New Rules and 8 Tips for Getting PPP Loan Forgiveness

Find out how to get a Paycheck Protection Program loan, document your expenses, and apply for loan forgiveness to keep your business operating despite the coronavirus challenges.

Laura Adams, MBA
7-minute read
Episode #640
The Quick And Dirty

If your business is struggling due to the COVID-19 crisis, getting a PPP loan can help you pay yourself and any employees. You can even get loan forgiveness by meeting some requirements. Here are eight things to know.

  1. Your forgiven amount depends on your payroll payments.
  2. Your forgiven amount depends on your non-payroll expenses.
  3. Your payroll costs can’t decrease significantly.
  4. You must make a good-faith effort to keep employees.
  5. You don’t owe taxes on forgiven amounts.
  6. You can’t claim forgiven expenses as a tax deduction.
  7. You must formally request loan forgiveness.
  8. You must repay unforgiven amounts.

Alex F. says:

Hello, Laura! I love your podcast, tips, and many helpful episodes over the years. I would love to learn more about documenting my payroll for the Paycheck Protection Program.

Thanks for your kind words and question, Alex. I’m glad to know that you’re a long-time listener and that you were able to take advantage of the Paycheck Protection Program (PPP) economic stimulus that the US government created for small businesses.

The best part about getting a PPP loan is that you can have some or all of it forgiven. In other words, if you follow some rules, you can turn a PPP loan into a grant that doesn’t have to be repaid.

If you follow some rules, you can turn a PPP loan into a grant that doesn’t have to be repaid.

Today, I'll explain how to get a PPP loan, what’s required for forgiveness, tips for documenting your expenses, and how to apply for loan forgiveness. Keeping as much of your PPP funds as possible saves money and keeps your business operating despite the coronavirus challenges.

Here's what small business owners need to know about getting a PPP loan and qualifying for forgiveness.

What is the Paycheck Protection Program?

The PPP is part of the $2 trillion CARES Act. It began in early April 2020 to provide financial relief to small businesses hurt by the pandemic. Participating lenders coordinate with the Small Business Administration (SBA) to offer forgivable loans to business owners who want to continue paying their employees (including themselves) during the COVID-19 crisis.

The first round of PPP stimulus paid out $349 billion in less than two weeks. At the end of April, Congress approved an additional $310 billion for the program. There are still funds in the program to date, and you can apply through June 30, 2020. 

How to get a PPP loan

PPP funds are generally available for small businesses with 500 or fewer employees (including those who are self-employed with no employees) that experience financial hardship due to the COVID-19 crisis. You can be a sole proprietor and work for yourself part- or full-time. Businesses in specific industries (such as food service and hotels) with more than 500 employees, may also qualify.

Eligible self-employed individuals and businesses must have been in operation on February 15, 2020. Other factors determine eligibility, but these are the primary requirements.

You apply for PPP through existing SBA lenders or institutions that enroll and are approved by the SBA to participate in the program. They include banks, credit unions, and online lenders. You don’t have to put up any collateral, make personal guarantees, or pay any lending fees to qualify for a PPP loan.

You apply for PPP through existing SBA lenders or institutions that enroll and are approved by the SBA to participate in the program.

If you have a business bank account, check to see if your institution is funding the PPP. But if not, don’t worry because there are plenty of institutions to work with. You can’t take more than one PPP loan, but you can apply with multiple lenders. That may increase your chance of getting approved because each one may evaluate you a little differently.

In general, I recommend working with tech-savvy online lenders with mobile-friendly, streamlined applications that are easy to complete. Check out Kabbage and Fundera, which are small business lenders offering PPP loans.

How much can you get from a PPP loan?

PPP loans can equal 2.5 times your average monthly payroll from 2019 to a $10 million cap. But payroll costs per employee, including yourself, are capped at $100,000 on an annualized basis. If you’re self-employed with no employees, or you’re in a partnership, your (or your share of) net business profit for 2019 or the beginning of 2020 can be used as your annual payroll.

You must submit Form 1040 Schedule C with a PPP application, even if it’s your best estimate on your business profit or loss for last year.

Since income taxes for 2019 aren’t due until July 15, 2020, many people haven’t completed their taxes. Nonetheless, you must submit Form 1040 Schedule C with a PPP application, even if it’s your best estimate on your business profit or loss for last year.

Let’s say you’re a solopreneur who offers graphic design and website services. If your business’s net profit last year was $120,000, then your PPP loan would be based on $100,000. You divide it by 12 for a monthly payroll of $8,333 and then multiply by 2.5, which would allow you to receive a maximum PPP loan of $20,833.

8 things to know about PPP loan forgiveness

If you’re considering applying for a PPP loan, or you've received one, it’s critical to make sure you qualify for as much forgiveness as possible. Just because you got approved for the program doesn’t mean you automatically get to keep all the funds.

At the beginning of June, the Paycheck Protection Program Flexibility Act of 2020 was passed, and it’s expected to be signed by the President. It modifies previous rules for PPP forgiveness making them more favorable for small businesses.

I’ll cover what you need to know about the pending legislation and eight key points related to PPP forgiveness.

1. Your forgiven amount depends on your payroll payments

Businesses have 24 weeks to spend PPP funds on qualified expenses, such as payroll. This was increased from 8 weeks to give companies more time to reopen and rehire staff.

You must use at least 60% (decreased from 75% previously) of a PPP loan on payroll costs, which do not include payments to independent contractors. You can include salaries, commissions, and benefits for your employees, such as insurance, sick leave, and retirement matching, up to $100,000 per employee annualized.

If you’re self-employed with no employees, you can’t include benefit costs in your payroll for PPP forgiveness, just wages or net earnings from your business. Your forgiveness was limited to eight weeks of pay up, to $15,385 per individual. If you earn more than $100,000, the calculation is $100,000 divided by 52 weeks in a year, multiplied by eight weeks of compensation.

But it’s not clear if this has changed due to the PPP Flexibility Act. If the self-employed also get 24 weeks of payroll the calculation is $100,000 divided by 52, multiplied by 24, which is $46,154. That’s more than double the allowable loan for a self-employed individual. So, I’m guessing that the eight-week cap won’t be lifted, but I’ll keep you posted.

2. Your forgiven amount depends on your non-payroll expenses

Some non-payroll expenses also qualify for PPP loan forgiveness. These include business rent, utilities, and interest on debts you pay over eight weeks after getting the loan. But they must have been your obligation before February 15, 2020.

These non-payroll expenses can't exceed 40% (up from 25%) of your PPP forgiveness amount.

3. Your payroll costs can’t decrease significantly

 To qualify for PPP loan forgiveness, you must maintain reasonable salaries and wages for your employees. If you decrease them by more than 25% for any employee (including yourself) who made less than $100,000 in 2019, your forgiveness amount will be reduced. 

However, you can increase salaries or pay bonuses if you like. Just remember than the total compensation can't exceed $100,000 on an annualized basis, which is $15,385 for the eight weeks following your PPP funding.

4. You must make a good-faith effort to keep employees

PPP loan forgiveness also depends on keeping your full-time employees. But if you had employees who left your company voluntarily, requested a cut in hours, or were fired for cause during the pandemic, your loan forgiveness amount won’t be reduced for those situations.

Another change is that you now have until December 31, 2020, to rehire or restore your staff for any employment changes that occurred between February 15 and April 26, 2020.

5. You don’t owe taxes on forgiven amounts

Any amount of your PPP loan that’s forgiven will not qualify as federal taxable income. Some states that charge income tax have indicated that they won’t tax forgiven amounts.

However, not all states have issued their rules on taxing PPP forgiveness. So be sure to get guidance if you live in a state with income tax.

6. You can’t claim forgiven expenses as a tax deduction

If you do qualify for PPP forgiveness on payroll or non-payroll expenses, you can’t also claim them as deductions on your taxes. Even if they would ordinarily be tax-deductible, getting them forgiven as the result of a PPP loan becomes your deduction. The IRS doesn’t let you double-dip a tax benefit.

7. You must formally request loan forgiveness

You must complete a PPP Loan Forgiveness Application and get approved by your lender to qualify for forgiveness. The paperwork should come from your lender, or you can download it from the SBA website.

The forgiveness application explains what documents you must include, and they vary depending on whether you have employees. You must verify the number of full-time employees and their pay rates. You also must verify your eligible non-payroll business expenses, such as lease and utility payments.

Once you submit your paperwork, your lender has 60 days to decide how much of your PPP loan can be forgiven.

8. You must repay unforgiven amounts

If some or all of your PPP loan is not forgiven, it must be repaid within five (up from two) years at a 1% fixed interest rate. You don't have to start making payments for 10 (up from six) months after loan disbursement, but interest will accrue during this deferral period.

How to document payroll for PPP loan forgiveness

Now that you understand the main requirements and limitations for getting a PPP loan forgiven, let's go back to Alex's question about properly documenting his payroll. Some lenders have requested that PPP loans get deposited into a separate business bank account, but that's not required.

If you have employees, you need documents that verify the number of employees, their salaries, and wages. You can generate a payroll report from your bookkeeping program and provide IRS Form 941, Employer’s Quarterly Federal Tax Return, and any state tax reporting forms to prove what you paid. Your bank account statements will also show cash compensation paid to your employees over the qualifying 24-week period.

You should maintain documentation for any non-payroll qualifying business expenses you established before February 15, 2020.

If you're self-employed with no employees, you simply need to document compensation paid to yourself over the qualifying eight-week period. You might generate a report or provide your bank account statements for verification.

Likewise, you should maintain documentation for any non-payroll qualifying business expenses you established before February 15, 2020. As I mentioned, these might include rent and utilities—such as power, water, gas, transportation, phone, and the internet—used for your business. If you use a bookkeeping program, create a new category for eligible expenses, so it's easy to run a report on the total amount.

There aren't any official rules about keeping records for PPP forgiveness, but the more detail you have, the better.

About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.