January 22, 2021

PPP Loan Forgiveness: What You Should Know

Since round one of the PPP loans expired in August 2020, the SBA has rolled out round two in January 2021. Round two is designed to give small businesses who had not yet received funding as well as those who have lost 25% or more in revenue a chance to receive funding. In this post, we'll provide more information on the latest PPP loan program update and what to expect from the forgiveness process.

Who Can Apply for the PPP Loan?

If you didn’t receive a PPP loan when the first round of funding was available, you may be eligible for round two as long as you meet these requirements.
  • Your business was operational before February 15, 2020.
  • Your business is still open and operating.
  • You have no more than 500 employees.
  • If your business has multiple locations, there are no more than 500 employees per location.
In the event you did collect a PPP loan during the first round but wish to apply for the second draw of funding, you can only do so if your business meets the following criteria.
  • You have 300 or fewer employees, you meet the North American Industry Classification System (“NAICS”) code beginning with 72, or you’re a qualifying news organization with multiple physical locations.
  • You’ve experienced a revenue decrease of 25% or more in 2020 relative to 2019.
  • You’ve used or plan to use the full loan amount on or before the date that you obtain the second round of funding.

What Expenses Qualify for Forgiveness? 

One of the greatest benefits of the PPP loan is that it can be forgiven, as long as you use your funds properly. Like with other SBA loans, there are set parameters on how you can spend your funding. To be eligible for forgiveness, the PPP requires that you spend at least 60% of your loan on payroll and 40% on other qualified expenses. These qualified expenses include:
  • Rent or prepaid mortgage interest
  • Utilities
  • Operational expenses like software or accounting fees
  • Property damages that were not covered by insurance and the result of 2020 public disturbances
  • Supplier expenses such supplier contract fees and purchase orders
  • Worker protection costs like personal protective equipment that helped you meet COVID-19 safety guidelines

PPP Loan Checklist for Forgiveness 

To apply for forgiveness, you’ll work directly with your PPP lender. Most likely, they'll get back to you with a decision regarding your loan application within 60 days. If a portion of your loan cannot be forgiven, you’ll need to repay it to your lender. Fortunately, it will come with a low 1% interest rate and two year term. You’ll also be able to pay off your loan early without a prepayment penalty. In addition, you won’t have to worry about the forgiven part getting taxed as income. While you pay back the loan, however, you’ll need to continue to use the funds on eligible expenses. If and when you apply for forgiveness, you may need to provide the following required documents and financial reporting:
  • Payroll reports
  • Federal payroll tax filings like Form 941
  • Proof of benefits for employees
  • Unemployment insurance forms
  • Proof of rent or mortgage payments
  • Proof of utility payments that indicate your business was fully operational before February 15, 2020

PPP Loan Forgiveness Pitfalls to Avoid

To increase your chances of being eligible for PPP loan forgiveness, it’s in your best interest to avoid these common pitfalls.

1. Not Understanding the Covered Period

Since your PPP loan is designed to cover 8 weeks or 24 weeks worth of expenses, your loan forgiveness will depend on your costs during your chosen time frame. If you have additional funds left over when your covered period comes to an end, you can return them to your lender or use them and pay back that portion with 1% interest

2. Ignoring the 60% Payroll Rule

To maximize forgiveness, you must use at least 60% of your loan for payroll costs. Payroll costs include salaries, wages, commissions, tips, bonuses, hazard pay, state and local taxes, and benefits. Your amount will be reduced if you use less than 60% for payroll expenses. For this reason, you’ll need to include a detailed document that outlines your specific payroll and non-payroll costs during the covered period.

3. Not Keeping Proper Documentation

If you’d like to be eligible for loan forgiveness, it is your responsibility to document your spending. Failure to keep proper documents can make it a challenge for you to prove that you used your loan proceeds appropriately. Your payroll company and accountant, bookkeeper, and CPA can help you maintain the right documents.

Conclusion: Consult Your Lender

For more information about PPP loan forgiveness, don’t hesitate to ask your lender. They can answer any questions you may and guide you through the process. Most likely, you'll find it fairly straightforward and can help your business during this challenging time.