This article applies to PPP loans taken out in 2020. Stay tuned for more information on applying for PPP loan forgiveness if you take out a PPP 2.0 loan under the Consolidated Appropriations Act.
With loan forgiveness on the line, you probably didn’t apply for a Paycheck Protection Program (PPP) loan for the low-interest rate of 1%. So, you got the loan. Now, you want to know how to get your PPP loan forgiveness.
If you can get your PPP loan fully forgiven, you will have essentially received free money to help your business navigate through the era of COVID-19. And who doesn’t want that?
But as the SBA continues to release new details on how to get your PPP loan forgiven, you may have some questions (and frustrations) about the process.
How to get PPP loan forgiveness
Depending on what you do with your PPP loan during the eight (if applicable) or 24 weeks after receiving it, you may qualify for partial or full forgiveness.
We know you really want to know how to get it fully forgiven. Use the following tips on how to make sure your PPP loan is forgiven to get started:
- Use it for eligible expenses
- Keep your employee headcount up
- Don’t reduce an employee’s wages by more than 25%
- Document everything
- Talk with your lender
- Apply for loan forgiveness
In short, the PPP forgiveness calculation factors in 1) what you spent your PPP loan on, 2) your employee headcount, and 3) whether you reduced an employee’s wages by more than 25%.
1. Use it for eligible expenses
For PPP loan forgiveness, you must use 100% of the loan for eligible expenses. Eligible expenses include payroll costs, interest on mortgages, rent, and utilities. And, the SBA requires you to use the majority of your loan for payroll expenses.
Use at least 60% for payroll costs and 40% for the qualifying non-payroll costs.* Here’s the breakdown:
- 60%: Payroll costs
- Salaries, wages, commissions, tips, bonuses, or hazard pay ($100,000 gross earnings max per employee)**
- Employee benefits (vacation, parental, family, medical, or sick leave***; separation pay; group health care coverage; and retirement benefits)
- State and local taxes assessed on compensation
- 40%: Non-payroll costs
- Interest on mortgages (mortgages incurred before February 15, 2020)
- Rent (leases dated before February 15, 2020)
- Utilities (service agreements dated before February 15, 2020
*If you’ve been following the PPP closely, you know that the expense breakdown was originally 75% payroll and 25% non-payroll. But on June 5, the Paycheck Protection Program Flexibility Act was signed into law. This changed the 75/25 rule to 60/40.
**Keep in mind that your employer share of payroll tax does not count toward payroll costs. Federal taxes you withhold from employee wages (FICA tax and federal income tax) also do not count as eligible payroll costs.
***You can use your PPP loan to cover paid sick leave, but you cannot use it to cover paid sick and family leave wages under the Families First Coronavirus Response Act.
Alert! The Consolidated Appropriations Act expanded eligible expenses for “PPP 2.0” to also include group life, disability, vision, and dental insurance; covered operations expenditures; property damage; supplier costs; and worker protection expenditures.
If you are a self-employed individual who received a PPP loan, you must use 60% of the loan on wages, commissions, income, or net earnings from self-employment. There’s also a cap on the amount of loan forgiveness you can request if you’re self-employed, according to Treasury guidance. The loan forgiveness cap for self-employed individuals is the lesser of:
- ~15.38% of 2019 compensation
Keep in mind that you can use your loan to cover other expenses. However, that portion won’t be forgiven.
The bottom line on how to get your PPP loan fully forgiven: Use at least 60% of your PPP loan to cover payroll costs. You can use the remaining 40% to cover qualifying non-payroll costs.
What’s the time period for using the loan on eligible expenses?
Your PPP loan is meant to cover eight or 24 weeks’ worth of expenses. So, your loan forgiveness depends on your costs during the covered period.
The clock starts when your lender makes your first PPP loan disbursement. From that date, you’ll have eight or 24 weeks to make eligible payments. This is known as the “covered period.”
SBA guidance released on May 15 gives borrowers with a biweekly or more frequent payroll schedule the option to use the “Alternative Payroll Covered Period.” This begins their covered period on the first day of their first pay period after receiving the first disbursement.
If you have extra money left over at the end of the covered period, you have two options:
- Return it to your lender
- Use it, but remember that you’ll have to pay that portion back, plus 1% interest
2. Keep your employee headcount up
The purpose of the Paycheck Protection Program is to keep employees on payroll (and off of unemployment). This is why keeping your employee headcount at the same level as when you applied is essential to getting your loan forgiven.
Of course, keeping your employee headcount up is only part of the equation. You already know that using 60% of your loan for payroll costs (and 40% for the other qualifying expenses) is a must for forgiveness. But even if you spend 60% on payroll costs and 40% on non-payroll costs, you could lose part of your loan forgiveness if your workforce drops, according to the Treasury’s PPP Loans FAQs.
When you applied for your PPP loan, you included all employees you employed—full-time and part-time workers—in the calculation.
But for loan forgiveness, the CARES Act looks at your average full-time equivalent (FTE) employees during the covered period.
You can use one of the following methods to calculate your FTE during the covered period:
- Enter the average number of hours each employee was paid for per week, divide by 40, and round to the nearest tenth (maximum, 1.0).
- Assign a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours
The SBA will reduce PPP loan forgiveness based on your average FTE employee reduction. Here’s the calculation to determine your PPP loan forgiveness reduction amount for FTEs:
Loan Forgiveness Reduction Percentage = Average number of FTEs during the covered period / Average number of FTEs per month employed during an eligible time period of your choice**
**You can use one of two time periods:
- February 15, 2019 – June 30, 2019 (seasonal businesses must use this)
- January 1, 2020 – February 29, 2020
Then, multiply your loan forgiveness reduction percentage by your loan forgiveness amount (based on eligible expenses) to determine your loan forgiveness reduction.
You can calculate the average number of FTE employees by calculating the average number of employees for each pay period per month.
If you decreased your FTE employee levels between February 15, 2020 – April 26, 2020, you can qualify for the FTE Reduction Safe Harbor (i.e., no FTE loan reduction) if you restore levels by December 31, 2020.
This means that, if you laid off or furloughed employees, you must bring them back on board so your headcount reflects what it did when you applied for the loan. Or, you can restore FTE employee levels through new hires.
What if a laid-off employee refuses my rehire offer?
If you furloughed or laid off an employee you counted when applying for the loan, your best bet is to bring them back to maximize your loan forgiveness. But, what if they refuse your rehire offer?
Fortunately, the SBA released new guidelines on May 3 that discuss this type of situation. And, the PPP Flexibility Act further expanded forgiveness rules.
You may be exempt from the FTE loan forgiveness reduction if you:
- Can’t rehire individuals who were employees on February 15, 2020 AND
- Can’t rehire similarly qualified employees for unfilled positions before January 1, 2021
You must make a good faith, written offer of rehire and document the employee’s rejection of that offer to qualify for this loan forgiveness reduction exemption. Keep in mind that the laid-off employees may no longer be eligible for unemployment compensation if they refuse your rehire offer.
The PPP Flexibility Act also states that you may not be impacted by the FTE loan forgiveness reduction if you:
- Can document why you weren’t able to return to the same level of business activity you had before February 15, 2020. You must show how complying with the CDC’s, OSHA’s, or the Secretary of Health and Human Services’ health guidelines (e.g., social distancing) between the months of March 1, 2020 – December 31, 2020 prevented you from keeping your employee headcount up.
3. Don’t reduce an employee’s wages by more than 25%
If you want full loan forgiveness, don’t reduce an employee’s wages by more than 25% of what they received in the most recent full quarter.
This rule applies to employees who earned:
- Less than $33,333 between March 1, 2019 – June 30, 2019 OR
- $100,000 or less annually in 2019
Reducing an employee’s wages by more than 25% will result in a decreased PPP loan forgiveness amount equivalent to the amount you reduce their wages by.
I cut wages … what do I do?
If you reduced an employee’s wages by more than 25%, increase their compensation as soon as you receive the PPP loan to maximize loan forgiveness.
4. Document everything
In addition to keeping documents supporting your PPP loan application, you need to record everything the moment you receive your PPP loan disbursement.
- When you receive the loan
- Each time you spend part of the loan
- Accrued interest on the loan
Keep copies of every expense you use your PPP loan to cover, no matter how small. This includes payroll records; copies of mortgage interest, rent, and utility payments; receipts for any other expenses you use the PPP loan for; bank account statements; and journal entries.
No document is too insignificant when it comes to PPP loan forgiveness. When in doubt, it’s better to be safe than sorry and have something in your records.
And, documenting everything will be much cleaner if you separate your PPP loans from your other funds.
|Need help keeping detailed records for your loan forgiveness? Read our article, “PPP Loan Accounting: Creating Journal Entries,” to learn how to record every PPP-related transaction.|
5. Talk with your lender
Keep the communication lines strong with your lender throughout the process. From the day you apply to the day you request forgiveness, talk with your lender about your loan forgiveness responsibilities.
When applying for a PPP loan, ask your lender about loan forgiveness requirements. And, ask them what documents you need to bring when applying for loan forgiveness.
6. Apply for loan forgiveness
To apply for PPP loan forgiveness, use the SBA’s Loan Forgiveness Application form, Form 3508. You might be able to use Form 3508EZ or Form 3508S if you meet the eligibility guidelines. Then, submit it to your lender.
Here’s a brief overview of who can use the different forgiveness application forms:
- Form 3508: Any borrower
- Form 3508EZ: Borrowers who did not reduce employee salaries by more than 25% and either did not reduce staff or were unable to operate due to following health guidelines
- Form 3508S: Borrowers who received a PPP loan of $50,000 or less
In addition to the loan forgiveness application form, you must also attach supporting documents.
Your lender may have additional requirements when it comes to documentation, but the SBA requires you to provide documents showing the:
- Payroll costs during the loan period (don’t include employer share of taxes)
- Average number of full-time equivalent employees on payroll
- Interest on mortgage payments
- Rent payments
- Utility payments
The records you bring showing this information include:
- Payroll reports showing cash paid to employees
- Payroll tax filings (e.g., Form 941)
- Copies of lender amortization schedule (mortgage interest), current lease agreement (business rent), and utility invoices (utilities)
- Bank account statements
- Accounting records
- Written offer of rehire and subsequent employee rejection
For more information on documents that the SBA requires, consult the Loan Forgiveness Application form. And for more information on documents that your lender requires, consult your lender.
After applying for loan forgiveness, your lender has 60 days to make a decision. If your loan is fully or partially forgiven, update your accounting books to reflect the debt forgiveness.
If you have further questions, check out the SBA’s FAQs on PPP loan forgiveness.
Not sure if you should wait to apply? Check out our article, “Your PPP Loan Forgiveness Strategy Might Be to Play the Waiting Game. Here’s Why,” for more information on proposed changes to the PPP.
What if some of my loan isn’t forgiven?
If part or all of your loan isn’t forgiven, you can appeal the decision. According to the Treasury, the SBA will provide more information on the appeal process soon.
If your appeal is denied, you have to pay back the loan. Here’s what you need to know about paying back unforgiven PPP loan funds:
- 5-year loan term
- 1% interest rate (accruing immediately)
- 6-month payment deferral from the date of loan disbursement
There’s no prepayment penalty if you want to pay off your loan balance before the five years are up.
Talk with your lender about how you can make payments on any unforgiven PPP loan amount and when payments are due.This is not intended as legal advice; for more information, please click here.