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Understanding PPP Loan forgiveness

Updated: Jun 12

Now that you know how to go about securing a Paycheck Protection Program (PPP) Loan to help your business, it is time to start thinking about how to secure forgiveness. As long as you’ve used your loan proceeds for the purposes outlined by the SBA, there’s no reason why you can’t receive full forgiveness using the proper documentation.

In our final article in the PPP series, we give you all the details on how to go about applying for PPP Loan Forgiveness, what forms are required, what supporting documents you need, where you need to apply and a whole lot more!

Forgiveness window and process overview

First things first. You can apply for forgiveness at any time, for any amount that has been spent, as per the PPP Loan requirements. However, as things stand right now, the standard time period of a PPP loan stretches for 24 weeks, starting from the day the loan amount is deposited. Do note however, that loans from before June 5 have a duration of 8 weeks.

Your lender or bank should be able to tell you when to begin the application process. Your accountant or bookkeeper will be able to help you gather the required financial records and documentation.

After the covered period ends, you have 10 months before payments are required. Forgiveness can be applied for during any time under the covered period, assuming your lender has opened their forgiveness portal. Your lender has 60 days to review your forgiveness application. If you don't agree with your lender's decision, you can request the SBA to review it. You may be fully or partially approved for forgiveness, or denied altogether. If partially approved, you will be able to make monthly payments on the balance amount of the loan. Your accountant or bookkeeper will be able to help you categorize the transactions properly.

Your lender will send their decisions to the SBA. The SBA has up to 90 days to evaluate your application. They may contact you directly for additional information. If you don't agree with the SBA's decision, you can appeal it.

Applying for forgiveness - The Forms

Depending on the nature of your PPP Loan and the specific circumstances of loan use, there are different forms available for Loan forgiveness.

These include:

Form 3508S: Simplified forgiveness

This is the simplest of the PPP Loan forgiveness forms. It is meant for those with loan amounts of under $150,000. All you need to do is to fill-out the form certifying that you have complied with the rules governing PPP Loans. No additional documentation is required. Do remember though that the SBA, or your specific lender may request additional documentation if they so require. Form 3508S helps to declare that you:

  • Used the approved PPP loan only to cover eligible expenses

  • Did not reduce your full-time equivalent headcount

  • Did not reduce employee pay below 75% of their pre-COVID wages

Please note: Providing false or misleading information on your PPP Loan forgiveness application could invite imprisonment up to 30 years and a $1 Million fine.

Form 3508EZ

This meant for borrowers who received amounts greater than $150,000. However, there are certain applicable conditions. These include:

  • A declaration (with proper documentation) that for all employees earning under $100,000. or less, you did not reduce the hourly wages by more than 25% during the applicable period.

  • This covered period must be compared to the most recent full quarter prior to the covered period

  • A certification, in good faith, that you did not reduce either the number of employees or the average hours of employees between the 1st of January 2020 and the end of the loan's covered period. This does not apply to employees who refused an offer to come back to work or were fired for just cause

Alternatively, you must declare that:

  • You were unable to operate at the same capacity as on February 15, 2020 due to compliance with rules related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

  • These rules must have been put in place by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration.

For all the above scenarios, you will require documentation detailing your payroll and other eligible expenses. If required, SBA or your specific lender may ask for additional documentation.

Form 3508

If you don't qualify for Forms 3508S and 3508EZ, you will use Form 3508. This is by far the longest of the PPP Loan forgiveness forms and includes a Schedule A detailing your FTE and any salary or wage reductions during the applicable period.

It would be helpful to check with your payroll services provider to see if they have a specific format of report applicable for PPP Loans. It will save you a lot of time and effort to gather this information beforehand.

You will also need to provide all relevant documentation for payroll and other expenses covered under the purview of the loan. Please note that the SBA or your specific lender may ask you for additional documentation.

If you need help with ensuring that your accounting and bookkeeping records are in line with the requirements, please schedule a conversation with us.

Applying for Forgiveness – the documents required for 3508 applicants

In order to apply for and secure PPP loan forgiveness, you will need to provide the following documents with your application:

  • Documentary evidence of the number of full-time (or equivalent) employees on payroll with all the necessary details

  • Payroll reports from your payroll provider

  • Payroll Tax Filings (Form 940)

  • Income, payroll and unemployment insurance filings from your state

  • Documents confirming your retirement and health insurance contributions

  • Documentary support for your rent, interest and utility payments

  • Documents confirming that the business was active as of February 2020

Please note: These are the minimum required list of documents. Please remember that the SBA and your specific lender have the right to request and audit your business's financial documents and records. Hence, it is important that you maintain complete and proper accounting and bookkeeping records.

Where to submit the applications?

Forgiveness applications will be processed through the financial institution you received your loan from. Each lender will accept and process PPP Loan forgiveness applications from their own online portals. As soon as the process begins, your lender will be able to let you know the details. In the meantime, you can prepare yourself by gathering all the required documents, financial records and proof of payments.

Frequently Asked Questions

Are the PPP Loan Forgiveness applications open?

Yes! The SBA is currently accepting applications. However, this process must be initiated through approved lenders. Some banks do not currently have their forgiveness portal opened as they work to integrate the most recent legislative updates.

What are the features of forgiveness for the self-employed?

Self-employed individuals are entitled to use the PPP loan to replace lost compensation due to the impacts of COVID-19.

  • They are eligible to claim 2.5 months’ worth of your 2019 or 2020 net profit to replace pay (review your loan application to confirm the tax year basis).

  • If they didn’t have any other payroll expenses, their entire PPP loan could be forgiven for the 24-week period.

  • If using an 8-week forgiveness period, they can claim 8 weeks’ worth of their 2019 or 2020 net profit as owner compensation replacement.

  • The remaining PPP funds will need to be spent on other eligible expenses in order to be forgiven.

  • In order to submit mortgage interest, rent, or utilities expenses for forgiveness, they must have claimed a deduction for those expenses on their 2019 Form 1040 Schedule C.

Please note: Self-employed individuals, who received a PPP loan through multiple businesses, are capped at $20,833 in owner compensation across all the businesses they've received a PPP loan through.

What are the features of forgiveness for partnerships?

As a general partner in a partnership, eligible compensation is based on the partnership's 2019 or 2020 net earnings.

  • The maximum partner compensation is capped at the 2019 or 2020 Schedule K-1 net earnings from self-employment.

  • This amount must be reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties.

  • Once these reductions have been taken into consideration, the value must be multiplied by 0.9235. This is to remove what would be the employer portion of self-employment taxes.

What happens if you are not approved for forgiveness?

  • Your lender has 60 days to review your forgiveness application. Your lender may allow you to provide additional documentation so they can reevaluate your request. If you don't agree with your lender's decision, you can request the SBA to review it.

  • Your lender will send their decisions to the SBA. The SBA has up to 90 days to evaluate your application. They may contact you directly for additional information. If you don't agree with the SBA's decision, you can appeal it.

  • Otherwise, your outstanding balance will continue to accrue interest at 1%, for the remainder of the 2 to 5-year period.

  • There is no prepayment penalty. You can pay off the outstanding balance at any time with no additional fees.

How will PPP loan forgiveness affect taxes?

With the passing of the second stimulus bill at the end of 2020, it was made clear that a PPP loan will not affect taxes.

  • he forgiven amount need not be included as taxable income.

  • Any expenses covered using a PPP loan will still be tax deductible.

How long are you required to keep the supporting documents?

Any supporting documents supplied in order to secure the PPP loan must be retained for six years after the loan is fully forgiven or fully repaid. These will need to be provided to the SBA or the Office of Inspector General if so requested.

To understand the Paycheck Protection Program

in its entirety, please read our previous articles:


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