection expenditures, and certain property damage costs resulting from public disturbances. (PPP funds also can be used for interest on other debt but can’t be included in forgiveness.)
The guidance on allowable “utilities” expense includes what’s necessary to keep the business operational, such as gas and electric, water, transportation, phone, and internet access.
Keep in mind that all lease or utility service agreements must have been in place before February 15, 2020.
7. If necessary, forge ahead without loan forgiveness
“Ultimately don’t run your business based solely on loan forgiveness,” says Mark West, national vice president of business solutions for Principal.
The long-term stability of your business should be your guiding light and might require you to repay some or all of the PPP at its very favorable 1% rate.
And for loans taken prior to June 5, 2020, you have up to two years to repay any portion not forgiven. For those taken on or after that date, you have even longer—up to five years.
“Having to pay back that loan understandably may make many business owners nervous,” West says. But your first loan payment can be deferred, potentially for a year or more.