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PPP Forgiveness Rules, Qualified Expenses, and How To Apply For Loan Forgiveness

The Paycheck Protection Program (PPP) loan if used for qualifying purposes, can be converted to a grant (i.e. forgiven). However, depending on the size of the loan, you’ll first have to apply to your lender for forgiveness. The SBA began accepting PPP forgiveness applications from lenders on August 10, 2020. Not all lenders however opened up their forgiveness programs at that point as some continued to wait upon Congress to clarify the rules of forgiveness.  But now virtually all lenders have begun to process applications so if you have yet to hear from your lender or begin the process you should contact them. Since forgiveness time is now here, I thought it might be helpful to go over some of the basic requirements the SBA will be looking for when evaluation your application.

Requirements For PPP Loan Forgiveness (Updated Due To The PPP Flexibility Act)

The requirements for having your PPP loan forgiven are surprisingly lenient. It is, however, vital that you understand and follow these requirements. Otherwise, you will not qualify for loan forgiveness.  (One important thing to note is that the original PPP requirements have been modified under the Paycheck Protection Flexibility Act).

Loan Proceeds Must Be Used For A Qualifying Purpose

If you receive a PPP loan, you are limited in how you can use your funds. Understand that this loan is meant to help you pay and retain your employees if your business has been affected by the coronavirus.

Funds Must Be Spent Within 24 Weeks

Your loan is calculated to provide you with eight weeks of capital to pay employees and cover other qualified costs. To be forgiven, you must spend your loan proceeds within 24 weeks of disbursement. The covered period cannot extend past December 30, 2020. If you can’t spend all of your funds during this period, you can still claim forgiveness on any portion that meets all other requirements. Any funds that aren’t spent during the 24-week period, or by December 30, 2020 will not be forgiven.

Incurred Costs Can Be Included, Too

In addition to costs that have already been paid, expenses incurred during the 24-week period are also eligible for loan forgiveness.

For example, let’s say that you’ll pay your employees on November 13th for work completed November 1st through November 7th. Your 24-week deadline falls on November 7th. Even though this payday will fall after the 24-week period, payroll costs were incurred and therefore are eligible for forgiveness.

You Must Maintain Your Full-time Staff

Because this loan should be used to help you pay your staff, it makes sense that one requirement for loan forgiveness is that you must maintain the headcount of your full-time employees. If you had five employees when applying for your loan, you should continue to have at least five full-time employees on your payroll.

You Must Maintain Your Payroll

Your payroll costs must remain the same as they were when you applied for funding. If you decrease salaries or wages, you may be required to pay back a portion of your loan. To be eligible for loan forgiveness, you can’t reduce the salary of any full-time employee earning less than $100,000/year by more than 25%.

If you had to cut salaries or wages due to financial challenges caused by the coronavirus, you have 24 weeks to restore these salaries and wages. The 24-week period can’t extend past December 31, 2020.

Qualified Expenses For PPP Loans

PPP loans can only be used for certain expenses. If you use your loan for anything other than these expenses, you will not qualify for full loan forgiveness. So how exactly can you use your funds?

Payroll Costs

Your PPP loan funds can be used to cover payroll expenses so that you can keep your business staffed. Various payroll costs are qualified expenses, including:

  • Salaries, Wages, Tips & Commissions: Capped at $100,000/annually per employee
  • State and local taxes on compensation
  • Employee Benefits: Includes costs associated with retirement plans, group health insurance, separation or dismissal, vacation time, sick and medical leave, and parental and family leave

These costs will need to be proven by submitting payroll documentation. For small businesses, acceptable documentation includes:

  • Tax Forms: Form 941 quarterly tax filings and Form 944 annual tax filings
  • Payroll Registers: Should be from the last 12 months
  • Business Bank Statements: Should be from the last 12 months

Other documentation may be acceptable — ask your chosen lender for additional details.

Mortgage Interest

Your PPP loan can be used to pay mortgage interest. Mortgage interest obligations must have been incurred before February 15, 2020, to be a qualified expense.

Make sure to have documentation showing the mortgage interest that was paid. Acceptable documentation includes receipts, bank statements, account statements, and canceled checks.


If you rent your commercial space, you can use a portion of your funds to cover rent.  To be considered a qualified expense, a lease agreement for the property must have been in effect before February 15, 2020.

Again, you need to keep all documentation proving your funds were spent toward this qualified expense. So, don’t forget to hang onto your account statements, receipts, bank statements, and canceled checks.


You can use a portion of your loan to cover your utilities. The SBA defines utilities as “electricity, gas, water, transportation, telephone or internet access, for which service began before February 15, 2020.”

You’ll want to have documentation proving that these utilities were paid by keeping account statements, bank statements, canceled checks, and receipts.

One last thing to note is that you must use at least 60% of your loan to cover payroll costs to be forgiven (before the passage of the Paycheck Protection Flexibility Act, borrowers were required to use at least 75% of loan funds for payroll costs). The remaining 40% can be used to pay mortgage interest, utilities, and rent.

Failure to meet this requirement would result in a reduction in the portion of the loan that is forgiven. Now, only 60% of funding must be used toward payroll costs. If you don’t meet this threshold, you may still be eligible for partial forgiveness.

Deadline To Apply For PPP Loan Forgiveness

There are several timelines to keep in mind if you plan to apply for PPP loan forgiveness. You have until your loan’s maturity date (in other words, the date the final payment is due) to submit a PPP loan forgiveness application.

  • If you received your loan funds prior to June 5, 2020, this date will be two years after the origination of the loan.
  • If you received your funds after June 5, you have five years from the origination date to apply for forgiveness.

But there’s a catch. If you don’t apply for loan forgiveness within 10 months of the last date of your covered period, your loan is no longer deferred. That means you will have to make payments on the loan. So, it’s best to get started as early as possible to allow yourself time to gather information and documentation. If you qualify for full forgiveness, submitting your application early also helps prevent you from making any loan payments.

When & How To Apply For Forgiveness

You will apply for PPP loan forgiveness through the lender that serviced your PPP loan. You must submit SBA Form 3508; some borrowers may also be eligible to submit the EZ Loan Forgiveness Application. The EZ option is available to borrowers who meet one of the following conditions:

  • Self-employed or have no employees
  • Salaries or wages of employees were not reduced by more than 25%, and employee hours were not reduced
  • Experienced reduction in business as a result of COVID-19 health directives and did not reduce employee wages by more than 25%

As of October 2020, the US Small Business Administration now offers a simplified loan forgiveness application for businesses that received PPP loans of $50,000 or less. Form 3508S (the new form) requires fewer calculations and less documentation. To successfully apply through Form 3508S, you’ll need:

  • Your business info, including name, address, and contact information
  • SBA loan number
  • Lender PPP number
  • PPP loan amount
  • Employees at the time of application
  • Employees at the time of a forgiveness application
  • PPP loan disbursement date
  • Forgiveness amount
  • EIDL info (if applicable)

Note that you submit your loan forgiveness application to your lender, not to the SBA. The lender is responsible for all forgiveness action and ultimately will be the entity compensated by the SBA.  Key things to remember:

  • Once your lender has received everything, they must decide on your loan forgiveness status within 60 days.
  • Your lender is responsible for informing you of how much, if any, forgiveness was paid to them by the SBA and any forgiveness the lender directly applies to the loan.
  • If the lender denies your application in full, they must inform you that they’ve sent a letter to the SBA denying the application.
  • If you want to dispute the decision and directly petition the SBA, you have to notify the lender within 30 days of receiving your rejection letter that you are requesting an SBA review.

Have Questions? 

The absolute best place to turn to get answers to your questions is likely to be your lender, as are the ones the SBA has commissioned to distribute the funds and process the forgiveness applications.  Next best, your ministry’s certified public accountant (CPA). CPA’s are required to stay current with the laws and regulations governing the activities of their clients so very likely your CPA will be well versed in what you need to do to take full advantage of the loan forgiveness process.

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