Updated January 27, 2021
As the second round of Paycheck Protection Program (PPP) loans roll out this month, small businesses are lining up for more relief.
Because PPP loans are forgivable under certain circumstances, there’s a huge incentive to follow the requirements from the Small Business Administration (SBA) and the Department of Treasury. There are a lot of details to keep in mind as you seek loan forgiveness, so here’s a detailed rundown.
If you already know the basics, here’s everything you need to apply for forgiveness.
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 in this article, but you can see a broader overview here.
What expenses do PPP loans cover?
The primary goal of PPP loans is to keep employees of small businesses on the payroll without causing undue burden for their employers. The current rules governing PPP loans were created by the CARES Act and updated by the Paycheck Protection Program Flexibility Act and the Consolidated Appropriations Act, 2021.
PPP loans may be forgiven if the loan is spent on payroll expenses within a 24-week “Covered Period” after receiving the loan. The Covered Period for those expenses could not originally extend beyond December 31, 2020, but the most recent legislation (which also created a second draw for PPP loans) extended the Covered Period to 24 weeks for both new and old loans.
PPP loan forgiveness overview
There are three big requirements to keep in mind when determining whether a PPP loan may be forgiven:
- Funds from a PPP loan must be spent within the Covered Period. As we mentioned, all borrowers now have the option to use a 24-week Covered Period.
- At least 60% of the loan amount must be spent on payroll for a loan to be completely forgiven. However, employers will remain eligible for partial forgiveness even if they do not spend at least 60% of the loan funds on payroll costs. The remaining 40% can only be spent on things like rent, mortgage interest, utility bills, or other qualified business expenses.
- Employers generally need to maintain their employee count and the amount of money they spend on payroll during the duration of the forgiveness period.
If a PPP loan recipient doesn’t meet one of these requirements, the amount that can be forgiven will decrease. For example, if an employer’s full-time equivalent employee headcount decreases and is not restored, they will be required to repay at least a portion of the loan (although there are a few exceptions detailed below).
Once a business has calculated payroll expenses and any changes to their employee count, they must request forgiveness by submitting a loan forgiveness application within 10 months of the last day of the Covered Period. Read on for a detailed look at the timing and eligibility requirements for forgiveness. We also recommend talking to your bookkeeper or accountant to make sure you’re calculating your expenses and employee headcount correctly.
What dates does the Covered Period include?
For both payroll and non-payroll expenses, the 24-week Covered Period begins the day the loan is issued. That means any expenses that are used to claim forgiveness must be incurred or paid out during the 168 days following loan disbursement.
The steps to understanding Covered Period expenses
Being able to track your expenses during the Covered Period is essential if you want to apply for forgiveness, so it’s a good idea to keep everything well organized throughout the Covered Period. In particular, you’ll need to report on your payroll-related costs, certain non-payroll expenses, changes to employee headcount, and how your payroll expenses during the Covered Period compare to the payroll expenses you included in your PPP loan application.
Here’s what you’ll need to do to get ready to apply for forgiveness:
1. Add up payroll costs — applies to all PPP loans:
For the purposes of PPP loan forgiveness, a business’s payroll costs may include any of the items listed below. To have a loan completely forgiven, these payroll costs must be at least 60% of the value of the loan. Please note that there are some additional limitations for costs related to owner-employers of S-Corporations listed later in this article.
- Salaries, wages, commissions or similar. Note that per-employee payroll costs are capped at $46,154 for a 24-week Covered Period. Technically, the limit is based on what an employee who earns $100,000 per year would earn over the course of 24 weeks. If a business bases their forgiveness application on an 8-week covered period, the per-employee limit is $15,385.
- Payments for paid employee leave
- Payments for group health care benefits. But please note that any healthcare costs paid on behalf of owner-employees of S-Corporations are not eligible for forgiveness.
- Payments of retirement benefits. However, employer contributions to retirement plans for owner-employees of S-Corporations and C-Corporations are capped at 2.5 months’ worth of the annual contribution amount.
- Payments of state and local employment taxes.
- Cash tips or the equivalent
- Bonuses and hazard pay for tipped employees: The Department of Treasury says supplementary wages paid to tipped employees are also a form of compensation that is eligible for forgiveness.
2. Determine eligible non-payroll expenses — applies to all PPP loans:
Up to 40% of a PPP loan may be spent on the following non-payroll expenses:
- Rents and/or mortgage interest. Note that only mortgages or rental leases established before 2/15/2020 are eligible.
- Utilities: Payment for expenses such as electricity, gas, water, transportation, telephone, or internet access may also be included, so long as service was established prior to 2/15/2020.
- Other qualified expenses: Some other expenses incurred may also be included among forgivable non-payroll expenses, including: software fees, human resources and accounting expenses, property damage due to public disturbances, ongoing supplier costs, and any expenditures to protect workers from potential COVID-19 exposure.
3. Count your employees — applies to most loans over $50,000:
To have a PPP loan totally forgiven, a small business must also retain its workforce. The SBA’s forgiveness application specifies the following approach to determining the number of Full-Time Equivalent employees (FTEs):
- Each employee who works 40+ hours per week or earns their normal full time salary counts as one employee.
- For each employee who worked less than 40 hours per week, divide their average number of hours worked by 40 and round to the nearest tenth.
- For example, an employee who averaged 30 hours a week would count as .8 of an FTE after dividing 30 by 40 and rounding up from 0.75.
- Add up your number of FTEs
4. Review the compensation of each employee — applies to most loans over $50,000:
The wages for individual employees may not decrease by more than 25% when compared to a previous period (more on this later). To be ready to understand whether a wage decrease occurred, you’ll also need to have employees’ wage history for the Covered Period and January through March of 2020 available.
Estimating PPP loan forgiveness
To help you put all the pieces together and get a clear estimate, we created a free PPP loan forgiveness calculator. If you know your expenses, employee compensation, and your FTE count, you should be able to quickly calculate how much of your loan will be forgiven.
To learn more about applying for forgiveness or find the right version of Form 3508, we also have detailed instructions available.