Under a Paycheck Protection Program (PPP) loan, small business owners were able to borrow money for payroll, rent, mortgage interest, and utilities. The loan was available from any Small Business Administration (SBA)-approved lender as well as through online loan brokers like Lendio.
Approximately $284 billion were authorized in the second draw of PPP loans, and program funds were fully exhausted in May 2021. As the eligibility period to use borrowed funds concludes, businesses can apply for forgiveness of the second offering of PPP loans either through their lenders or through a portal that has been established by the SBA.
PPP Loan Basics
The Paycheck Protection Program was designed to help small businesses overcome:
- Disruptions to the supply chain
- Challenges with staffing
- Reduced earnings because of COVID-19
- Lost customers due to capacity restrictions
- Closure because of a state-mandated shutdown
Businesses could apply for the PPP loan through any SBA-approved lender, provided the business was operating as of February 15, 2020. If the loan proceeds were used for eligible expenses during the loan’s forgivable period, the PPP loan converts to a grant.
PPP Loan Recap
Number of employees
300 or fewer for the second PPP loan
Business must have been operating as of February 15th, 2020
Must pay payroll taxes
Maximum loan amount
Up to $2 million for second PPP loan
Up to 2 years
Interest rate on unforgiven portion
PPP Loan Forgiveness Process
The sum of the following costs, up to $2 million, is eligible for forgiveness:
- Payroll costs, including taxes
- Employee salaries and commissions of up to $100,000 per employee
- Insurance premiums and costs associated with healthcare benefits
- Mortgage interest
- Rent payments
- Uninsured property damage costs due to vandalism during 2020
- Utility payments
The documents required to verify loan forgiveness include:
- SBA Paycheck Protection Program forgiveness application
- Payroll tax filings—forms 940 and 941
- State income, payroll, and unemployment insurance filings
- Canceled checks, payment receipts, and bank account statements to verify mortgage, lease, and utility obligations
If you borrowed $150,000 or less in the second round of PPP loans, you may not have been required to submit supporting documents at the time of application. However, you should still have these on hand in case your lender or the SBA asks for verification.
Applying for Forgiveness
Businesses that borrowed over $150,000 will be required to apply for forgiveness directly through the lender they used for the PPP loan. This process varies by lender and involves either using an online portal hosted by the lender or emailing the SBA forgiveness application to their lender directly. Businesses that borrowed $150,000 or less may be eligible to apply directly through the SBA if their lender has opted for this. Check with your lender for specific instructions.
Once you apply for forgiveness, your lender will have up to 60 days to review before submitting your application to the SBA. The SBA will then have up to 90 days to complete its review; however, most reviews will not take the full allotment of time.
Applying Through Your Lender
Businesses that are required to use their lender to apply for forgiveness may be asked to complete an online application on the lender’s website or submit the SBA’s forgiveness application directly to the lender.
There are three application forms that the SBA has created:
- SBA Form 3508: Any borrower who received more than $150,000 and reduced employee salaries by at least 25% or reduced the number of full-time equivalent (FTE) employees is required to use this form. This form is very similar to the one used in the first forgiveness application.
- SBA Form 3508EZ: Businesses who received more than $150,000 and didn’t reduce employee salaries by at least 25% or cut FTE employees may use this form. Form 3508EZ doesn’t contain Schedule A, which requires you to list employee compensation and FTE status.
- SBA Form 3508S: Businesses that applied for $150,000 or less and aren’t directed to apply through the SBA’s portal generally can use this form. However, businesses that are affiliates of or contracted with another business that took out a PPP loan—with combined PPP loans totaling more than $2 million—will be required to use Form 3508.
Applying Through the SBA Portal
Many businesses with PPP loans of $150,000 or less may be eligible to use the SBA’s PPP Direct Forgiveness Portal. The SBA’s forgiveness portal requires businesses to register online prior to applying. If your lender has opted out of using the SBA’s forgiveness portal, you will need to apply for forgiveness through your lender.
The SBA’s forgiveness portal comprises the same information that is on Form 3508S over a series of pages.
While most businesses that have borrowed up to $150,000 from eligible institutions can use the Direct Forgiveness Portal, there is one restriction: Businesses that are affiliates of or contracted with another business that took out a PPP loan with the combined total of PPP loans exceeding $2 million will be required to apply directly through their lender.
What Happens When Not All of Your PPP Loan Is Forgiven?
Should any funds be used for expenses not forgivable in the program, those funds will remain in a low-interest SBA loan with a 2-year repayment term. Your lender will continue to service the loan until this portion is repaid. The forgiven portion of the loan will be canceled and removed from your loan balance.
The terms for the remainder of the loan are:
- Guarantee: The SBA will continue to guarantee the remaining portion of the loan
- Repayment term: Up to 2 years from the date of issuance
- Interest rate: 1% fixed
Calculating Estimated PPP Payments
The portion of the loan not forgiven by the SBA has a term of 24 months, with an interest rate of 1%, and the payments will be due each month. We’ve created a spreadsheet you can download to estimate the costs of the loan after payroll forgiveness.
If you wish to recreate this calculation, you can use the payment function (=PMT) in Excel. Make sure the interest rate is divided by 12 so that it matches the payment frequency. The only other thing left to add is the accumulated interest, which you can figure out by following these steps:
- Multiply the loan amount by the interest rate (.01).
- Multiply again by 10.
- Divide by 12 to get 10 months of deferred payments.
Tax Treatment of Forgiven Debt
Debt forgiveness of PPP loans doesn’t count as income on tax filings. This is an exception in the CARES Act to avoid penalizing businesses that needed help from the loan.
Applying for PPP loan forgiveness is relatively straightforward, provided business owners have kept track of their payroll, lease, and utility payments over the use period of the loan. Most businesses that have taken out a PPP loan of $150,000 or less will be able to utilize an expedited form or application process through their lender or the SBA. Preparation and record keeping are critical to ensure that the application process is easy.