Everything You Need to Know About SBA Paycheck Protection Program (PPP) Loan Forgiveness

9 min read
small business owners apply for PPP loan forgiveness

Executive Summary

PPP loan applications officially closed on May 31, 2021 as the funds available were exhausted sooner than many analysts predicted originally. Existing borrowers may be eligible for PPP loan forgiveness, meaning they do not need to be repaid (read: free money). In this article, we will explore how PPP loan forgiveness works, how you can apply, and everything else you need to know about the program.

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In the US, around 99.9% of all businesses qualify as small businesses, according to the Small Business Administration (SBA)’s definition, and they collectively employ more than 47% of the nation’s private workforce

Small businesses have been one of the hardest-hit sectors in the US amid the COVID-19 pandemic. To address this, the government launched a special program called the Paycheck Protection Program (PPP) in partnership with the SBA. The PPP program provided loans through the SBA in which businesses could potentially qualify for loan forgiveness in order to keep their workforce employed, making them a little more like grants.

Launched with the intention to help provide relief to small businesses and their employees, the bill provided small businesses with over $300 billion in aid.

PPP loan applications officially closed on May 31, 2021 as the funds available allocated by the government were exhausted shortly sooner than many analysts predicted originally. It’s essential to know that existing borrowers may be eligible for PPP loan forgiveness, meaning they do not need to be repaid (read: free money) 

In this article, we will explore how PPP loan forgiveness works, how you can apply, and everything else you need to know about the program.


How PPP Loan Forgiveness Works

The PPP loan program is an SBA loan program under the SBA 7(a) program. It was created by the CARES Act that became law on March 27th, 2020. Under the PPP program, business owners, including those who were self-employed (solopreneurs), were eligible for a loan worth up to 2.5 times their average monthly payroll. 

As per data from the SBA, more than 3.3 million loans, worth a combined total of $279.4 billion, have been forgiven so far. This is out of a total of 5.2 million loans that were issued last year. Approximately $1 billion in PPP loans were not forgiven, while $81.5 billion in loans are under review. Applications for forgiveness have not been received for $159.1 billion worth of loans. In a nutshell, over 99% of the loan value has already been forgiven.

Overall, the process works like this: You get a PPP loan → During the covered period, you spend it on specific items, primarily payroll → You apply for forgiveness with your lender and provide the required documentation (which we will explain below) → The lender has up to 60 days to respond to your request.

Note that there are a few differences between first-draw PPP forgiveness and second-draw PPP forgiveness. These mainly have to do with the “covered period,” so be sure to check up on the covered periods that apply to your PPP loan. Finally, keep in mind that if you received both a first-draw loan and a second-draw loan in excess of $150,000, then you must submit your first-draw forgiveness application before or at the same time as your second-draw forgiveness application.

It’s important to note that any balance not forgiven will become a loan at 1% with a payback period of 5 years if you were part of PPP Round 2, or 2 years for loans made before June 5, 2020 as part of PPP Round 1.

Here’s what expenses are included in the forgivable costs:

  • Salary, commissions, wages and tips amounting to $100,000 annualized for each employee
  • Employee benefits, such as vacation, parental, medical, or sick leave, retirement benefits
  • State and local taxes assessed on pay

For sole proprietors as well as independent contractors, payroll costs include wages, commissions, income or net earnings from self-employment, based on 2019 income capped at $100,000 on an annualized basis for each employee.


How do you calculate PPP loan forgiveness amount?

Now that we understand what PPP loan forgiveness is and how it works, let’s take a look at how to calculate the PPP loan forgiveness amount. First, you need to calculate the total number of paid hours each week for full-time and part-time employees. 

To calculate your full-time employment equivalent employees (FTE), the formula is simple: 

Total number of hours paid each week/40 = FTE

Here, the number of hours is an important factor. An FTE employee is a staff member who works for 40 or more hours per week. They would receive a score of 1.0. Part-time employees who work less than 40 hours would receive a score less than 1.0. The FTE score cannot exceed the mark of 1, so even if you have employees working over 40 hours per week, their FTE score would still be 1. The number of FTE employees, plus part-time employees calculated together, will determine your score.

Additionally, there are a few other factors that can play into your loan forgiveness amount, such as wage caps and salary reductions. Other loan forgiveness exemptions include employees rejecting a rehire offer, employees fired with just cause, or employees resigning and/or choosing to work reduced hours. 

In these special situations, it is important to talk to your lender. For example, if an employer had to furlough a certain number of employees before the PPP loan was sanctioned and later after the loan, they provided those employees with a written reemployment letter and the employees refused, that employee FTE may be excluded when calculating forgiveness. But in this case, it is important to secure the rejection documentation on file. On that note, here are the key documents and forms required to process a PPP loan forgiveness.


Key Requirements for PPP Loan Forgiveness Application

Documents needed for PPP Forgiveness Loan Program

When it comes to documents for PPP loan forgiveness applications, each lender may have specific requirements. Even so, there are some general documents that are required for all applications (**these are important!**):

  1. Documents verifying the total number of FTE employees on payroll and their pay rates, for the periods used to verify you met the staffing and pay requirements:

    • Payroll reports from your payroll provider
    • Payroll tax filings (Form 941)
    • Payroll, income, and unemployment insurance filings from your state
    • Documents verifying any retirement and health insurance contributions
    • Documents verifying that your eligible interest and utility payments, including rent were active in February last year 
  2. Documents verifying your eligible interest, rent, and utility payments (cancelled checks, payment receipts, account statements)

It is important to maintain records properly. You need to keep track of eligible expenses and their accompanying documentation over your loan’s covered period. Your lender will most likely require these documents in digital format, so it is always good to keep scanned copies ready.

Furthermore, you also need to have complete financial statements ready. Also, note that the lender and the SBA have the right to request and audit your business’s financial documents and records. So, it is important to be prepared for PPP audits.


Forms for the PPP Forgiveness Loan Program

For different loans, there are different PPP loan forgiveness application forms available from the SBA.

Form 3508S: The simplest PPP loan forgiveness application

Meant for borrowers with loan amounts of $150,000 or less, form 3508S is one of the simplest forms. Filling it out is relatively straightforward, as it does not involve complicated calculations or documentation. However, it is advised to keep documents ready as the SBA can request them at any time.

For this form, you simply need to certify the following:

  • You have used the loan to cover eligible expenses only
  • You did not reduce employee pay below 75% of pre-COVID wages
  • You did not reduce your full-time equivalent headcount

Remember, lying on your PPP forgiveness application form is a punishable offence. If the SBA finds out that you’ve committed any fraud, you may be subject to up to 30 years imprisonment and a $1 million fine.


Form 3508EZ: For loan amounts higher than $150,000

For PPP loan amounts higher than $150,000, the 3508EZ form needs to be filled out and you must certify the following:

  • For any employees earning $100,000 or less, you did not reduce the annual salary or hourly wages by more than 25% in the covered period. You must compare the covered period to the most recent full quarter prior to the covered period.
  • You did not reduce the number of employees or the average hours of employees between January 1, 2020, and the end of the loan’s covered period. Here, you can ignore employees that refused an offer to come back to work or were fired for just cause. If you are unable to certify this, you have an alternate option: you need to certify that you were unable to operate to the same capacity as of February 15, 2020, due to issues related to COVID-19. 

Any compliance or sanitation rules that were put in place by the Secretary of Health and Human Services, the Occupational Safety and Health Administration or the Director of the Centers for Disease Control and Prevention apply here.

Also, all payroll and eligible expenses related documents will be required when applying for forgiveness with this form.


Form 3508: The longest form for everyone else

If you’re a borrower who is not eligible to use either form 3508S or form 3508EZ, then you can apply for PPP loan forgiveness with form 3508. This is the longest form, in which borrowers need to fill out an attached PPP Schedule A. In addition to the PPP Schedule A, borrowers using form 3508 need to provide documents for payroll and other eligible expenses.

Schedule A includes tables detailing your FTE as well as any salary or wage reductions in the covered period. A quick tip here to make things easy for you: before you start filling out this lengthy form manually, it is good to check if your payroll provider has a ready PPP report available. Some payroll providers have all the information you need about documents and eligibility in an easy to use document.

We hope this guide will help you apply for PPP loan forgiveness successfully. In the current climate, small businesses have been the worst affected and if by following the right guidelines, companies are able to get any financial aid, they must. This will not only help individual businesses but also aid in the overall economic recovery of the country. 


Be sure to check out our other resources on the PPP program on our website, blog and sign up for a free Tillful account now to start getting the credit you deserve including free business credit scores, reports, monitoring services, customized tips on how to grow your business credit quickly, growth capital tools, and opportunities for small business loans on-demand with our new Tillful Funding feature, plus credit card offers you’re automatically pre-approved for once you sign up! What are you waiting for? Let’s grow your business 🌱

About the author

Catherine Giese

Written by Catherine Giese

Catherine is the Brand Content Manager at Tillful. She writes answers to our most-asked questions and covers the news updates that small business owners need to know.

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