What is a PPP Forgivable Loan, and How Can I get my Loan Forgiven?

The PPP loans are forgivable under certain conditions only. If you have received (or hope to receive) a Paycheck Protection Program loan and want loan forgiveness, understand the requirements and how to apply.

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Can PPP loans be forgiven? Yes — under certain conditions. Learn what a Payroll Protection Program Forgivable loan is and the requirements that must be met.

The Paycheck Protection Program has issued billions of dollars in loans to small and medium-sized businesses (SMBs) since it was approved in March. After funding ran out in less than 2 weeks, the federal government authorized an additional $320 billion. The PPP program provides loans to businesses to cover the costs they incur due to mandated COVID-19 shutdowns and reduced commerce that has resulted from the virus.

The PPP loans are forgivable under certain conditions. The Department of the Treasury has issued guidelines on what costs are forgivable under the program, and which will need to be repaid. Forgiveness of some PPP loan costs will turn the “loan” into a grant that businesses will not need to repay to the Small Business Association. SMBs will eventually need to repay costs that are not specifically “forgivable” at this time. Loan payments can be deferred for 6 months.

Forgiveness of some costs will turn the “loan” into a grant that businesses will not need to repay to the Small Business Association.

What is a forgivable loan?

Loans can cover:

  • Payroll costs, including salary wages, commissions or tips (capped at $100,000 for each employee)
  • Employee benefits, health premiums and retirement benefits
  • Vacation, parental, family, medical, or sick leave
  • Interest on mortgage incurred before Feb. 15, 2020
  • Rent, under lease agreement before Feb. 15, 2020
  • Utilities, which service began before Feb. 15, 2020
  • State and local taxes assessed on compensation
  • For sole proprietors or independent contractors, wages, commissions, income, or net earnings capped at $100,000

Coverage is for the 8 weeks after SMBs receive the loan.

To meet the threshold for loan forgiveness, the program requires no more than 25% of the loan amount be allocated to facility costs (rent, utilities, etc.)

Businesses should issue 75% of the loan to paying employees. The payment can be for back, current, or upcoming pay for a period of 8 weeks total.

Payroll loan forgiveness requirements

  1. The loans require employees to be paid no more than what they would normally earn. There is also a cap of $100,000 per year (broken down by weekly payments) per employee. This means employees who normally earn $52,000 per year would be eligible to receive $1,000 per week in pay through the loan program and meet the forgiveness threshold. For employees who normally earn over $100,000 per year, the maximum weekly payment is about $1,925. This is the most an employee can receive for the forgiveness threshold. Anything SMBs pay above that threshold will be a loan that SMBs will need to repay.
  2. You can pay yourself back under certain conditions. Sole proprietors, pass-through corporations, and the self-employed may also use the PPP loan/grants to pay themselves their back, current, and future wages during the 8 week period.
  3. To assure 100% forgiveness, employees should not receive payment higher than their salary as of February 15, 2020. If you’re hiring them back full-time or undoing wage reductions due to diminished hours, wages paid will be covered for 8 weeks total, ending June 30. If you laid staffers off or reduced their hours, it will be time to hire them back or reinstate them. This will assure 75% of the loan received is allocated to employee salaries. Every dollar over 25% of the loan that isn’t spent on salaries, will need to be repaid — including interest.

What do payroll costs include? 

Payroll costs include more than just a paycheck. The program covers salaries, commissions, tips, and other costs. It also includes employee perks, such as vacation, parental, sick, or family leave. Payments made to cover insurance premiums or retirement benefits are eligible under the PPP.

The fine print on payroll costs

The amount of loan forgiveness may be reduced if you cut:

  • Full-time employee headcount
  • Salaries by more than 25% for any employee earning less than $100,000 per year

You have until June 30, 2020 to restore employment and salary levels that were changed between February 15, 2020 and April 26, 2020.

Note: If your business is required to pay qualified sick leave under the Families First Coronavirus Response Act, those payments are expressly excluded from the PPP forgiveness program since these wages qualify for tax credits under the FFCRA.

How to apply for loan forgiveness

Documentation on how you spent the PPP funds  is essential. It’s important you document everything you spend in the 8 weeks following the loan.

When you’re ready to go your lender to submit documentation for loan forgiveness, you’ll want to bring detailed records of what payments you’ve made.

If you run payroll through a third-party processor or Payroll Software Tool, you’ll be able to download and print all the documents you need to substantiate payroll.

If you process payroll manually, you’ll want to bring copies of check ledgers and even cancelled checks. This will help verify the employees were remitted their wages.

When you’re ready to go back to the SBA or your lender to submit documentation for loan forgiveness, you’ll want to bring detailed records of what payments you’ve made.

Plan to bring with you documentation about the following:

Wages

  • Payroll documentation, including wages, taxes, tips, commissions, healthcare premiums paid, and sick/family leave payments that qualify under the PPP
  • Payroll tax filings, if made
  • Unemployment insurance filings, if any. These can verify if employees came back

Other expenses

  • Documentation of rent/mortgage and utility bill payments due
  • Check ledgers and/or cancelled checks to verify the payment was made

Remember that all totaled, your payroll costs should equal 75% of the amount you requested under the program. If employees normally receive tips or commissions, you can include extra wages under the PPP. This can help compensate them for lost additional income beyond their base salary.

When will I know if my PPP loan is forgiven?

The lender has 60 days to make a decision if the loan is forgiven.

If any portion of the loan does not qualify for loan forgiveness, all payments are deferred for 6 months. Interest is 1% and will continue to accrue over this period. The loan will be due in 2 years.

The SBA reported they’ve issued over 1.6 million loans through April 16, 2020. Loan forgiveness requests will likely begin after the June 30 application due date.

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