Update as of May 20, 1:00pm PT: This article has been updated to reflect the SBA and Treasury’s latest guidance on PPP loan forgiveness.
Beyond the ease of qualifying and low interest rates, perhaps the most attractive feature of Paycheck Protection Program (PPP) loans is that they are eligible for “forgiveness.” This means that the lender can release the borrower from the obligation of repaying the balance. In other words, borrowers can get up to 2.5 times their monthly payroll costs without paying a cent.
However, “free” money is seldom unconditional. You’ll need to apply for forgiveness after the eight-week loan term is up and meet certain requirements to qualify.
For more information about how to apply for PPP loan forgiveness and answers to frequently asked questions, read on.
How do I qualify for PPP loan forgiveness?
Once you’ve applied for and received a PPP loan, you must spend the loan on approved expenses in order for it to be eligible for forgiveness. Luckily, the loans are intended to help with payments many business owners are struggling with right now, including:
- Payroll costs (more on what this means in the next section)
- Interest for mortgages and certain debt*
- Business rent obligations (real or personal property)*
- Business utility payments (including electricity, gas, water, transportation, telephone, or internet access)
- Health care benefits
- Additional wages to account for the reduction in tips for tipped employees
*Mortgages and lease agreements must have been signed before February 15, 2020. Interest on debt must also have been incurred prior to February 15, 2020.
Non-payroll costs must be incurred and paid during the covered period. Or, if the costs were incurred during the covered period but are due after the covered period ends, they will still be forgivable if they’re paid on or before the billing date.
If you use any part of your PPP loan for expenses not on this list, that amount cannot be forgiven. Also note that only 25% of your loan funds can be used for the non-payroll costs mentioned above if you want the full loan amount to be forgiven.
Finally, in order to qualify for full loan forgiveness, you must maintain your employee headcount and their compensation levels. If you’ve made any staffing or wage reductions between February 15, 2020 and the end of the eight-week period following disbursement of your loan, you have until June 30, 2020 to rehire employees and restore salary levels. Otherwise, your forgiveness amount will be reduced.
There are many nuances to how to calculate your eligible headcount and appropriately restore your staff and wages. We cover them in detail in our PPP spending guide.
What costs are included under forgivable payroll costs?
New guidance defines payroll costs as being:
- incurred on the day an employee’s pay is earned, and
- paid on the day the employer distributes paychecks or makes an ACH transaction.
The guidance further clarifies that payroll costs that were incurred but not paid by the last day of the eight-week period are still eligible for forgiveness if they are paid by the next regular payday.
Forgivable payroll costs include:
- Salary, wages, commissions, or tips—capped at an annual sum of $100,000 (prorated to the eight-week period) for each employee
- For a sole proprietor or independent contractor applying themselves (not an employer trying to recoup their payments to an independent contractor), payroll costs can include wages, commissions, income, or net earnings from self-employment, once again, capped at $100,000 per year for each individual.
- For tipped employees, you can pay wages to cover what they would normally have earned in tips and have them forgiven.
- Paid time off and leave, including costs for paid vacation and parental, family, medical, or sick leave
- Note: If you’re using credits from the Families First Coronavirus Response Act (FFCRA) for any of the above, those amounts are not eligible for forgiveness.
- Employee benefits, including group health insurance premiums and payment of any retirement benefit
- This includes:
- Health insurance plans
- Dental and vision plans
- Pension plans
- Health FSAs
- HRAs (but NOT QSEHRA)
- This does not include:
- Group term life plans (as long as there are no ancillary benefits for medical care)
- Long-term and short-term disability plans (again, as long as there are no ancillary benefits for medical care)
- Commuter benefits
- This includes:
- State and local taxes
- Note: you may not be able to get forgiveness for the employer’s share of FICA, RRTA, or federal income taxes reported on Form 941.
What info do I need to include in my application for loan forgiveness?
In your application for loan forgiveness, you must document the following:
- A record of the number of full-time employees and pay rates your business maintains during the eight-week forgiveness period, via the following documentation:
- payroll reports or bank statements
- payroll tax filings with the IRS
- state income, payroll, and unemployment insurance filings
- Proof of payment, including cancelled checks, receipts, and other documentation that verifies payments for mortgage, lease, and utility payments
- For business mortgage payments, copies of the amortization schedule or copies of your lender account statements
- For rent payments, copies of your lease agreement
- A certification that all the information you provide is accurate and that your loan was used to retain employees, or make rent, mortgage, or utility payments
You should check with your lender to determine if any additional information is required.
What do I need to do to get my loan forgiven?
Step 1: Keep track of your spending during your eight-week loan term.
During your eight-week forgiveness window—which either begins the day your loan is disbursed or on the date of your first payroll after disbursement (if you qualify for this option)—track everything you spend your PPP funds on.
Make sure the items map back to the list of forgivable expenses, and track how much you’re spending on non-payroll costs to get an idea of how much of your loan will be eligible for forgiveness (try to keep it under 25% of the full amount you spend).
If you’re a Gusto customer, use the PPP forgiveness reporting tool in your dashboard to see how much of your loan amount is going towards qualifying payroll expenses.
Step 2: Prepare your payroll report.
At the end of the eight-week period, use your federal and state payroll tax filings, payroll history, and bank statements to prepare a report of all your eligible payroll expenses, including employer contributions to health plan premiums and unemployment insurance. Your financial advisor or payroll provider can help you prepare this report.
Step 3: Gather documentation for non-payroll expenses.
Collect proof of payment for your qualifying non-payroll expenses, like rent, mortgage interest, utility payments, owner compensation, and so on.
Step 4: Keep documentation for employees that are excepted from the FTE requirement.
Employees who refuse an offer of rehire, employees who are terminated for cause, and employees who voluntarily resign or voluntarily reduce hours do not count against the employer when calculating headcount, salary, or wage reductions.
In order for this to apply though, you must have written documentation of these rehire offers or that proves the other criteria above. You only need this if you also do not replace the headcount or hours for these individuals during the eight-week forgiveness period.
Step 5: Submit your forgiveness application to your lender.
Check with your lender to see if they require anything else in order to get your loan forgiven. Once you’ve fulfilled all their requirements, submit your forgiveness application to your lender with the proper documentation after your eight-week forgiveness period ends.
What would reduce the amount of my loan that’s forgiven?
If your business reduced salary or wages (compared to the first quarter of 2020) or the number of employees (compared to a lookback period) between February 15, 2020 and April 26, 2020, the amount forgiven may be reduced.
But if you are able to restore your headcount and wages to your first quarter and lookback averages by June 30, 2020, reductions of your forgiveness amount can be waived. More on that below.
Additionally, if you don’t spend at least 75% of your total PPP loan on payroll costs, the amount that can be forgiven will be reduced. Check out our breakdown on calculating loan forgiveness reductions to figure out your new forgivable loan amount.
If you’re unable to uphold the loan forgiveness requirements, don’t worry—your loan payments will still be deferred up to six months.
What if I’ve already had to lay off employees—can I still get loan forgiveness?
Again, if you’ve let go of employees or reduced their wages between February 15, 2020 and April 26, 2020, you have until June 30, 2020 to rehire employees and reverse any pay cuts to prevent your loan forgiveness amount from being reduced. In order to have rehired employees count for your forgiveness application, you must run a payroll that includes any rehired employee before generating your payroll report.
You don’t have to rehire the same employees to meet your forgivable headcount. If an employee is terminated for a legal cause, if they voluntarily resign or reduce their hours, or if a laid off employee refuses your rehire offer, these won’t count against your forgivable FTE count. Just make sure you have records to support each of these instances.
When will I find out if my loan was forgiven?
All lenders have 60 days from that date that you apply for forgiveness to decide whether or not you qualify. If any portion of your loan is not forgiven, those amounts must be repaid within two years. As a bonus, any forgiven loans will be excluded from gross income for tax purposes.
If my loan isn’t forgiven, how do I pay it back?
In cases where your PPP loan isn’t forgiven, make arrangements directly with your lender to repay the loan. The standard terms are 1% interest and payback period of two years.