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.”

Eligible Costs for Loan Forgiveness

According to SBA guidance released on May 20, 2020, the following costs and expenses are eligible for loan forgiveness under the Paycheck Protection Program. These costs must be paid or incurred during the covered period.

• Payroll costs incurred during the covered period or alternative payroll covered period
• Mortgage interest payments on mortgages established prior to February 15, 2020 (Payments toward the mortgage principal are not eligible. Advance payments on mortgages are also not eligible.)
• Business rent or lease payments for lease agreements established prior to February 15, 2020
• Utility payments toward electricity, gas, water, transportation, telephone, or internet access, as long as service began prior to February 15, 2020 (Advance payments on utilities are not eligible.)

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.

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.

The SBA has not released guidance on what will be required for a borrower to “demonstrate” that their business or nonprofit was unable to hire a “similarly qualified employee” or that they have been unable to return to the “same level of business activity” prior to February 15, 2020.

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.

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?

The short answer: not necessarily. The SBA has provided some wiggle room 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.

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.

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 their lender.

Can You Apply for Loan Forgiveness Directly Through the SBA?

You cannot. Lenders will be responsible for submitting forgiveness applications.

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.