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.”

Good News: Simplified Forgiveness for Smaller Loans

The SBA has announced that borrowers who received PPP loans of $150,000 or less will benefit from a streamlined forgiveness application and automatic forgiveness. 

Borrowers will simply be required to submit a one-page certification that lists:

• Number of employees they were able to retain because of the loan
• Estimated amount spent on payroll costs
• Total loan value

The record retention guidelines for these smaller loans has been reduced to 4 years for employee records and 3 years for compliance records.

Eligible Costs for Loan Forgiveness

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: 
  • Compensation in the form of salaries, wages, commissions or similar compensation up to $100,000
  • Payment of cash tips or equivalent
  • Payment for vacation, parental, family, medical, or sick leave
  • Allowance for dismissal or separation
  • Payment of retirement benefits
  • Group vision, dental, disability, or life insurance
  • Payment of state or local taxes assessed on the compensation of employees
• Healthcare costs related to the continuation of group healthcare benefits during periods of sick, medical, or family leave, as well as insurance premiums.
• Mortgage interest payments (but not prepayment or payment of the mortgage principal)
• Rent
• Utilities
• Interest on any other debt obligations incurred before February 15, 2020
• Refinancing an SBA EIDL received between January 31, 2020, and April 3, 2020
• Covered expenditures such as business software or cloud computing services that facilitate:
  • business operations
  • product or service delivery
  • the processing, payment, or tracking of payroll expenses, human resources, sales, and billing functions
  • accounting or tracking of supplies, inventory, records, or expenses
• Covered property damage costs
• Covered supplier costs
• Covered worker protection expenditures

Payroll Changes That Affect PPP Loan Forgiveness

The forgiveness amount may be reduced if you have laid off employees or reduced their salaries. 

To determine how much might be forgiven, you can use this calculation: 

Your payroll cost multiplied by the average number of full-time employees per month for one of these 8-week periods:

• February 15, 2019, through June 30, 2019
• January 1, 2020, through February 29, 2020

Seasonal employers must use the period from February 15, 2019, through June, 30, 2019.

What to Know if You’ve Reduced Employee Salary

Reductions in employee salary may also affect your eligible forgiveness amount. A reduction of 25% or more in annual salary (compared to their most recent full quarter) for employees who make less than $100k/year will reduce the loan forgiveness amount. 

What if You Bring Back Employees or Restore Wages?

If you laid off employees or reduced payroll beginning February 15, 2020, you may eliminate the forgiveness reduction as long as you rehire the laid-off employees or restore payroll before applying for forgiveness.

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

Due to the SBA anticipating a high number of borrowers requesting PPP loan forgiveness, it is anticipated that no more than 40% of the forgiven amount may be for non-payroll costs.

How to Apply for Loan Forgiveness

You must apply for PPP loan forgiveness through your lender. 

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 the loan term. If you decide to repay early, you can do so without incurring any early payment penalties or fees.