PPP Loan Forgiveness: What We Know

Update 6/30: On June 5, the Paycheck Protection Program Flexibility Act adjusted some requirements for loan forgiveness, including timelines and the amount required to be spent on payroll. New forgiveness forms were released in mid-June. We’ve updated the information below to reflect the latest guidance.

If your business received a Paycheck Protection Program (PPP) loan, chances are you’re hoping to take advantage of the program’s generous loan forgiveness offer. Here’s the latest on what we know about how that will work.

PPP Loan Forgiveness Requirements

When Congress created the PPP as part of the Coronavirus Aid, Relief, and Economic Security (CARES) act, the intent was to preserve employment by helping small businesses cover payroll and other expenses during the economic interruption caused by COVID-19. This is reflected in the requirements set out for loan forgiveness:

• The entire loan amount must be spent within 24 weeks. Originally, businesses seeking loan forgiveness were required to spend the entire amount within 8 weeks of the first loan disbursement. Under the PPP Flexibility Act, businesses can now spend their funds over 24 weeks (6 months) in order to qualify for forgiveness.
  

• At least 60% must be spent on eligible payroll. While you’re allowed to spend PPP funds on other categories like rent or utility bills, the SBA has indicated that no more than 40% of the loan can be forgiven for these non-payroll items. In order to be fully forgiven, 60% or more of your loan amount must go towards paying your employees. This is another PPP Flexibility Act change – the original ratio for forgiveness was 75% on payroll and 25% on other qualified expenses.
  

• You can’t reduce headcount, or salaries by more than 25%. In keeping with the intent to preserve employment, full loan forgiveness is dependent on keeping your workforce mostly intact. The rules state that if you reduce your employee headcount, or reduce salaries by more than 25% for employees making under $100K annually, the amount of your loan eligible for forgiveness is reduced proportionally.
  
  The SBA does specify an exception if you lay off an employee, then offer to rehire them at the same pay and hours. If your employee declines the offer to be rehired, then they don’t count against your loan forgiveness amount. The PPP Flexibility Act also introduced new allowances for businesses who are unable to find qualified replacements, or who can’t restore normal business operations because of issues like local shelter-in-place orders.

How to Apply for PPP Loan Forgiveness

Following the PPP Flexibility Act, the SBA released two application forms for requesting loan forgiveness: the simplified EZ form, for businesses that meet certain requirements, and an updated version of the full form. Like the loan application itself, however, forgiveness will be handled through your lender, not directly through the SBA. You’ll need to work with your lender to find out their specific PPP forgiveness process. 

Regardless of the steps in their process, however, one thing is guaranteed: you’ll need to have evidence of how the money was spent to prove that you qualify for forgiveness. The application form includes a page-long list of documentation required to show eligibility.

If you aren’t in the habit of keeping clean, well-ordered books, this is absolutely the time to start. You’ll need to be able to produce a paper trail of where the money went, including documentation for rent, utility payments, and the all-important payroll records. 

If you haven’t already, start working with your bookkeeping and payroll providers to make sure you have the documentation you need to show your lender. This can include your payroll tax filings, insurance payments, and contributions to health or retirement plans. If you have any reductions in pay or headcount, be prepared to explain them. For example, if you ran into the situation where you offered to rehire an employee and they declined it, you’ll need documentation of the offer and their refusal.

Your lender may also have additional documentation requirements as part of their process. Even after you’ve provided everything you need for your lender to forgive your loan, it’s a good idea to keep your documentation handy. The Treasury has indicated it intends to audit some – or even maybe all – PPP loan recipients. Assume you will be audited for how you spent your loan money, and prepare accordingly.  

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