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PPP Loan Forgiveness Guide
Business Capital

PPP Loan Forgiveness Guide

17 min read


The deadline for PPP application submissions has been extended to May 31, 2021. We encourage all those interested in receiving PPP funding to apply as funds are still available for distribution.

Apply for your PPP loan now.

The Paycheck Protection Program (PPP) launched in April 2020 has seen great success–resulting in a second round of funding and an expansion Flexibility Act to better meet the needs of American small businesses and small business owners. The Coronavirus Relief Bill passed December 27th, 2020 provided an additional $284 billion to the Paycheck Protection Program and made loan forgiveness even easier for American small businesses.

What is loan forgiveness? Loan forgiveness is the cancellation or discharge of an existing loan, meaning you are no longer responsible for the payments or interest of the loan.

We’ve created a guide to help walk you through the PPP loan forgiveness process, so that your business can maximize PPP forgiveness, work closely and effectively with your PPP lender, and find the best financial landing spot for your future growth.

The Paycheck Protection Program in review

The Paycheck Protection Program was rolled out with the passing of the CARES Act, designed to provide financial relief to business owners and employees during the early stages of the COVID-19 outbreak in the United States. The CARES Act stimulus package provided over $2 trillion to the U.S. economy, with loans, grants, and stimulus checks to citizens. One appendage of this act was the Paycheck Protection Program, which provides 2.5 months of payroll funding to qualifying businesses. 

The most popular feature of the Paycheck Protection Program is the possibility of total loan forgiveness. Small Business Administration loans are mercifully low in interest (PPP loans accrue 1% interest once mature), but the ability to have your entire loan forgiven is incredibly enticing to business owners struggling under the economic injuries caused by COVID-19.

Can I apply for second-draw PPP loans if I’ve applied for loan forgiveness for my first PPP loan?
Yes. As long as you used your first PPP loan as outlined you can apply for second-draw PPP loans, so long as you meet all other eligibility requirements (<300 employees, 25% reduction in revenue, etc.).

The PPP Flexibility Act

The Paycheck Protection Program was rolled out very quickly in an effort to respond to the unprecedented challenges of COVID-19. As loan applications were approved and disbursed, many small businesses reported back with suggestions and concerns about the existing process of the PPP loans. In response, a bipartisan congressional effort produced the Paycheck Protection Program Flexibility Act of 2020 on June 4th, 2020. 

The PPP Flexibility Act is designed to make PPP loans easier to use and easier to maximize the loan forgiveness. All changes are retroactive and apply to PPP loans that have been approved and disbursed, though may require working with SBA preferred lenders.

PPP Flexibility Act changes

  • Payroll percentage: Previously 75% of the loan needed to be applied to payroll, but now only 60% of the funds need to be used for payroll costs 
  • Forgiveness window extension: Instead of 8 weeks, business owners now have 24 weeks to utilize funds and apply for loan forgiveness
  • Rehiring exemptions: Laid off workers needed to be rehired before June 30, but business owners now have until December 31 to return to headcount. More exemptions exist for business owners unable to rehire employees. 
  • Repayment: You now have 10 months to apply for forgiveness and payments will begin at that point.
  • Loan lengths: PPP loans are now 5 years in length and existing 2 year loans may be refinanced to 5 years with the lender

The Coronavirus Relief Bill

A new stimulus bill passed in the final days of 2020 provided $900 billion in aid to Americans and their businesses. This bill’s features are retroactive, expanding the deadlines which were set to expire on December 31, 2020 to March 2021 and in some cases even December 2021. This bill also lightens restrictions on how PPP funds can be used and simplifies loan forgiveness for loans under $150,000.

Coronavirus Relief Bill changes to loan forgiveness

  • Eligibility restricted to businesses <300 employees showing a 25% reduction in quarterly revenue compared to the same quarter in 2019
  • Second-draw applications cap at $2 million
  • Business owners may choose their own covered period between 8 and 24 weeks in length, maximizing usage and forgiveness potential
  • Expanded use of PPP funds, including expenses related to COVID compliance and repairing damage due to public disturbances
  • EIDL advances will not be deducted from loan forgiveness totals
  • Loans under $150,000 will need only a simplified one-page forgiveness application detailing the employees retained and how funds were used

Requirements for PPP loan forgiveness

In order for a PPP borrower to have their PPP loans forgiven, the funds need to be used appropriately, and certain conditions need to be met. Total forgiveness is contingent on meeting all conditions, but partial forgiveness can be given and is proportional to the compliance of the business. 

Eligible expenses

  • Payroll, including salary, wages, all types of leave, and health benefits. Independent contractor payments do not qualify as payroll, but employee bonuses can be included. 
  • Mortgage interest
  • Rent 
  • Utilities which includes the traditional utilities of electricity, water, gas, and sewage with the additions of telephone, internet, and transportation.
  • Covered expenses including facility modifications for employee and customer safety, repairs due to public disturbances, upgrades to internet & cloud computing, etc.

Need help tracking expenses? Use Divvy.

Coverage window

Expenses need to come from the eligible categories listed above, and need to be completed during a 24 week window. The Coronavirus Relief Bill provides flexibility for business owners to choose their own coverage window, so long as it is at least 8 weeks and no more than 24 weeks. This allows business owners more control over their funds and employee reduction to maximize forgiveness.

Payroll proportion

In order to be forgiven, at least 60% of the loan amount needs to be used for payroll purposes. If less than 60% of your loan is used for payroll, you can still be eligible for forgiveness, with the amount you spend correlating directly to forgiveness. For example, spending only 40% on payroll would mean 40% of your loan is eligible for forgiveness.

Maintaining headcounts

A major design of the PPP program was to help businesses maintain or return to their existing headcount amidst COVID-19 layoffs. In order to receive loan forgiveness, you need to show that you maintained your headcount or rehired employees within the designated window. Business owners need to calculate their FTE (full time employees) by measuring previous employment against employment during this PPP loan window. 

How do you calculate FTE for PPP loan forgiveness?

  1. Start with the FTE employee headcount you had at the beginning of your PPP loan disbursement (the day you received your first payment). 
  2. Find the average number of full time employees during the period of February 15-June 30, 2019. (This provides a baseline for a seasonal employer.)
  3. Find the average number of full time employees during the period of January 1-February 29, 2020. (This provides a baseline for immediate pre-COVID employment.)
  4. Divide your total from #1 by your total for #2 and write it down. 
  5. Divide your total from #1 by your total for #3 and write it down. 
  6. Take the highest number from step 4 and 5. Seasonal employers must choose their total from #4 to indicate accurate employment numbers. 

If your final total is equal to or greater than 1, you meet the requirement for 100% loan forgiveness. If your final total is less than 1, you may be eligible for a proportionate loan forgiveness amount. 

Exemptions for rehiring

Some business owners have experienced difficulty rehiring individuals after COVID-19 layoffs. You may be eligible to exempt some of the missing headcount if specific conditions are met. 

  • Employee rejects a written job offer for the same pay and hours (must be documented)
  • Employees fired for cause
  • Employees who resigned
  • Employees who requested a reduction in hours
  • Positions for which a qualified individual could not be found
  • You were unable to return to normal operation and employment levels due to safety restrictions

*If you reduced your headcount during February 15-August 26 due to COVID-19, you have until June 30, 2021 to return to full eligibility for loan forgiveness.

Maintaining pay

Eligibility for loan forgiveness is also dependent on business owners maintaining pay for their employees. Owners must maintain 75% of total salary over the loan period. This number is calculated for each individual employee (as long as they don’t make more than $100,000 annually), and is compared with the quarter prior to the loan disbursement window. Paying employees below 75% of original salary or wages will cause your forgiveness to be reduced proportionally. 

*If you reduced your salary below 75% during February 15-August 26 due to COVID-19, you have until June 30, 2021 to return to full eligibility for loan forgiveness.

The February-March 2021 updates to the PPP for small businesses and sole proprietorships allows for larger loans and easier forgiveness that is based more on gross income and less on payroll (which can be difficult or nonexistent for very small businesses). 

How does SBA PPP loan forgiveness work?

Once you receive and use your PPP funds according to the aforementioned requirements, what can you expect for the loan forgiveness process? Much like the awarding of funds, the Small Business Administration wants to make loan forgiveness as easy and generous a process as possible to facilitate the health of American small businesses. However, the designed incentives need to be met. You will need to prove your compliance with the conditions and requirements of the PPP loans 

SBA loan forgiveness will be managed by your SBA-preferred lender. You will submit your PPP forgiveness application to the lender disbursing your PPP funds. Within 60 days the lender will return a loan forgiveness statement which will indicate the loan forgiveness amount and the terms for paying off any funds not eligible for forgiveness. PPP loans before June 5 have a two year term, and loans disbursed after the Flexibility Act will have five year terms.

What documents are needed to receive PPP forgiveness?

Documentation is critical to receive PPP forgiveness, especially if your goal is to have 100% of your loan forgiven. Keep careful records from your application forward, and be sure to have digital and physical copies of the following documents: 

  • Employee numbers and pay (payroll reports, Form 941 tax filings)
  • Contributions to retirement and health benefits
  • State filings of income, payroll, unemployment
  • Interest, rent, and utility payments that were active in February 2020, and any expenses during the coverage period
  • PPP loan application and loan information
  • Economic Injury Disaster Loan (EIDL) documents if you applied for it

How do you apply?

Applying for your PPP loan forgiveness can be a tedious process, but it’s important to comb through it with a critical eye. Begin by downloading and printing the SBA Loan Forgiveness Application Instructions and the SBA Loan Forgiveness Application

Follow the application instructions with the assistance of your accountant or bookkeeper, and be sure to work closely with your SBA-approved lender disbursing your PPP loan. You will submit your application and necessary documents electronically, so scan all documents, but retain your physical copies in the event of a lender or SBA audit. 

Deadline for PPP loan forgiveness

Expenditures and applications for PPP loan forgiveness need to be completed within 10 months of the end of your loan window. If you received your loan before the PPP Flexibility Act in early June you can still use the 8 week window originally designated. We recommend waiting to apply for loan forgiveness until you’ve been able to restore headcount and pay to acceptable levels for loan forgiveness. After applying for loan forgiveness, you will receive a decision from your SBA-approved lender within 60 days. 

How do you maximize PPP loan forgiveness?

In order to maximize PPP loan forgiveness you need to use at least 60% of your PPP loan for payroll costs. The higher the percentage used for payroll, the larger proportion of funds eligible for forgiveness. When your PPP funds are disbursed, focus first on payroll costs–salary, wages, hazard pay, bonuses, pay for sick/family/vacation leave, benefits, and related payroll taxes. 

It is not recommended that you change payroll or check dates, or falsify any information in order to receive a more favorable loan forgiveness resolution. Instead, use careful documentation and save all information. Work carefully with your SBA-approved lender to identify any issues with your loan forgiveness and work toward fixing the issues. You have until June 30, 2021 to resolve any issues with your headcount, payment totals, or other roadblocks to your loan forgiveness.

What states are taxing forgiven PPP loans?

Usually a forgiven loan is taxed as income, but PPP loans were designed to be exempt from income taxation at the federal level. Some states, however, are treating the forgiven loans as taxable income or deny the related deductions. Check your state here to see if you’ll be taxed for your forgiven PPP loan.

What happens if you’re not approved for PPP loan forgiveness?

If some or all of your PPP loan is not approved for loan forgiveness, you will typically have two options. You can continue working with your SBA lender to provide additional documentation to prove eligibility for loan forgiveness, or your loan will begin accruing interest and payments will be due. Interest will be 1% on the remaining balance for a two or five year term (depending on when your loan was awarded).

Forgiveness for self-employed individuals

For self-employed individuals, the PPP loan can replace lost income. Self-employed individuals can claim 2.5 months worth of their 2019 gross income. They can utilize PPP funds for this income (as their own payroll expense), and any remaining funds for approved expenses like rent, utilities, and mortgage interest. The only specification is that any expenses must have also been claimed as deductions for your 2019 taxes. For example, if you work from home and want to use PPP funds to pay mortgage interest for your home, you must have been working from home last year and claimed mortgage interest as a deduction in 2019. 

In some ways it’s a simpler process for self-employed individuals to receive loan forgiveness, since many requested a PPP loan directly for their income–which is 100% forgivable. As long as you don’t have to worry about payroll and headcount, most self-employed individuals can easily qualify for total loan forgiveness. Self-employed individuals will fill out the PPP Loan Forgiveness Application EZ form, rather than the basic PPP Loan Forgiveness Application form.

The Paycheck Protection Program saved businesses across the nation, but the benefits don’t have to stop there. We hope you can take full advantage of the generous PPP loan forgiveness and maximize the positive impact for your business. As always, Divvy is here to help you spend smarter. Check out the COVID-19 hub for more helpful articles.

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