How to Get PPP Loan Forgiveness

The Paycheck Protection Program officially ended on May 31, 2021. While lenders have until June 30 to finish processing approved loans, new PPP loan applications are no longer being accepted.


The Paycheck Protection Program reopened to all eligible borrowers on Jan. 19, with $284.5 billion for new PPP loans and second loans for businesses that can demonstrate significant revenue loss. While the requirements for PPP loan forgiveness remain largely unchanged, there are a few notable exceptions. Namely, businesses can now spend their PPP money on a wider range of expenses, including supplier costs, protective equipment and some property damage.

These changes can add more questions to a loan forgiveness process that is already a little unclear for some. Plus, it’s not an all-or-nothing—you can have your loan only partially forgiven. Loan reduction can happen by the dollar if you use the loan other than how lawmakers prescribed it.

With that in mind, let’s review the basics of Paycheck Protection Program loan forgiveness, and go over how to ensure you don’t pay a cent more than you need to for this financial relief.

Which PPP Loan Uses Will Be Forgiven?

As a refresher on the terms of PPP loans, you can borrow up to 2.5x your average monthly payroll, or 3.5x for businesses in the accommodation and food service sector, up to $10 million for the first loan.

Second PPP loans are capped at $2 million and reserved for businesses that lost at least 25% in annual gross receipts year over year.

The basics of PPP loan forgiveness are as follows: You must use 100% of your funds on eligible costs within the covered period, which is typically 24 weeks but borrowers who take out a loan in 2021 can choose any duration between eight and 24 weeks when they apply .

Eligible loan costs were previously limited to payroll and operating costs, but now include five main categories:

Payroll Costs

To receive full forgiveness, at least 60% of your loan funds must go toward covering your payroll.This is true no matter when you received your PPP loan.

What does “payroll” mean? All of the following:

  • Salary, wage, commissions, or similar compensations
  • Payment of cash tips or equivalent
  • Payment for sick, vacation, parental, family, or medical leave
  • Dismissal or separation allowance
  • Payments for group health care benefits, including insurance premiums
  • Payments for retirement benefits
  • Payments of state or local tax on employee compensation

In terms of payroll costs that are not covered: compensation for an individual employee for more than $100,000 in annual salary; payroll taxes, railroad retirement taxes, and income taxes; compensating employees that live outside the United States; qualified sick or family leave wages for which there is a credit under the Families First Coronavirus Response Act.

You must also keep your employees on staff (or re-hire by the deadline, more on that below) and not “materially reduce” their salary.

Other Covered Costs

You can spend up to 40% of your loan on other covered costs, including:

  • Operating expenses: rent, utilities, mortgage, business software, and accounting and human resource services
  • Supplier costs: purchase orders for perishable goods and payments on existing contracts for goods essential to business operations
  • Health and safety: personal protective equipment, health screenings, modifications made to comply with state and local regulations
  • Property damage: repairs or looting resulting from public disturbances in 2020, unless covered by insurance

Technically, you can use your loan to cover other debt obligations as well, such as credit card debt accrued before February 15, 2020. But this expense is not eligible for loan forgiveness, and will need to be repaid.

How Your PPP Loan Forgiveness Can Be Reduced

As mentioned, to qualify for PPP loan forgiveness, at least 60% of the loan proceeds must be spent on payroll costs. The remainder of your loan must be spent on other covered expenses.

If rent, utilities, and/or your mortgage for your business location is a large and pressing concern, you can allocate 40% of your loan for these costs right away, then use the remainder on payroll. You could also use 20% of your loan on rent, and the remaining 80% on payroll. Either of these examples will result in 100% of your loan—both the principal and accrued interest—being forgiven.

Let’s review two ways that you can reduce your PPP loan forgiveness down from 100%:

Spending More Than 40% of the Loan on Non-Payroll Costs

Let’s say you spend less than 60% of your loan on payroll costs.

To calculate how that affects your forgiveness, use this calculation: Your maximum forgivable amount will be what you spend on payroll costs, divided by 0.60.

For example, on a $100,000 PPP loan, spending just $45,000 on payroll during your covered period means you can have $75,000 of the loan forgiven.

Laying Off Employees or Reducing Salary

If you lay off employees, your loan is still eligible for partial forgiveness. But that forgiveness will be reduced in proportion to the number of “full-time equivalent employees” you let go.

“Full-time equivalent employees” per month is the average number of full-time equivalent employees for each pay period within a month.

To calculate your reduced loan forgiveness under the new guidelines issued on Jan. 19, 2021, you’ll first select one of the following “reference periods.”

  • Feb. 15, 2019, through June 30, 2019
  • Jan. 1, 2020, through Feb. 29, 2020

Seasonal employers can elect to use a consecutive 12-week period between Feb. 15, 2019, and Feb. 15, 2020.

Your lender will compare the reference period to your loan’s covered period to calculate partial forgiveness.

For example: If you had 10 full-time equivalent employees during the reference period but only eight during the covered period, your staffing declined by 20%. Your loan forgiveness will also be reduced by 20%.

Additionally, if you reduce the total salary of any employee “materially”—meaning in excess of 25% below that employee’s typical compensation—your forgiveness will be decreased by the total amount of that reduced salary during the covered period.

Keep in mind: Your loan can still be forgiven in full if you reverse any salary reductions and make a good-faith effort to rehire employees by Dec. 31, 2020, or by the end of your loan’s covered period (for loans issued on or after Dec. 27, 2020).

There is one new major exception to this rule. As of Oct. 9, 2020, if your PPP loan was for $50,000 or less, you are not required to maintain your pre-pandemic headcount or salary/wages, provided you use the new SBA Form 3508S.

What About for Self-Employed Workers?

Self-employed workers, such as independent contractors, are also eligible for PPP loans and loan forgiveness.

A similar set of guidelines applies to these workers: A minimum of 60% of your loan proceeds must be used to replace your lost salary, capped at $100,000 annualized.

The remainder of your loan must go toward the other eligible costs in order to receive full forgiveness. To spend money on these costs, you must have claimed (or been able to claim) a deduction for those expenses on your 2019 Form 1040 Schedule C.

How to Ensure Your PPP Loan Is Fully Forgiven

To ensure you receive the maximum amount of PPP loan forgiveness, you need to prove how you spent each dollar of your loan to your lender.

Document All Loan Expenses

You can now spend your PPP loan on a wider range of expenses, including supplier costs and health and safety modifications. But you still need documents showing each cost and purchase.

For payroll, you’ll need documents that verify the number of employees on payroll as well as their salaries and wages. You can use IRS Form 941; payroll reports from a payroll provider like Gusto, Zenefits, or QuickBooks; income/payroll/unemployment insurance filings from your state; and documents that verify retirement and health insurance contributions.

For your other costs, you’ll need documents that show payments of those costs, which could be canceled checks, payment receipts, or account statements.

Keep these documents handy and prepare to present them to your lender when it’s time to apply for loan forgiveness.

Independent contractors, sole proprietors, and other self-employed workers can have eight weeks of their loan proceeds forgiven as salary replacement; the remainder (utility payments, etc.) requires the same sort of documents as any other business.

Complete the Official PPP Loan Forgiveness Application

There are three PPP loan forgiveness applications: SBA Form 3508, 3508EZ, and 3508S. Which form you use will depend on your circumstances.

SBA Form 3508EZ can be used by:

  • Self-employed workers with no employees
  • Business owners who did not reduce the salaries or wages of their employees by more than 25%, and did not reduce the number or the hours of their employees
  • Business owners who experienced reductions in business activity as a result of health directives related to the pandemic, and did not reduce the salaries or wages of their employees by more than 25%

SBA Form 3508S is exclusively for PPP loans of $50,000 or less.

SBA Form 3508 should be used by all other PPP loan borrowers.The form comes with two sections, the Loan Forgiveness Calculation Form and the PPP Schedule A. Read our step-by-step guide to Form 3508 if you have any questions about the process.

Your lender may have their own version of these forms (more on that below). Be sure to follow their guidelines when the time comes.

Follow Your Lender’s Guidelines

Although the PPP is a program administered by the SBA, you technically receive a PPP loan through a lender such as a bank or credit union. The lender is the entity that forgives your loan. You will also make payments to that lender if your loan is not fully forgiven.

For this reason, it’s worth noting that beyond the SBA-issued forms, there is no standardized PPP loan forgiveness process that every lender follows. Your lender may ask for specific documents or forms from you in order to qualify for forgiveness, so stay informed of their exact guidelines throughout your loan application, disbursement, and forgiveness process.

When Your PPP Loan Will Be Forgiven

Once you apply for loan forgiveness, your lender is required to make a decision regarding your request within 60 days. Within that time frame, you should receive notice that your loan has been forgiven—either fully or partially. If your loan forgiveness was reduced, you’ll repay the remaining principal plus 1% interest over the remainder of your loan term.

You may decide that using your loan to pay certain costs, such as outstanding debt, or using more than 40% of it to pay your rent is more important than receiving full forgiveness. That’s fine, legal, and for some businesses it may be a necessity. Just be prepared to repay the amount that wasn’t forgiven when the time comes.

Note: Fundera is not providing and does not intend to provide legal advice or otherwise to act in a fiduciary capacity. Fundera is only providing general information for illustrative purposes. Fundera is not providing and does not intend to provide information specific to any individual company. Information provided by Fundera, therefore, should not be relied upon by any individual company. Each individual company should evaluate its own unique circumstances independently.

Eric Goldschein
Partnerships Editor at Fundera

Eric Goldschein

Eric Goldschein is the partnerships editor at Fundera.

Eric has nearly a decade of experience in digital media, writing and reporting on entrepreneurship, finance, business lending, marketing, and small business trends. 

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