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To help your business stay solvent and keep your employee count up, your PPP loans are totally forgivable if you spend the funds as directed within the 24-week Covered Period following receipt of the loan.
Learn more about how forgiveness works, or read on for specific instructions and forms to help you understand what you need to do to have your loan forgiven.
2021 Updates
Please note that there were a number of changes to PPP loans when new legislation was passed in December 2020. We’re covering loan forgiveness applications and forms in this article, but you can see a broader overview here.
How and when can you apply for loan forgiveness?
Employers can apply for forgiveness at any time on or before the loan maturity date. The deadline to apply for forgiveness is 10 months after the end of the Covered Period when the loan should be spent.
If the borrower does not apply for loan forgiveness within 10 months of the last day of the Covered Period, or if SBA determines that the loan is not eligible for forgiveness (in whole or in part), the PPP loan is no longer deferred and the borrower must begin paying principal and interest.
When the application for loan forgiveness is completed, documentation such as payroll reports, payroll tax returns, canceled checks, receipts, account statements, or other proof of payment may be required. Check with your payroll provider to see if any reports are available to itemize and classify these expenses to meet the terms of the CARES Act, FFCRA, or PPP.
What are the PPP forgiveness application forms?
There are three applications available for PPP loan forgiveness, depending on the size of the loan and who the borrower is. Please check with your lender or a tax expert if you’re unsure which form to use for your loan. Also note that your lender may have its own versions of these forms.
- Form 3508S: Businesses with a loan amount less than $150,000 should use this form. This form is shorter and simpler than the full Form 3508 because it does not require employers to maintain employee headcount or compensation levels. To receive complete forgiveness, employers must only certify that they incurred expenses during the Covered Period which satisfy the 60/40 rule for payroll expenses.
- Form 3508 EZ: The SBA introduced a streamlined form that can be used by small business owners who certify they that they meet any one of the following three conditions:
- They are self-employed individuals, independent contractors, or sole proprietors and have no employees.
- They did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or hours of their employees.
- They experienced reductions in business activity as a result of health directives related to COVID-19 (from the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, the Occupational Safety and Health Administration) or due to new standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19 and did not reduce the salaries or wages of their employees by more than 25%.
- See detailed instructions within Form 3508 EZ if you have any questions about this form or whether it applies to your business.
- Form 3508. Borrowers that do not meet the requirements of Forms 3508EZ or 3508S should use the full form to apply for PPP loan forgiveness. If you have any questions about the form, complete instructions are available.
Again, the deadline for filing any of these forms is 10 months following the end of a borrower’s Covered Period.
Other things that will affect some businesses:
There are a few other small wrinkles that may affect owner compensation, owner-employers of S corporations, and businesses that return a PPP loan. Also note that some additional avenues of relief are available in 2021 — including the ability for some businesses to take advantage of both employee retention tax credits and a PPP loan.
What if your PPP loan isn’t forgiven?
A borrower has up to five years to pay off any portion of a PPP loan that’s not forgiven. The interest rate specified by the PPP program is just 1% per year, so it’s relatively inexpensive debt. At the same time, it’s worth making the effort to document your expenses because loan forgiveness is a much better outcome!
We’ll continue to update this article and our COVID-19 resource center as new developments are made public.
This article is for informational purposes only and should not be relied on for tax, legal or accounting advice. If you have questions about how the CARES Act impacts your business, please consult your legal advisor or tax professional, or review detailed guidance about PPP payroll cost reports from the Treasury Department and from the SBA.
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Erin Ellison is the former Content Marketing Manager for OnPay. She has more than 15 years of writing experience, is a former small business owner, and has managed payroll, scheduling, and HR for more than 75 employees. She lives and works in Atlanta.