You may have received funding from the Small Business Association (SBA) Paycheck Protection Program (PPP), which was a major component of the federal CARES Act.  While the funding is technically called a loan, 100% of the loan can be forgiven if you follow the PPP loan forgiveness rules. 

According to the US Treasury, the SBA will begin approving and paying out forgiveness requests as soon as this week after numerous complaints from banks and lenders that the process was overwhelming.

It can be difficult for small businesses to navigate the ins and outs of how to achieve total Paycheck Protection Program forgiveness. Furthermore, the SBA hasn’t exactly made it simple, with updated rules and regulations that some many find hard to keep up with. 

One of these updates came in the form of the Paycheck Protection Program Flexibility Act on June 5, 2020. In this article we’ll go over the new rules, as well as how to apply with the PPP loan forgiveness application. 

Note: This article does not cover how to apply for funding, but instead how to apply for PPP forgiveness. 

A brief overview of PPP loan forgiveness terms 

The amount of funding you either already received or are waiting to receive is equal to 2.5 times your average monthly payroll cost for 2019 or $10 million, whichever is lower. The funding you get from the loan can be used for: 

  • Payroll: Payroll costs include wages, salaries, PTO, and health benefits. 
  • Mortgage interest: You can use the funds to pay for mortgage interest as long as your mortgage was signed before Feb. 15, 2020. 
  • Rent: As long as your lease was signed before Feb. 15, 2020, you can pay rent with the loan. 
  • Utilities: If your services began before Feb. 15, 2020, you can also pay utilities with the funding. 

What’s included in the utilities category? According to the CARES Act, you can spend the funding on electricity, gas, water, transportation, phone services, or internet access. If you use your PPP loan for one of the spending buckets mentioned above, that money becomes eligible for forgiveness. 

24 weeks of eligible expenses

If you got your PPP loan number on or after June 5, 2020, you can spend the funding over a 24-week period. If you received your PPP loan before June 5, you can still opt to use the original 8-week period. The cutoff date for eligible expenses (meaning your forgivable amount) is December 31, 2020. 

Your 24-week period starts the day you received your first loan payment—not necessarily the day you signed your loan agreement. If you receive your loan on July 16 or later, you won’t have the full 24-week coverage due to December cutoff date. 

Don’t worry about adjusting your payroll schedule to fit this window. Any payroll incurred during the 24 weeks is an eligible expense. 

PPP Forgiveness payroll percentage 

You have to use at least 60% of the funding on payroll costs in order to get the most out of PPP loan forgiveness. You can still receive some forgiveness if you don’t follow this rule, but the amount will reduce in proportion to the percentage you did spend on payroll. 

This new percentage is a result of the changes to PPP loan forgiveness laid out in the Paycheck Protection Program Flexibility Act. Initially, small business owners had to spend 75% of the funding on payroll. 

Note: You can’t include payments to independent contractors in this percentage. 

Maintaining staff numbers

You must maintain the number of employees on your payroll in order to qualify for full forgiveness. If you previously laid employees off due to COVID-19, you have until December 31, 2020 to rehire them. 

However, some employees may not want to return to work. In this case, you may be able to exclude this previous staff member if: 

  • You send the employee a written job offer. 
  • The wage and hours you offered to employee were the same as before they were laid off.  
  • You document the employee’s offer rejection. 

You can also qualify for an exemption if you fired the employee for cause. If the employee voluntarily quit or asked for a reduction in hours and received that reduction, you could qualify for an exemption as well. 

You might have to show that you could not hire similarly qualified employees for certain unfilled positions, or that you could not return to normal staffing levels due to safety regulations. It’s also important to note that employees who reject your job offer may not be eligible for further unemployment insurance as a result. 

Staff maintenance example

Let’s walk through an example: say you had five full-time employees who each made $4,000 a month, but you laid them off back in February because of the coronavirus pandemic. Your PPP loan amount was $50,000. 

Once you receive your loan, you’re able to hire back 4 out of the five employees. This places your staffing level at 80% of where it was. 

You spend $96,000 on your current employees over the 24-week period, which is more than your PPP loan amount. You apply for the full forgiveness of your loan—$50,000. Since you have a smaller workforce, your forgivable amount would be multiplied by .80. 

This would mean your forgiveness amount would be $40,000.

Maintaining wage levels 

The PPP loan forgiveness regulations also require you to maintain at least 75% of total wages. Every employee that did not receive an annual amount of $100,000 in 2019 will undergo assessment on this requirement. 

If any employee’s pay is less than 75% of the most recent quarter of their employment, the difference between 75% of their pay and their current pay will be reduced from your forgivable amount. 

Let’s stick with the original numbers for another example. You have five employees who each made $4,000 a month, giving you a PPP loan of $50,000. Again, you had to lay them off due to COVID-19. But this time you were able to hire them all back at a lower wage rate of $2,500 a month. 

You spend $75,000 on your employees over the 24-week period, which is more than your loan. You claim full forgiveness on your loan. 

The 75% minimum salary for each of your employees would be $3,000. You’re paying $500 less than that to each employee every month. Multiply that by 6 to bring it to the 24-week period and you get $3,000. This amount is deducted from your forgivable amount, but since it’s repeated for each employee, your forgivable amount would be $35,000. 

How to apply for PPP loan forgiveness

The first step to applying for PPP loan forgiveness is to download the application here. You’ll need to fill it out yourself after your 24-week window is up and then submit it to your lender for processing.  

Note: If you plan on restoring your staff or wage level, don’t apply for forgiveness until you’ve already done so. You have 10 months to apply for forgiveness from the end of your covered period or December 31, 2020, whichever comes first. 

At first glance you’ll see the form isn’t very user-friendly, so you can utilize the guidance on how to apply from the SBA to make the experience a little easier. 

You’ll need to collect a few documents in order to complete the application:

  • Verification of the number of full-time employees on payroll, as well as their wage rates for the period used to show you met the staff and wage level requirements. These can include payroll reports, payroll tax filings, or documents that verify benefit contributions. 
  • Documents that verify your mortgage, utility, or rent payments. These can be in the form of payment receipts and account statements. 

Your lender must respond with a forgiveness determination within 60 days of receiving your application. After the SBA determines your your loan forgiveness amount, your loan payments will begin. However, if you follow all the rules and regulations that come with your PPP loan, you ideally won’t have a payment at all.