©2023 OnPay, Inc.
Insurance offered through OnPay Insurance Agency, LLC (CA License #0L29422)
Updated: October 31, 2022
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.
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.
There are three big requirements to keep in mind when determining whether a PPP loan may be forgiven:
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.
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.
For many small businesses, getting access to capital for initiatives like purchasing equipment or building a team can be challenging. You might find out guide to applying for an SBA loan to be a useful resource — it details the various loan options, how the application process works, ways to connect with lenders, and some expert tips.
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.
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:
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):
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.
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.