The Paycheck Protection Program rolled out originally in 2020 as a way to assist businesses impacted by Covid-19, however the government has approved extra funding for the program. Quite a bit has changed between the first few rounds in 2020 and the new round in 2021, however the PPP loan forgiveness rules have some subtle differences you may want to keep in mind.
Below, we’ll explain everything you need to know about PPP loan forgiveness. We’ll outline each category to make sure you don’t leave out any of the rules, regulations, and requirements hidden within the fine print.
The 3 Most Important PPP Loan Forgiveness Rules
The best part about PPP loans is that as much as 100% of the funding may be forgiven. However, you’re going to have to follow the the SBA’s guidelines:
1. Forgivable expenses need to be spent on eligible categories and follow the 60/40 rule
2. Eligible expenses need to be incurred over your chosen covered period between 8 and 24-weeks (starting when your lender gives you your first payment)
3. You need to keep the same number of employees on the payroll
Let’s break down each one of these guidelines in greater detail.
1. Forgivable Expense Categories
This year’s PPP 2.0 loans have an extended list of eligible expenses. Before, forgiveness-eligible expenses were restricted to payroll, rent, and utility expenses—now, there is more coverage and extra context:
Payroll: Your payroll expenses encompass wages, salary, commissions, tips, and bonuses. It additionally consists of retirement benefits and paid leave (including vacation and medical). PPP 2.0 loans clarify that organization insurance benefits (like group life, dental insurance, disability, and vision) are all counted as payroll costs.
Rent: Your rent costs for any buildings, vehicles, or equipment which have lease dates starting before February 15, 2020.
Utility bills: Your electricity, gas, water, transportation, telephone, and internet carrier fees for any deals or plans made earlier than February 15, 2020.
Interest payments: Any interest payments on mortgage debts that started earlier than February 15, 2020.
Operations expenses: Any bills for software, cloud computing, or different human resources and accounting needs—this consists of remote-enabling services like Slack, Zoom, and others.
Supplier charges: Expenses made to your suppliers—before acquiring a PPP loan—that are vital for ongoing operations.
Worker protection costs: The expenses for personal protective equipment and adaptive investments that make certain your business complies with federal health and safety guidelines.
Property damage expenses: All costs for damages completed because of public disturbances in 2020 that your insurance did not cover.
Expenses that fall under these categories are eligible for forgiveness. However, you’ll want to follow with the 60/40 PPP loan forgiveness rule.
60/40 PPP Loan Forgiveness Rule
The 60/40 rule states that 60% of your loan needs to be spent on eligible payroll expenses. Any other non-payroll fees that exceed 40% of your loan will no longer be eligible for forgiveness.
2. 24-Week Period of Coverage
Originally, PPP loans needed to be used within eight weeks to be eligible for loan forgiveness. Now, the protected length has been extended to 8-24 weeks.
The protected period begins when you receive your first payment, not when you sign contracts.
In the previous rounds of PPP, you may only apply for forgiveness after the end of your protected period. However, after the PPP Flexibility Act, you could apply for early forgiveness. If you choose to apply for forgiveness early, keep in mind the SBA’s instruction: If the borrower applies for forgiveness earlier than the end of the protected period and has reduced any employee’s salaries or wages more than 25 percent, the borrower must account for the excess salary reduction for the entire 8-week or 24-week protected period.
3. Payroll Requirement Maintenance
To be eligible for complete loan forgiveness, you’ll want to keep the same number of employees on your payroll prior to February 15, 2020. If you don’t keep headcount, you’ll want to rehire personnel (or try and rehire personnel). If you don’t do this, your eligible forgiveness can be reduced proportionately.
You’ll additionally want to maintain at the least 75% of their total salary. This is assessed on an individual employee basis not for your payroll as a whole. If you don’t maintain the 75% salary requirement, your forgiveness amount will be decreased.
How to Apply for PPP Forgiveness
You apply for loan forgiveness via the lender that issued your loan, not the government. After qualifying for a PPP loan with your lender, they have to send follow-up information with step by step instructions on how to apply for loan forgiveness (including a way to access your loan forgiveness application). For the best practices PPP loan forgiveness please review our loan forgiveness checklist above.
When is the forgiveness application deadline?
There is no official deadline. However, if you don’t submit for forgiveness within 10 months of the end of your protected period, then you’ll have to begin making payments on the loan.
What happens if you don’t apply for PPP loan forgiveness?
If you don’t apply for forgiveness, you’ll have to repay the loan with a low 1% fixed interest rate.
You’ll have 2 or 5 years to repay the loan (2 years if you received your PPP loan before June 5, 2020, 5 years if after June 5, 2020). Payments will begin 10 months after the end of your protected period.
Who determines PPP forgiveness?
You can apply for forgiveness through your PPP loan lender, not the SBA. Your lender will confirm your documents and let you know how much of your loan is eligible for forgiveness. Then, the SBA will review your loan and forgiveness application before remitting any funds to your lender.