Paycheck Protection Program (PPP) Loan Forgiveness: Requirements, When and How to Apply

The Paycheck Protection Program (PPP) was a huge federal program that paid out $790.9 billion in small business loans during the COVID-19 pandemic. The PPP Act, which instigated the program, allowed for much of that money to be forgiven, so the businesses that received it don’t have to pay it back. Since the program ended on May 31, 2021, nearly $661.5 billion has been forgiven.

If your business received a PPP loan, and you haven’t yet applied for forgiveness, you still can. Though there are limitations on exactly what expenses can be forgiven, most companies will be able to write off at least some of their PPP debt.

PPP Loan Forgiveness Through the SBA 

If your business received a PPP loan before the program ended on May 31, 2021, you can apply for PPP loan forgiveness until the date when your loan matures, which is two years for loans originated before June 5, 2020, and five years for loans issued on or after that date. However, you can apply earlier than that, or as soon as your covered period ends. It’s best to apply early, because you will have to start paying the loan back 10 months after your covered period ends.

The vast majority of these loans (92%) were for less than $150,000. If your loan is in that category, you can apply for loan forgiveness via your lender, or directly from the U.S. Small Business Administration (SBA) if your lender was one of the 1,400 lenders that participated in the SBA’s Direct Forgiveness program.

To apply for forgiveness through the SBA, you should visit the SBA’s PPP Direct Forgiveness Portal. During the application process, you’ll have to fill out SBA Form 3508S. You don’t have to tell the SBA how you spent the funds, and if it’s your first loan, you don’t need to submit any further documentation.

How to Apply for PPP Loan Forgiveness from Your Lender 

You can also apply for loan forgiveness via your lender, and if your loan was for more than $150,000, this is the only way you can apply.

Each lender has a different process for this application, but they will typically contact you if you are eligible for loan forgiveness. Some lenders will even draft SBA Form 3508 for you and just require you to sign it. If you haven’t heard from your lender, and you think you are eligible for forgiveness, you should contact them as soon as possible.

If your loan was for more than $150,000, you may have to provide extra documentation before your loan can be forgiven. Your lender will be able to provide guidance on their process for applying for loan forgiveness.

Eligible Expenses for PPP Loan Forgiveness 

Though the majority of the funds disbursed through the program have already been forgiven, there are some eligibility requirements for forgiveness. First, to receive full forgiveness, your business must have maintained staffing and compensation levels throughout the covered period.

In addition, the money from your PPP loan must have been spent on eligible expenses. These are:

• Payroll costs: To qualify for full forgiveness, you must have spent at least 60% of your PPP loan on payroll, which includes all wages, commissions, bonuses, and insurance payments and retirement payments made on behalf of your employees.
  
• Operating costs: This includes mortgage payments, rent, software, and utility bills.
  
• Supplier costs: The cost of goods that are necessary for the operation of your business are forgivable only if you ordered them before the beginning of your covered period. Perishable goods ordered during the period are also eligible.
  
• Property damage: If your property was damaged during the covered period, you may be able to include repair costs in your forgiveness application, but only if you haven’t already been recompensed for this from your insurance. 
• Worker protection: If you had to pay for personal protective equipment (PPE) for your workers, or install barriers to keep them safe during the pandemic, this cost is also eligible for forgiveness.
  

Documents Needed for PPP Loan Forgiveness

The documents you will need to submit in support of your loan forgiveness application will depend on how much your loan was for, and whether it was a first-draw or second-draw loan.

If your first-draw loan was for less than $150,000, you won’t need to provide additional documents. Instead, you sign a form that certifies that you complied with the rules of the program. If you borrowed less than $150,000 on a second-draw loan, you need to prove that your revenue dropped by at least 25% for any quarter of 2020 compared to the same quarter in 2019.

If your loan was for more than $150,000, you’ll need to submit evidence of how you spent it. Only the expenses in the list above are eligible, and to prove that you spent your loan on these expenses, you may have to submit:

• Third-party payroll reports
  
• State and local quarterly financial reports
• State unemployment insurance filings
• Bank statements
• Tax documents: Form 1040 Schedule C or Schedule F, Form 1065 Schedule K-1, Form 941, Form 944, Form W-2, Form W-3
• Payment receipts, canceled checks, or account statements showing employer health and retirement contributions
• Account statements
• Utility bills reflecting payments made
• Purchase orders, contracts, and receipts for vendor payments
• Canceled checks or receipts for covered expenses

This is an indicative list. Depending on your lender, you may not need to provide all of these documents, or you may have to provide more. Your lender will be able to advise you on exactly what they need.

The Bottom Line

The Paycheck Protection Program (PPP) was a federal program designed to support small businesses through the COVID-19 pandemic. If you received a PPP loan, you may be able to apply for forgiveness. If this is granted, you won’t have to repay the loan.

You should apply for PPP forgiveness as soon as possible.