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PPP Loan Repayment & Forgiveness – Common Questions Answered

On June 5, 2020, President Donald Trump signed a law modifying key provisions of the Paycheck Protection Program (PPP), one of the highest-profile coronavirus-related financial aid and stimulus measures passed by the United States Congress in the opening months of the COVID-19 pandemic.

According to a Fox Business report, the Paycheck Protection Program Flexibility Act (PPPFA) allows loan recipients to use up to 40% of their loans’ proceeds for certain expenses unrelated to payroll — specifically, rent, mortgage interest, and utilities — without jeopardizing their eligibility for full loan forgiveness, provided they use the remainder for payroll expenses. A subsequent rule issued by the Small Business Administration (SBA), the federal agency charged with overseeing PPP, clarified that loan recipients don’t need to meet the 60% payroll threshold to qualify for partial loan forgiveness as long as they used at least 60% of the forgiven amount for payroll expenses. The SBA is even more lenient with self-employed borrowers, forgiving loan amounts up to $20,833 regardless of how the funds were used, according to Forbes.

America’s small business community welcomed the PPPFA and the SBA’s follow-up action. But questions still linger for many business owners, solopreneurs, and even freelancers whose self-employment income makes them eligible for PPP.

Common Questions About PPP Loan Forgiveness

The PPP was initially conceived to blunt the impact of a large-scale collapse in consumer demand on employer payrolls. To that end, the program’s forgiveness provision was and remains quite generous to businesses that reserve a majority of loan proceeds for payroll expenses. But forgiveness is far from automatic, so it pays to understand how the program works before you spend the money.

How Long Do I Have to Spend My Loan’s Proceeds While Remaining Eligible for Forgiveness?

The PPPFA allows all PPP borrowers to apply for forgiveness on loan proceeds put toward eligible expenses on or before Dec. 31, 2020. Essentially, borrowers must spend any proceeds they wish to be forgiven before the end of 2020. That’s known as the “covered period.”

Borrowers whose loans originated before June 5, 2020, have the option to restrict forgiveness eligibility to the period stipulated in the CARES Act, which enacted the PPP. This initial eligibility period lasted for eight weeks from the loan funding date.

What Paperwork Do I Need to Apply for Forgiveness?

The details of PPP loan forgiveness applications vary by lender, but expect to provide the following documents and records to substantiate your forgiveness request:

  • Verification of full-time status for each full-time employee on your payroll
  • Salary or wage rates for each full-time employee
  • Mortgage documents
  • Real estate lease agreements
  • Evidence of rent paid
  • Any applicable utility bills

How Long Must I Wait for My Lender to Approve My Forgiveness Application?

The SBA requires your lender to determine whether to forgive your PPP loan within 60 days of receiving your application for forgiveness.

What PPP Loan Expenses Are Eligible for Forgiveness in Any Amount?

Four types of expenses are eligible for forgiveness in any amount:

  • Payroll
  • Rent
  • Mortgage interest
  • Utilities

PPP’s forgiveness provision is most generous with payroll expenses, but all four types are subject to limitations.

What Are the Limits on Forgiveness for Payroll Expenses?

The SBA defines forgiveness-eligible payroll expenses as any of the following:

  • Salaries, wages, tips, and commissions, up to $100,000 annualized per employee
  • Employee benefits, such as paid leave and vacation time, group insurance benefits, severance pay, and retirement benefits
  • State and local employer-paid payroll taxes
  • Self-employment income and income from contract work, up to $100,000 annualized per employee

Beyond these constraints, PPP loan proceeds used to cover payroll expenses are eligible for forgiveness up to the full principal amount. So if you use 100% of your loan’s proceeds to cover eligible payroll expenses for employees earning less than $100,000 per year, you can apply for forgiveness of your entire loan. For self-employed borrowers who received loans after June 5, 2020, loan proceeds up to $20,833 are eligible for forgiveness, regardless of how they were spent. For self-employed borrowers who received loans before June 5, 2020, forgiveness eligibility is capped at $15,835.

What Are the Limits on Forgiveness for Nonpayroll Expenses?

Under the PPPFA, forgiveness eligibility for loan proceeds put toward nonpayroll expenses — rent, mortgage interest, and utilities — is capped at 40% of the total loan amount.

For example, you’re eligible for forgiveness on $9,000 of a $10,000 loan if you:

  • Received $10,000 in PPP loan funds
  • Put $5,000 (50%) toward eligible nonpayroll expenses during the covered period
  • Put the remaining $5,000 (50%) toward eligible payroll expenses during the covered period

The unforgiven $1,000 represents nonpayroll expenses above the nonpayroll forgiveness cap.

If you instead put just $4,000 (40%) toward eligible nonpayroll expenses and reserved $6,000 (60%) for eligible payroll expenses during the covered period, you’d be eligible for forgiveness on the entire loan balance.

What if I Don’t Use at Least 60% of My Loan’s Proceeds for Payroll Expenses?

You can still apply for forgiveness on nonpayroll expenses up to 40% of your total loan amount and on the entirety of your payroll expenditure during the covered period. Failing to reach the 60% payroll expense threshold won’t jeopardize your eligibility for partial forgiveness — you’ll just have to repay your excess nonpayroll expenses.

Am I Still Eligible for Forgiveness if I Laid Off Employees or Reduced Salaries During the Covered Period?

Technically, you’re not eligible for PPP loan forgiveness if you lay off employees during the covered period and fail to do one of the following before the covered period’s conclusion:

  • Rehire laid-off employees
  • Hire similarly qualified employees to replace laid-off employees who decline to return

However, there’s a decent chance you’ll qualify for one of the fairly broad exceptions to the rehiring requirement if you can substantiate that you:

  • Made a good-faith effort to rehire laid-off employees or hire similarly qualified workers and were unable to do so
  • Have been unable to return your business activity to its pre-pandemic state (with Feb. 15, 2020, as the benchmark) due to government health and safety mandates, such as social distancing requirements that prevent operation at full capacity

If either condition applies to your business, your chances of qualifying for forgiveness remain high, though are by no means assured.

Common Questions About PPP Loan Repayment

If your business or sole proprietorship received a PPP loan before June 5, 2020, you’ll most likely need to repay any unforgiven amounts within about two years. Loans received after June 5, 2020, carry five-year repayment terms. Other questions could arise between now and then.

How Much Interest Do I Owe on Unforgiven Loan Funds?

The interest rate on all PPP loan balances is 1%. That’s $100 per year, per $10,000 in unforgiven loan proceeds.

How Long Can I Defer Repayment of Unforgiven Loan Funds?

Under the PPPFA, you can defer repayment of unforgiven loan funds until the SBA pays the full forgiveness amount to your lender. If you don’t plan to apply for forgiveness, you can defer repayment for up to 10 months after your loan’s funding date.

How Long Do I Have to Repay My Loan After the Forbearance Period Ends?

If your loan originated before June 5, 2020, you must repay all unforgiven balances (including interest and fees) within two years of the origination date. If your loan originated on or after June 5, 2020, you have five years from the origination date to repay all unforgiven balances.

Can I Prepay My Loan?

Yes, and notwithstanding the very low interest rate, you should if you can afford to do so. PPP lenders are not permitted to levy prepayment penalties or any other charges for payments made ahead of schedule.

Final Word

The true scale of the COVID-19 pandemic’s economic impact will only become apparent in hindsight. That said, the skyrocketing unemployment rate, near-cessation of international travel, and collapse in demand at U.S. restaurants and retailers provide stark glimpses of its extent. While PPP unquestionably provided thousands of businesses with sorely needed support and probably saved many from bankruptcy, it wasn’t by itself sufficient to turn the tide.

Fortunately, PPP wasn’t the only lifeline thrown to struggling businesses in the first months of the pandemic. In particular, in making clear that it’s willing to do everything in its power to stave off a full-blown financial crisis, the U.S. Federal Reserve Bank gave major U.S. lenders the assurance they needed to continue making loans — and took a worst-case scenario off the table, at least for now.

But few expect the stimulus measures and fiscal policies announced thus far to be all that’s necessary to get the economy back on track, especially not if a severe second wave prompts large swathes of the country to lock down into 2021 and beyond. That could necessitate additional rounds of funding for PPP or a similar successor program, giving businesses and independent professionals that missed out on the first round another chance to take advantage.

Do you have a PPP loan on your books? Are you planning to apply for forgiveness?

Brian Martucci
Brian Martucci writes about credit cards, banking, insurance, travel, and more. When he's not investigating time- and money-saving strategies for Money Crashers readers, you can find him exploring his favorite trails or sampling a new cuisine. Reach him on Twitter @Brian_Martucci.

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