What Do Businesses Need to Know About Paycheck Protection Program Loan Forgiveness?
Update (5/5/2021): The Small Business Administration is no longer accepting PPP applications from most lenders. However, funding may remain for lenders designated as community financial institutions (CFI). CFIs include Community Development Financial Institutions, Minority Deposit Institutions, Certified Development Companies, and Microloan Intermediaries. Find a CFI
With no indication from the federal government that the Paycheck Protection Program (PPP) will have additional funds allocated to it after several extensions of the program since its implementation in 2020, businesses that received PPP loans should turn their attention to the forgiveness process.
Helpful Tips About Applying for PPP Loan Forgiveness
You’re not alone in this: more than 10 million loans totaling more than $750 billion have been issued under PPP. Businesses have been able to apply for forgiveness since August 2020, and it is important that you apply for forgiveness of the loan with the same lender that issued the loan.
Businesses will submit their loan forgiveness application to their lender, but each lender might have different requirements as to when they will accept an application. To avoid having to start repayment of any unforgiven portion of a PPP loan, borrowers must apply for forgiveness within 10 months of loan disbursement date.
How Will Loan Forgiveness Be Handled?
The loan forgiveness process is simplified for first-time borrowers and second draw PPP loans of up to $150,000. Businesses only have to complete a certification to be established by the SBA, which includes:
- Describing the number of employees the employer retained
- Estimated amount of the loan spent on payroll costs
- The total loan amount
For loans of more than $150,000, borrowers need to submit to their lender the documentation currently required by the PPP.
Loan Forgiveness Applications
Depending on your circumstances, you can use one of three loan forgiveness application forms issued by the U.S. Treasury Department and the SBA.
The circumstances that dictate which form to use are:
- Type of business
- Loan amount
- Reduction in staffing, salary or wages
There is a full form, an EZ form, and now a form for loans of $50,000 or less — Form 3508S. The EZ Form can be used by self-employed individuals with no employees or by those who kept employee count and salaries and wages at certain levels. Those who use the full or EZ forms must calculate forgiveness amount. The 3508S is intended to make the process less administratively and financially burdensome for eligible applicants, including not reducing the forgiveness amount if the business decreased staff or salaries and wages. All the forms require businesses to make certifications and submit and retain documentation.
PPP Flexibility Act Impacts Loan Forgiveness
On June 5, 2020, the PPP Flexibility Act was enacted and amended many of the loan forgiveness provisions, including the covered period. Additional changes were made on the percentages applied to eligible costs that could be forgiven and exemptions on full-time equivalent (FTE) employees that are included in calculating forgiveness. Our Customer Support page has FAQs that address these changes under the Paycheck Protection Program (PPP) category.
What is the Paycheck Protection Program?
The Coronavirus Aid, Relief, and Economic Security (CARES) Act added PPP loans to provide economic relief to small businesses nationwide adversely impacted by the COVID-19. Designed to provide quick access to loans from the SBA for companies with 500 or fewer employees, the PPP's intention was to help with payroll and operating costs during short-term business disruption caused by the COVID-19 pandemic.
The SBA stopped accepting PPP loan applications May 4, 2021 for most businesses, although funding may remain for lenders designated as community financial institutions (CFI). There are also other funding options are available.
What kind of expenses does the loan cover?
The loan covers the following payroll and non-payroll costs:
Payroll costs include:
- Cash compensation including employee salaries, commissions, or similar compensation. Bonus and hazard pay also are included. For each employee, the total cash compensation eligible for forgiveness may not exceed $100,000, annualized for the covered period for each employee (for 24 weeks, this would be a maximum of $46,154 per individual, or for eight weeks, a maximum of $15,385 per individual.
- Employer paid benefits such as employer paid group health costs, including insurance premiums and employer paid retirement contributions. Employer paid benefits include cost related to continuation of group health care benefits for furloughed employees and employees during periods of paid sick, medical or family leave
- Employer assessed state and local taxes on cash compensation.
- Compensation to owner-employees/self-employed individuals/general partners. Individuals with self-employment income who file a Schedule C, PPP self-employment loan forgiveness is limited to a proportionate eight-week share (8/52) of 2019 net profit (up to $15,385) for an eight-week covered period or 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period, as reflected in the individual's 2019 Form 1040 Schedule C. Any qualified sick leave equivalent amount for which a credit is claimed under section 7002 of the Families First Coronavirus Response Act (FFCRA) is excluded.
Non-payroll costs include:
- Payments of interest on any mortgage obligation incurred before Feb. 15, 2020 (not including mortgage principal or interest pre-payments)
- Payment of rent under a lease in force prior to Feb. 15, 2020
- Utilities payments for which service began before Feb. 15, 2020 (electricity, gas, water, transportation, telephone, and internet access)
- Interest payments on any other debt obligations that were incurred before the covered period
After the passage of the Consolidated Appropriations Act, 2021 in December 2020, additional covered non-payroll costs were expanded.
- Operation expenditures such as payments for business software or cloud-computing services that facilitate business operations, product or service delivery, processing of payroll, human resources, tracking supplies and inventory, and more.
- Property damage costs related to vandalism or looting caused by public disturbances in 2020 that were not covered by insurance.
- Covered supplier cost are expenditures made by a borrower to a supplier of goods for the supply of goods that; a) are essential to the operations of the borrower at the time at which the expenditure is made; and b) is made pursuant to a contract, order, or purchase order — i) in effect at any time before the covered period with respect to the applicable covered loan; or ii) with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan.
- Worker protection expenditures such as costs related to adaptations of business activities to comply with requirements or guidance from national (OSHA, CDC) agencies, as well as state and local governments from March 1, 2020 to the date the national emergency expires related to standards of sanitation, social distancing and other worker/customer safety requirements. They include:
- Purchase or maintenance of materials to create or expand a drive-through window, a ventilation or filtration system, indoor or outdoor business space, onsite or offsite health screening capability, and more
- Filtering facemask respirators approved for emergency use
- Personal protective equipment (PPE) as determined by the SBA
The loan does not cover:
- Compensation of an individual employee in excess of an annual salary of $100,000, as prorated during the covered period (for 24 weeks, a maximum of $46,154 per individual, or for eight weeks, a maximum of $15,385 per individual).
- Any compensation of an employee whose principal place of residence is outside the U.S.
- Qualified family leave or sick leave wages under the .
Will my loan be forgiven?
Recipients of a loan made under the Paycheck Protection Program may be eligible for loan forgiveness in an amount equal to the sum of the following costs incurred, and payments made, during your covered period:
- Payroll costs (including employee benefits)
- Interest payments on any covered mortgage obligation incurred before Feb. 15, 2020
- Payment of rent under a lease in force prior to Feb. 15, 2020
- Utility payments for which service began before Feb. 15, 2020
You must submit the PPP Loan Forgiveness Application to the lender that is servicing your loan. Payments of loan principal, interest, and fees may be deferred until the date on which the loan forgiveness amount is remitted to your lender. Loans made after June 5, 2020 will have a loan term of five years. Loans made before June 5, 2020 have maximum terms of two years, however the borrower may renegotiate the maturity terms of loan to five years with their lender.
To maximize loan forgiveness, at least 60% of the loan proceeds must be used for payroll.
- Forgiveness amount cannot exceed the principal amount of the loan.
- Forgiveness amount is subject to reductions based on (1) reduction in the number of FTEs; and/or (2) reduction in the amount of salary or wages, with an important exception for rehires.
Reduction Exemptions for Those Who Borrowed $50,000 or Less
On October 8, 2020, the SBA released a revised and simplified PPP Loan Forgiveness Application Form 3508S, including detailed instructions on how to complete the application. In parallel, the SBA and Treasury issued an Interim Final Rule on Additional Revisions to Loan Forgiveness and Loan Review Procedures Interim Final Rules.
Any borrower of a PPP loan of $50,000 or less, other than any borrower that together with its affiliates received loans totaling $2 million or greater, may use SBA Form 3508S (or lender’s equivalent form) to apply for loan forgiveness.
A borrower that uses SBA Form 3508S (or lender’s equivalent form) is exempt from any reductions in the borrower’s loan forgiveness amount based on reductions in full-time equivalent (FTE) employees or reductions in employee salary or wages that would otherwise apply.
When a borrower submits SBA Form 3508S or lender’s equivalent form, the lender shall (1) confirm receipt of the borrower certifications contained in the SBA Form 3508S or lender’s equivalent form, and (2) confirm receipt of the documentation the borrower must submit to aid in verifying payroll and nonpayroll costs, as specified in the instructions to the SBA Form 3508S or lender’s equivalent form.
Providing an accurate calculation of the loan forgiveness amount is the responsibility of the borrower, and the borrower attests to the accuracy of its reported information and calculations on the Loan Forgiveness Application. The borrower will not receive forgiveness without submitting all required documentation to the lender.
Self-Employed and the PPP FAQs
On April 14, 2020, the SBA released an Interim Final Rule providing guidance for individuals with self-employment income who file Form 1040, Schedule C. Below are answers to frequently asked questions regarding the self-employed, freelancers, independent contractors and sole proprietors.
Are there any other restrictions on how I can use PPP loan proceeds?
Yes. At least 60% of the PPP loan amount should be used for payroll costs. For purposes of determining the percentage of use of proceeds for payroll costs (but not for forgiveness purposes), the amount of any refinanced Economic Injury Disaster Loan will be included.
What amounts shall be eligible for forgiveness?
According to the SBA, the full principal amount of the loan and any accrued interest can be forgiven for funds used to pay for covered payroll costs during the covered period. The SBA has determined that for individuals with self-employment income who file a Schedule C, PPP self-employment loan forgiveness is limited to a proportionate eight-week share (8/52 weeks) of 2019 net profit (up to $15,385) for an eight-week covered period of 2.5 months’ worth (2.5/12) of 2019 net profit (up to $20,833) for a 24-week covered period, as reflected in the individual's 2019 Form 1040 Schedule C. Any qualified sick leave equivalent amount for which a credit is claimed under Section 7002 of the Families First Coronavirus Response Act (FFCRA) is excluded.
For example, if you reported making $52,000 to the IRS in 2019, you would be forgiven for $8,000 of self-employment income as long as that income represented at least 60% of your total loan. The other 40% can be forgiven if it's spent on eligible costs and expenses.
This article was previously updated on March 30, 2021.