Between April 2020 and May 31, 2021, the Small Business Administration’s Paycheck Protection Program disbursed $790.9 billion in small-business loans to struggling enterprises. As of January 2, 2022, over $661.5 billion of the lent amount had been forgiven.
Continue reading to learn more about SBA loan forgiveness for PPP loans, including when and how to apply and what expenses are covered.
When to apply for PPP loan forgiveness
Borrowers who acquired a PPP loan before the program’s termination on May 31, 2021, have already completed their coverage period and can request forgiveness now. If you haven’t heard from your lender about forgiveness, contact them right away.
You have two years for loans issued up to June 5, 2020, and five years for loans issued after that date to petition for PPP loan forgiveness before your loan matures. It’s preferable to take action, though, well in advance of that day, ideally before any payments are due. After the covered period has ended, PPP loan payments are postponed for ten months.
How to apply for PPP loan forgiveness
If your loan was for $150,000 or less
Around 92 percent of all borrowers fall into this category. Such business owners have two options for applying for PPP loan forgiveness.
- Through your lender. When your protected time is finished, your PPP lender will generally get in touch with you and provide details on how to apply (eight to 24 weeks after you receive your funds). Some even pre-fill your application with the essential data, making asking for forgiveness simple.
- Through the SBA. You can apply through the SBA’s PPP Direct Forgiveness Portal if your PPP lender is one of the more than 1,400 participating in the program.
You must respond to the same inquiries as on SBA Form 3508S, regardless of how you apply. If it’s your first PPP loan, you don’t have to provide any more information or provide any receipts, payroll records, or other supporting paperwork. Before their debt can be forgiven for second-draw loans, borrowers must demonstrate the necessary revenue loss.
If your loan was for more than $150,000
The PPP lender will accept applications for forgiveness from business owners having PPP loans that are more than $150,000. Before applying, check with your lender, as many have procedures that should adhere to SBA Form 3508 requirements.
If you fit this description, you must provide documentation of your loan usage. It will be simpler to ask for forgiveness if you keep track of all of your documentation as you go. The types of documentation you might need to submit are listed below.
Requirements for PPP loan forgiveness
Both PPP loans with the first and second draws have identical loan forgiveness requirements. You must maintain personnel and remuneration levels during the covered period to receive complete loan forgiveness.
Additionally, during the covered period, funds from your PPP loan must be used for approved purposes (see below). At least 60% must go toward payroll expenses for your loan to be forgiven entirely.
While borrowers with loans provided before June 5, 2020, may choose to keep the original eight-week duration, the covered time for most loans produced in 2020 is 24 weeks after your loan is disbursed. In 2021, business owners receiving a first- or second-draw loan can choose a covered term ranging from eight to 24 weeks.
Expenses eligible for loan forgiveness
The coronavirus relief bill passed in December 2020 enlarged the list of eligible expenses to include supplier costs, spending connected to health and safety measures, and some property damage. Initially, qualified expenses were only limited to payroll and operational costs.
The PPP loan forgiveness program now covers the costs listed below:
- Payroll costs: This covers any compensation received, such as gratuities, commissions, bonuses, and perks the employer provides, like insurance, paid time off for illness, and retirement contributions. Employee compensation for those making over $100,000 annually is not eligible for forgiveness.
- Operating costs: This includes the principal and interest on a mortgage, rent, utilities, and business software like accounting, payroll, or inventory control systems.
- Supplier costs: If the purchase order or contract was in place before the covered period, the price of products necessary to run your business is eligible for forgiveness. Perishable goods ordered throughout the covered time are also qualified.
- Property damage: Regarding public disturbances in 2020, this is for repairs for loss or damage caused by looting. Insurance-covered expenses cannot be reimbursed.
- Worker protection: Personal protective equipment and other expenses for meeting health and safety criteria, such as the expansion of outdoor eating or the installation of barriers, are included in this.
A few nuances to note: Prior costs incurred but not paid for until after the covered period are eligible for forgiveness. Costs incurred during the covered period but paid after it has ended also covered as long as they are paid by the next scheduled payroll or billing date or earlier.
Documentation needed for PPP loan forgiveness
If your loan was for more than $150,000, you must show documentation of how it was used. Only money used for eligible expenses will be forgiven, and to receive complete forgiveness, at least 60% of your loan must be used for payroll expenses.
The supporting documents for your PPP loan forgiveness application are below. Not all the paperwork on this list will be required for every type of business.
- Third-party payroll reports.
- State and local quarterly financial reports.
- State unemployment insurance filings.
- Bank statements
- 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.
- Account statements.
- Utility bills reflect 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.
When you request forgiveness of your first PPP debt, you do not need to provide further evidence if your PPP loan was less than $150,000. Instead, you only confirm that you complied with the program’s rules by signing a paper.
You must provide data demonstrating a decrease of at least 25% in yearly gross receipts for any quarter of 2020 compared to the same quarter in 2019 for second-draw loans under $150,000.
COVID EIDL loans
Even though payments are deferred for the first two years, loans provided by the SBA’s COVID-19 Economic Injury Disaster Loan (EIDL) program must be paid back in full.
For loans up to $15,000, borrowers who obtained a Targeted EIDL Advance or Supplemental Targeted Advance are exempt from making partial payments. No application for forgiveness is necessary because these advances are considered grants.