3 Essential PPP Loan Forgiveness Rules to Follow

The Paycheck Protection Program (PPP) is offering a ray of sunshine to small businesses in 2021. With loan forgiveness possibilities of up to 100%, low interest rates, and generous loan amounts, it’s no wonder every eligible business is eager to apply. However, there are a few essential rules that you need to follow to ensure your PPP loan is forgiven. Let’s dive into the details!

The 3 Essential PPP Loan Forgiveness Rules

The SBA has set out three crucial rules that you must keep in mind when applying for PPP loan forgiveness:

  1. Forgivable Expense Categories
  2. 24-Week Period of Coverage
  3. Payroll Requirement Maintenance

Let’s take a closer look at each of these rules.

1. Forgivable Expense Categories

To qualify for loan forgiveness, your expenses must fall into specific categories. Previously, these were limited to payroll, rent, and utility costs. However, with PPP 2.0 loans, there is more coverage and greater context. The expanded list of eligible expenses includes:

  • Payroll: This category covers various payroll costs such as wages, salary, commissions, tips, bonuses, retirement benefits, and paid leave. Group insurance benefits like dental, disability, and vision are also considered payroll costs.
  • Rent: Any rent fees for buildings, vehicles, or equipment with lease dates before February 15, 2020.
  • Utility payments: Electricity, gas, water, transportation, telephone, and internet service fees for deals made before February 15, 2020.
  • Interest payments: Interest paid on mortgage debts that began before February 15, 2020.
  • Operations expenditures: Payments for software, cloud computing, and other human resources and accounting needs.
  • Supplier costs: Expenses made to suppliers necessary for ongoing operations before obtaining a PPP loan.
  • Worker protection expenses: Costs for personal protective equipment and adaptive investments to comply with federal health and safety guidelines.
  • Property damage costs: Costs for damages in 2020 that your insurance didn’t cover due to public disturbances.
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Remember, expenses falling under these categories are eligible for forgiveness, but you must adhere to the 60/40 PPP loan forgiveness requirement.

60/40 PPP Loan Forgiveness Requirement

The 60/40 rule states that at least 60% of your loan must be spent on eligible payroll costs. Non-payroll expenses exceeding 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 forgiveness. However, the covered period has been extended to between 8 and 24 weeks. Your covered period begins when you receive your first payment, not when you signed the loan agreement.

Thanks to the PPP Flexibility Act, you can now apply for early forgiveness. Just remember that if you apply before the end of the covered period and have significantly reduced employee salaries or wages, you must account for the excess reduction throughout the full covered period.

3. Payroll Requirement Maintenance

To qualify for full loan forgiveness, you must maintain the number of employees on your payroll as of February 15, 2020. If your headcount decreases, you’ll need to rehire employees or attempt to do so. Failure to meet this requirement will proportionately reduce your eligible forgiveness amount.

Additionally, you must ensure that each employee’s total salary remains at least 75% of their original amount. This evaluation is done on an individual basis, not as a whole. Failing to maintain the 75% salary requirement will result in a reduction of forgiveness.

How to Apply for PPP Forgiveness

To apply for loan forgiveness, you’ll need to go through the lender that issued your loan. They will provide you with step-by-step instructions on how to apply for forgiveness, including accessing the loan forgiveness application. For more information and best practices, consult our loan forgiveness checklist.

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PPP Loan Forgiveness FAQs

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

Compared to the original PPP loans, there are a few notable changes in the program:

  • Payroll expenditure requirement: Previously, 75% of loan funds had to be spent on payroll costs; now, 60% is sufficient.
  • Business size limitations: For first draw loans, businesses with fewer than 500 employees qualify for loans up to 2.5 times their monthly payroll costs. For second draw loans, businesses with fewer than 300 employees can obtain loans up to 2.5 times their monthly payroll costs, or 3.5 times for those in the NAICS code beginning in 72.
  • Time to spend loan proceeds: The covered period has been extended from 8 weeks to between 8 and 24 weeks.
  • Loan terms: Borrowers now have up to 5 years to repay loans instead of the original 2 years.

How can I maximize PPP loan forgiveness?

To maximize forgiveness, follow all SBA rules and requirements. Provide all requested documentation and submit your applications on time.

When is the forgiveness application deadline?

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

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

Failure to apply for forgiveness means you’ll have to repay the loan with a low 1% fixed interest rate. You’ll have either 2 or 5 years to repay the loan, depending on when you received it.

Who determines PPP forgiveness?

You’ll apply for loan forgiveness through your PPP loan lender, not the SBA. Your lender will review your documentation and confirm the amount of your loan eligible for forgiveness. The SBA will then review your application before remitting any funds to your lender.

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Haven’t applied for PPP yet? You can apply with Simple Money Tips – Steps To Financial Freedom until March 31, 2021, or until funds have been exhausted, whichever comes first.