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3 Essential PPP Loan Forgiveness Rules to Follow

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3 Essential PPP Loan Forgiveness Rules to Follow

Updated: October 9th, 2023

3 Essential PPP Loan Forgiveness Rules to Follow

The Paycheck Protection Program (PPP) is back, giving small businesses a ray of sunshine in 2021. With PPP loans ranging up to $10 million for first draw loans and up to $2 million for second draw loans, the potential for 100% loan forgiveness, and a non-compounding 1% interest rate, it’s no wonder every eligible business is applying for help.

The Paycheck Protection Program rolled out initially in 2020 as a way to help business impacted by the Covid-19 pandemic, but now the government has approved additional funding for the program. Quite a bit has been updated between the first few rounds in 2020 and the new round in 2021 —but the PPP loan forgiveness rules have a few subtle nuances you’ll need to keep in mind.

Below, we’ll walk you through everything you need to know to apply for PPP loan forgiveness. We’ll offer some guidance to help ensure you don’t miss any of the rules, regulations, and requirements hidden in the oh-so fine print.

The 3 Essential PPP Loan Forgiveness Rules

The best part about PPP loans is that up to 100% of the funds can be forgiven. However, you’re going to have to play by the SBA’s rules:

  1. Forgivable expenses must be spent on eligible categories and adhere to the 60/40 rule
  2. Eligible expenses must be incurred over your chosen covered period between 8 and 24-weeks — starting from when your lender provides your first payment
  3. You must maintain the number of employees on the payroll

Let’s break down each of these rules in more detail.

1. Forgivable Expense Categories

This year’s PPP 2.0 loans have an expanded list of eligible expenses. Before, forgiveness-eligible expenditures were limited to payroll, rent, and utility costs—now, there is more coverage and greater context:

  • Payroll: Your payroll costs include wages, salary, commissions, tips, and bonuses. It also includes retirement benefits and paid leave (both vacation and medical). PPP 2.0 loans clarify that group insurance benefits (like group life, dental insurance, disability, and vision) are considered payroll costs.
  • Rent: Your rent fees for any buildings, vehicles, or equipment that have lease dates beginning before February 15, 2020.
  • Utility payments: Your electricity, gas, water, transportation, telephone, and internet service fees for any deals or plans made before February 15, 2020.
  • Interest payments: Any interest payments on mortgage debts that went into effect before February 15, 2020.
  • Operations expenditures: Any payments for software, cloud computing, or other human resources and accounting needs—this includes remote-enabling services like Slack, Zoom, and more.
  • Supplier costs: Expenses made to your suppliers—before obtaining a PPP loan—that are necessary for ongoing operations.
  • Worker protection expenses: The costs for personal protective equipment and adaptive investments that ensure your business complies with federal health and safety guidelines.
  • Property damage costs: All costs for damages done due to public disturbances in 2020 that your insurance didn’t cover.

Expenses that fall under these categories are eligible for forgiveness. However, you’ll need to comply with the 60/40 PPP loan forgiveness requirement.

60/40 PPP Loan Forgiveness Requirement

The 60/40 rule states that 60% of your loan must be spent on eligible payroll costs. Any other  non-payroll expenses that exceed 40% of your loan will not be eligible for forgiveness.

2. 24-Week Period of Coverage

Originally, PPP loans had to be used within 8 weeks to be eligible for loan forgiveness. Now, the covered period has been extended to between 8 and 24 weeks.

The covered period begins when you receive your first payment from your lenders—not necessarily when you signed the loan agreement.

In the previous rounds of PPP, you could only apply for forgiveness after the end of your covered period. However, thanks to the PPP Flexibility Act, you can apply for early forgiveness. If you opt to apply for forgiveness early, keep in mind the SBA’s instruction: “If the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages in excess of 25 percent, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period.”

3. Payroll Requirement Maintenance

To be eligible for full loan forgiveness, you’ll need to maintain the number of employees on your payroll prior to February 15, 2020. If you don’t maintain headcount, you’ll need to rehire employees (or attempt to rehire employees). If you don’t do this, your eligible forgiveness will be reduced proportionately.

You’ll also need to maintain at least 75% of their total salary. This is assessed on an individual employee basis—not on your payroll as a whole. If you don’t maintain the 75% salary requirement, your forgiveness amount will be reduced.

How to Apply for PPP Forgiveness

You apply for loan forgiveness through the lender that issued your loan—not the government. After qualifying for a PPP loan with your lender, they should send follow-up information with step-by-step instructions on how to apply for forgiveness – including how to access your loan forgiveness application. For best practices on loan forgiveness and PPP loan forgiveness documentation please review our loan forgiveness checklist.

PPP Loan Forgiveness FAQs

What are the biggest changes to the Paycheck Protection Program 2.0 loans?

Compared to the original PPP loans in 2020, the program has a few notable changes:

  • Payroll expenditure requirement: Originally, PPP loans required you to spend 75% of your funds on payroll to be eligible for forgiveness. Now, you only need to use 60% of your loan on payroll costs.
  • Business size limitations:
    • For First Draw PPP loans: Businesses with fewer than 500 employees can now obtain loans for up to 2.5 times their monthly payroll costs.
    • For Second Draw PPP loans: Businesses with fewer than 300 employees can now obtain loans for up to 2.5 times their monthly payroll costs. For business with NAICS code beginning in 72, they can obtain loans up to 3.5 times their monthly payroll costs.
  • Time to spend loan proceeds: The period over which borrowers can use loan proceeds has been extended from between 8 weeks and 24 weeks.
  • Loan terms: Borrowers now have up to 5 years to repay their loans instead of the original 2 years.

How can I maximize PPP loan forgiveness?

Make sure you follow all the SBA rules and requirements. Failure to do so can cause you to receive partial forgiveness or no forgiveness at all. Provide all the requested documentation and be on-time with your applications.

When is the forgiveness application deadline?

There’s no official government-mandated deadline. However, if you don’t submit for forgiveness within 10 months of the end of your covered period, then you’ll have to start making payments on the loan.

What happens if you don’t apply for PPP loan forgiveness?

If you don’t apply for forgiveness, you’ll have to repay the loan with a low 1% fixed interest rate.

You’ll have 2 or 5 years to repay the loan (2 years if you received your PPP loan before June 5, 2020—5 years if you received your loan after). Payments will begin 10 months after the end of your covered period.

Who determines PPP forgiveness?

You’ll apply for loan forgiveness through your PPP loan lender—not the SBA. Your lender will confirm your documentation and let you know how much of your loan is eligible for forgiveness. Then, the SBA will review your loan and forgiveness application before sending remitting any funds to your lender.

Haven’t applied for PPP yet? You can apply with Funding Circle until March 31, 2021, or until funds have been exhausted (whichever comes first).


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