The Paycheck Protection Program provides fully forgivable loans to small businesses struggling through the coronavirus pandemic. But applying for that forgiveness can be daunting, especially for business owners who have limited resources at their disposal.
We’ve put together a guide to help business owners better understand the PPP loan forgiveness process.
Requirements for PPP loan forgiveness
Loan forgiveness requirements are the same for first- and second-draw PPP loans. To receive full loan forgiveness, you need to maintain staffing and compensation levels during the covered period.
Additionally, money from your PPP loan must be spent on eligible expenses (see below) during the covered period. In order for your loan to be fully forgiven, at least 60% must be spent on payroll costs.
The covered period for most loans made in 2020 is 24 weeks after your loan is disbursed, but borrowers with loans issued before June 5, 2020, may opt for the original eight-week period. Business owners receiving a first- or second-draw loan in 2021 can opt for a covered period from eight to 24 weeks.
Expenses eligible for loan forgiveness
Eligible expenses were originally limited to payroll and operating costs, but the coronavirus relief bill passed in December 2020 expanded the list to include supplier costs, expenses related to health and safety enhancements and some property damage.
The following types of expenses now qualify for PPP loan forgiveness:
Payroll costs: This includes all wages paid, including tips, commissions and bonuses as well employer-paid benefits such as insurance, sick leave and retirement contributions. Compensation for employees earning more than $100,000 per year aren’t eligible for forgiveness.
Operating costs: This includes utilities, business software, rent, mortgage payments and interest and accounting services.
Supplier costs: The cost of goods essential to operating your business is eligible for forgiveness if the purchase order or contract was in place before the covered period. Purchase orders for perishable goods made during the covered period are also eligible.
Property damage: This is for repairs for damage or loss due to looting, specifically related to public disturbances in 2020. Costs covered by insurance aren’t eligible.
Worker protection: This includes personal protective equipment and other costs related to health and safety requirements, such as health screenings, installation of barriers or expansion of outdoor dining.
A few nuances to note: Costs incurred before the covered period, but paid during the covered period, are eligible for forgiveness. As are costs incurred during the covered period but paid after it ends, provided they are paid on or before the next regular payroll or billing date.
When to apply for PPP loan forgiveness
You can apply for PPP loan forgiveness as soon as you’ve spent the funds or as late as when your loan matures. But, ideally, you’d do so before you have to make a single payment.
Payments on PPP loans are deferred for 10 months after the covered period (eight to 24 weeks) ends. You’ll need to start making loan payments if you apply for forgiveness after this date.
Borrowers aren’t eligible for forgiveness if they apply after their loan matures, which is two years for loans originated before June 5, 2020, and five years for loans issued after that date.
How to apply for PPP loan forgiveness
Contact your PPP lender when you’re ready to apply for forgiveness. They can direct you to the correct loan forgiveness form. You’ll need to submit that along with paperwork showing how you spent your loan. Collecting this paper trail as you go will make it easier to apply for forgiveness. See below for the types of documentation you may need to provide.
Documentation needed for PPP loan forgiveness
Along with your loan forgiveness application, you will need to provide proof of how you spent your PPP loan. Remember, only funds spent on allowable expenses will be forgiven. And at least 60% of your loan must be spent on payroll costs to qualify for full forgiveness.
Third-party payroll reports.
State and local quarterly financial reports.
State unemployment insurance filings.
Tax documents: Form 1040 Schedule C or Schedule F, Form 1065 Schedule K-1, Form 941, Form 944, Form W-2, Form W-3.
Payment receipts, canceled checks or account statements showing employer health and retirement contributions.
Utility bills reflecting payments made.
Purchase orders, contracts and receipts for vendor payments.
Canceled checks or receipts for covered expenses, such as business software, protective equipment, safety modifications and repairs for damage sustained during summer protests.