PPP Loan Forgiveness: What We Know

Update: The SBA has now issued official guidance for PPP loan forgiveness, including an application form. We’ve updated the post below with the latest information.

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. With the SBA’s recent release of PPP loan forgiveness guidance, we now know more 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 8 weeks. Per a PPP FAQ doc on the SBA’s website, the 8-week period begins on the day of the first loan disbursement.
  • At least 75% 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 25% of the loan can be forgiven for these non-payroll items. In order to be fully forgiven, 75% or more of your loan amount must go towards paying your employees.
  • 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.

How to Apply for PPP Loan Forgiveness

The application form to request loan forgiveness is now available from the SBA. 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.