Update: On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021 into law. In the bill are guidelines for a second round of the Paycheck Protection Program. This article has been updated with new PPP forgiveness rules. You can also learn everything you need to know about the PPP updates in our article.
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.
It can be difficult for small businesses to navigate the ins and outs of how to achieve total Paycheck Protection Program forgiveness, but the new bill aims to make the application process easier.
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 you signed your mortgage before Feb. 15, 2020.
- Rent: As long as you signed your lease 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 does the utilities category include? 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.
Whose eligible for PPP forgiveness?
With the new bill comes a new rule stipulating that if you received a loan of $50,000 or less, you will be eligible for full forgiveness, even if you reduced your FTE (full-time equivalent) employee count or reduced employee wages or salaries.
In other words, as long as you meet the other forgiveness criteria, you can skip the complicated calculations around FTE employees and payroll expenses and still most likely be eligible for full forgiveness.
Eligible expenses coverage period
When you apply for your loan, you can choose a term of 8-24 week coverage period.
Your coverage period starts the day you received your first loan payment—not necessarily the day you signed your loan agreement. Don’t worry about adjusting your payroll schedule to fit this window. Any payroll incurred during the coverage period 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.
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How to apply for PPP loan forgiveness
The first step to applying for PPP loan forgiveness is to download the application. If this is your first time taking part in the PPP, download this form. If you are taking a second PPP loan, you’ll need to download this form.
Fill out the form yourself after your coverage period 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’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. If you follow all the rules and regulations that come with your PPP loan, you won’t have to pay.