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PPP Loan Repayment & Forgiveness – Common Questions Answered

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On June 5, 2020, former 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 (cash compensation) — specifically, rent or lease payments, mortgage interest, and utilities — without jeopardizing their eligibility for full loan forgiveness, provided they use the remainder for payroll expenses.

Beneficial Updates to the PPP Loan Program

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. Notably, other restrictions on forgiveness eligibility (for instance, for borrowers who also received EIDL relief from the SBA loan program) remained.

After taking office, President Biden announced additional PPP loan program changes that made life even easier for self-employed PPP loan claimants. The most important of these changes allowed any PPP applicant who files Schedule C (which taxpayers use to report business income) to apply using their gross income rather than net income.

PPP loan recipients can now also claim forgiveness for a wider range of expenses, including property damage caused by looting or vandalism and certain supplier costs. These expanded expense categories apply to second-draw PPP loans — loans received by individuals or entities that already received PPP loans (whether or not those loans were forgiven).

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

Frequently Asked Questions About PPP Loan Forgiveness (FAQs)

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 during a 24-week period following the disbursement of the loan.

Depending on whether the borrower chooses to begin this period on the actual loan disbursement date or the date of the first pay run after disbursement, it’s known as the “payroll covered period” or “alternative payroll covered period,” respectively.

This gets confusing, but the bottom line is that borrowers must spend any proceeds they wish to be forgiven within 24 weeks of receiving their loans. If the loan amount was calculated correctly and the business operated as intended, this should not be an issue.

One additional note: 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 Business Paperwork Do I Need to Apply for Forgiveness?

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

  • Verification of full-time status for each full-time employee or full-time equivalent (FTE) on your payroll
  • Salary or wage rates for each full-time employee or FTE
  • Mortgage documents
  • Real estate lease agreements
  • Evidence of rent paid
  • Any applicable bills from suppliers or vendors
  • Any applicable utility bills or utility payment records
  • Any applicable invoices for property damage that may qualify for forgiveness

What Forms Do I Need to Complete to Apply for Forgiveness?

That depends on the size and structure of your business.

Generally, enterprises that received PPP loans under $2 million should use PPP Loan Forgiveness Application Form 3508S (commonly known as SBA Form 3508) to apply for forgiveness.

However, borrowers that meet one of three criteria can use the much simpler PPP Loan Forgiveness Application Form 3508EZ:

  1. The borrower is a self-employed individual, independent contractor, or sole proprietor who had no employees at the time of the PPP loan application.
  2. The borrower did not reduce the salary or wages of any employee by more than 25% during the covered period AND the borrower did not reduce the headcount (number of employees) or the average paid hours of employees between January 1, 2020, and the end of the covered period.
  3. The borrower did not reduce the annual salary or hourly wages of any employee by more than 25% during the covered period AND the borrower was unable to operate during the covered period at the same level of pre-pandemic business activity due to COVID-related requirements or guidance issued at any point in 2020 by certain recognized health or labor authorities (such as the Centers for Disease Control and Prevention).

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 (forgivable) in any amount, including three types of nonpayroll costs:

  • Payroll costs
  • Rent
  • Mortgage interest
  • Utilities

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

What Are the Limits on Forgiveness for Payroll Expenses?

The SBA defines forgiveness-eligible payroll costs 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 net 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 Received an EIDL (Economic Injury Disaster Loan Program) Advance?

Most likely. The SBA automatically deducts the amount of any Economic Injury Disaster Loan Program (EIDL) advances before remitting PPP forgiveness funds to the lender.

If you received an EIDL advance, your forgiveness eligibility will be reduced by the amount of that advance, but you should still receive some forgiveness funds.

Am I Still Eligible for Forgiveness if I Laid Off Employees or Reduced Salaries (Instituted Wage Reductions) 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 exemptions 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.

Is PPP Loan Forgiveness Taxable?

Forgiven PPP loan balances are not subject to federal taxation.

However, even though the U.S. Treasury (through the IRS) won’t attempt to collect taxes on any forgiven amounts, approximately half of all states initially considered PPP loan forgiveness to be taxable.

Some state legislatures are working to pass laws waiving tax requirements on forgiven balances or authorizing offsetting tax credits for PPP loan recipients who’ve already paid taxes on forgiven amounts.

However, these are state-specific processes and policies, so it’s best to check with a qualified CPA and the revenue authorities in the state(s) where you do business to ensure you meet all local tax obligations.

Frequently Asked Questions About PPP Loan Repayment

The issue date of the loan is the most important consideration for borrowers with 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.

How Much Interest Do I Owe on Unforgiven Loan Funds?

The interest rate on all PPP loan balances is 1%. That’s $100 in interest payments 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 loan 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 —  that is, you have a 24-month maturity date.

If your loan originated on or after June 5, 2020, you have five years from the origination date (a 60-month maturity 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 loan 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 provided 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.

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.

The Biden Administration’s tax plan includes sweeping plans for additional economic stimulus and support for families and businesses. Elements of that plan are evident in the $1 trillion bipartisan infrastructure bill and an even more ambitious package of “human infrastructure” measures that Biden and the Democrats aim to pass without Republican support later in 2021.

Even if additional rounds of PPP funding never materialize, it’s clear that we haven’t seen the last of the federal government’s post-COVID economic intervention.

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.