PPP Loan Forgiveness: The Complete Guide

Editor’s note: on December 20, a new stimulus bill was formed that will simplify forgiveness for loans of $150,000 or less. This article will be updated as more information is released.

The best part of the Paycheck Protection Program is that 100% of the loan can be forgiven—if you meet certain criteria.

Here’s our comprehensive guidance on setting yourself up for full loan forgiveness.

Note: in order to get your loan forgiven, you’ll need to fill out a PPP Loan Forgiveness Application Form. Take 10 minutes to read our walkthrough of how to fill out your PPP Loan Forgiveness form.

Are forgiveness applications open?

Yes! The SBA is currently taking applications, however you must first apply to your lender. For the most up-to-date list of lenders taking forgiveness applications, check out our overview.

The conditions of the Paycheck Protection Program

Let’s first review the terms of the PPP.

The loan amount is based on your average monthly payroll cost for 2019. You can receive 2.5 times that amount, to help cover eight weeks of payroll.

The funds from the PPP can be used for the following purposes:

  • Payroll—salary, wage, vacation, parental, family, medical, or sick leave, health benefits

  • Mortgage interest—as long as the mortgage was signed before February 15, 2020

  • Rent—as long as the lease agreement was in effect before February 15, 2020 (here’s what’s included in rent)

  • Utilities—as long as service began before February 15, 2020 (here’s what’s included in utilities)

All expenses that fall under those categories are eligible for forgiveness. The following conditions will also apply:

1. 24 weeks of coverage

Eligible expenses are those that are incurred over 24 weeks, starting from the day the first payment was made by your lender. This is not necessarily the date on which you signed your loan agreement.

You do not need to adjust your payroll schedule. All payroll that your employees incur over the 24 weeks is eligible, even if the actual payout date falls outside the eight weeks.

December 31, 2020 is the final cutoff date for eligible expenses. For loans being disbursed July 16 and later, this means that you will not be able to take full advantage of the 24 weeks.

If you received your PPP loan before June 5, you can still use an 8-week period.

Not sure if you should go with the 8-week or the 24-week covered period? The main factors to consider are whether you’re a self-employed individual collecting the owner compensation benefit, and whether you have enough eligible expenses to spend the loan on. Read more on how a CPA breaks it down.

2. The 60/40 rule

At least 60% of your loan must be used for payroll costs. Payments to independent contractors cannot be included in the payroll costs. Your forgivable amount will scale in proportion to the amount you spend on payroll, up to the total loan amount.

3. Staffing requirements

You must maintain the number of employees on your payroll.

Here is the calculation you can use to determine if you’ve met this requirement:

First, determine the average number of full-time equivalent employees you had for:

  • The 8-week or 24-week period following your initial loan disbursement, (A)

  • February 15, 2019 to June 30, 2019, (B1)

  • and January 1, 2020 to February 29, 2020. (B2)

Take A and divide that by B1. Do the same with B2. Take the largest number you obtain. If you’re a seasonal employer, you must divide by B1.

  • If you get a number equal to or larger than 1, you successfully maintained your headcount and meet this requirement.

  • If you get a number smaller than 1, you did not maintain your headcount and your forgivable expenses will be reduced proportionately.

Properly hiring back employees may be complicated, but our guide simplifies it for you. Read more about PPP Rules on Rehiring (FAQ).

Exemptions on rehiring employees

Employees who were employed as of February 15, 2020, and were laid off or put on furlough may not wish to be rehired onto payroll. If the employee rejects your re-employment offer, you may be allowed to exclude this employee when calculating forgiveness.

To qualify for this exemption:

  • You must have made an written offer to rehire in good faith
  • You must have offered to rehire for the same salary/wage and number of hours as before they were laid off
  • You must have documentation of the employee’s rejection of the offer

If any of these conditions apply to an employee, you can also qualify for an exemption:

  • They were were fired for cause
  • They voluntarily resigned
  • They voluntarily requested and received a reduction of their hours

You may also be required to demonstrate you were unable to hire similarly qualified employees for unfilled positions, or document that due to safety requirements, you were unable to return to normal operating levels. Note that employees who reject offers for re-employment may no longer be eligible for continued unemployment benefits.

4. Pay requirements

You must maintain at least 75% of total salary.

This requirement will be individually assessed for every employee that did not receive more than $100,000 in annualized pay in 2019.

If the employee’s pay over the 24 weeks is less than 75% of the pay they received during the most recent quarter in which they were employed, the eligible amount for forgiveness will be reduced by the difference between their current pay and 75% of the original pay.

5. Rehiring grace period

You can rehire any staff that were laid off or put on furlough and reinstate any pay that was decreased by more than 25% to meet the requirements for forgiveness, if those changes were made due to COVID-19 between February 15 and April 26. You have until December 31st to do so.

Want to read more into these exemptions? In just 6 minutes you can read a CPA’s breakdown of these safe harbors.

Reductions in your forgiveness amount (examples)

Spending your PPP funds on the right things is straightforward enough. But things get more complicated when you don’t keep your headcount and employee pay levels the same.

Headcount reduction

Let’s say you have three full-time employees and they each made $3,000 per month, meaning your PPP loan amount was $22,500 (3000 x 3 x 2.5). You had to lay them off in February due to COVID-19.

If you only hire back two out of the three employees, your workforce is 67% (two thirds) of your original headcount.

Over the 24 weeks of the PPP period, you spend $36,000 on your employees, more than your PPP loan amount. You claim the full $22,500 of your loan for forgiveness. If we assume you do not qualify for any rehiring exemptions, when it comes to calculating your forgivable amount, because your workforce is smaller, your forgivable amount will be multiplied by 0.67. You would be able to have $15,075 forgiven.

Pay reduction

Let’s say you have three employees and they each made $3,000 per month, meaning your PPP loan amount was $22,500 (3000 x 3 x 2.5). You had to lay them off in February due to COVID-19. You hire back all three of your employees, but you only pay them $2,000 a month.

Over the 24 weeks of the PPP period, you spend $36,000 on your employees, more than your PPP loan amount. You claim the full $22,500 of your loan for forgiveness.

When it comes to calculating your forgivable amount, we look at each employee’s individual compensation. The 75% minimum salary is $2,250, so you’re paying each person $250 less than that each month. The difference is scaled up to a 24-week period, ($250 * 6), so $1,500 would be deducted from the forgivable amount. Repeating that for each employee would result in a total of $18,000 forgiven.

A conversation with a bookkeeper can help make sense of your specific situation. This is where Bench comes in. Learn more about who we are and how we can help beyond monthly bookkeeping.

Forgiveness for self-employed individuals

You are entitled to use the PPP loan to replace lost compensation due to the impacts of COVID-19. You are eligible to claim 2.5 months’ worth of your 2019 net profit to replace pay. If you didn’t have any other payroll expenses factoring into your PPP loan amount, this means that your entire PPP loan could be forgiven for the 24-week period. Take 5 minutes to read our blog post for the self-employed to learn more.

If you are using an 8-week forgiveness period, you can claim 8 weeks’ worth of your 2019 net profit as owner compensation replacement. The remaining PPP funds will need to be spent on utilities, rent, and mortgage interest expenses in order to be forgiven.

If you have mortgage interest, rent, or utilities expenses, you must have claimed or be entitled to claim a deduction for those expenses on your 2019 Form 1040 Schedule C in order to claim them for forgiveness.

For example, if you worked in an office space in 2019 and did not have a home office, you could not have claimed a deduction on your home mortgage interest. Even if you are currently working at home now, you are not eligible to claim home mortgage interest payments for forgiveness.

If you are self-employed but received a PPP loan through multiple businesses, you are capped at $20,833 in owner compensation across all the businesses you’ve received a PPP loan through. For example, if you’ve received a PPP loan through two businesses and you’ve received $15,000 in owner compensation replacement from your sole proprietorship, you’ll only be eligible for $5,833 of owner payroll from your other business.

Ready to apply for forgiveness? Our guide has everything you need to fill out the application form.

Forgiveness for partnerships

As a general partner in a partnership, your eligible compensation is based on your partnership 2019 net earnings.

The maximum partner compensation is capped at the 2019 Schedule K-1 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties), all multiplied by 0.9235.

Read more in our simple guide for partnerships.

After the 24 weeks: applying for loan forgiveness

Applications for loan forgiveness will be processed by your lender. You will need to fill out a PPP Loan Forgiveness Application form and submit that to your lender.

If you had a PPP loan prior to the Paycheck Protection Program Flexibility Act being signed, you can choose to use the original 8-week period instead of the 24-week period. (Check out our guide on selecting an 8-week or 24-week period written by a CPA)

After you submit your application for forgiveness, your lender is required by law to provide you with a response within 60 days.

Forgiveness Timeline

Recordkeeping and required documents for forgiveness

These are the required documents you will need to collect to provide with your PPP loan forgiveness application. Your lender may have additional requirements.

  • Documents verifying the number of full-time equivalent employees on payroll and their pay rates, for the periods used to verify you met the staffing and pay requirements:

    • Payroll reports from your payroll provider (Learn more about how payroll providers are supplying PPP specific reports)

    • Payroll tax filings (Form 941)

    • Income, payroll, and unemployment insurance filings from your state

    • Documents verifying any retirement and health insurance contributions

    • Documents verifying that your eligible interest, rent, and utility payments were active in February 2020

  • Documents verifying your eligible interest, rent, and utility payments (canceled checks, payment receipts, account statements)

Good recordkeeping and bookkeeping will be critical for getting your loan forgiven—you’ll need to keep track of eligible expenses and their accompanying documentation over the 24 weeks. Your lender will likely require these documents in digital format, so take the time to scan any paper documents and keep backups of your digital records.

Furthermore, your business will need to have complete financial statements at the end of your fiscal year. Your lender and the SBA have the right to request and audit your business’s financial documents and records. (Read more about what you need to know about PPP audits)

If you don’t have a reliable bookkeeping solution in place, Bench can do your bookkeeping for you, all online. Learn more.

What happens if I’m not approved for forgiveness?

Your lender may allow you to provide additional documentation so they can reevaluate your request.

Otherwise, your outstanding balance will continue to accrue interest at 1%, for the remainder of the 5-year period.

There is no prepayment penalty. You can pay off the outstanding balance at any time with no additional fees.

How to apply for forgiveness

In order to get forgiveness, you’ll need to complete a Forgiveness Application form and submit it to your lender. Here’s our step-by-step guide to filling out your PPP Loan Forgiveness Application form.

Forgiveness applications are not being accepted yet by lenders because the SBA is preparing for possible changes to forgiveness guidelines by Congress.

How will PPP loan forgiveness affect my taxes?

On November 18, the IRS confirmed that any forgiven expenses will not be tax deductible. They clarified that you should assume you will receive forgiveness on the eligible expenses regardless of whether you’ve received (or applied for) forgiveness yet.

Any expenses you will be applying for forgiveness on should not be included in your deductions on your tax return unless suggested by a tax professional.

Further reading: How the Paycheck Protection Program Affects 2020 Taxes


What were the main changes of the Paycheck Protection Program Flexibility Act?

The two biggest changes are:

  • The eight-week period to use your PPP funds has now been extended to 24 weeks.
  • Previously, you had to spend at least 75% of the funds on payroll. You now need to spend only 60% of the funds on payroll.

Here is a full breakdown of the PPP Flexibility Act.

Can I get PPP expenses forgiven and deduct them from my taxes?

No. Any expenses that you claim for forgiveness under the PPP cannot then be deducted from your expenses. A forgivable PPP loan is already tax-free, so the IRS wants to prevent double-dipping (getting free money from the same source twice). (Read a CPA’s guide on how the PPP, PUA, and EIDL will affect your 2020 taxes)

What counts as a utilities expense?

Business expenses on electricity, gas, water, transportation, telephone, or internet access are eligible uses of PPP funds and qualifies for forgiveness.

Check out our full review of What Are Utility Costs for the PPP?

My bills are due outside the 24-week covered period. Can I claim these expenses?

Yes, as long as you pay it on the next regular billing date, any of those eligible non-payroll expenses (utilities, rent, mortgage interest) can be claimed for forgiveness, prorated to the end of the covered period.

How long do I need to keep my documents?

You must retain your supporting documents for six years after the loan is fully forgiven or fully repaid, and provide them to the SBA or the Office of Inspector General if requested.

Learn more about PPP audits in our 5 minute guide of what you need to know.

Can I prepay my rent or mortgage?

No, prepayment is not an allowed use of the PPP and is not eligible for forgiveness.

What counts as mortgage interest?

Any interest paid on mortgage on property used for business purposes is an eligible expense that the PPP can be used for, and qualifies for forgiveness.

Acceptable examples include:

  • Mortgage interest on a warehouse you own to store business equipment
  • Auto loan interest on a car you own to make business deliveries

How is eight weeks of net profit from 2019 calculated?

Your net profit that was reported on your Form 1040 Schedule C is multiplied by 8/52.

More COVID-19 resources

Looking for other relief programs?

Need more information on PPP loans?

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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