Note that a borrower is allowed to apply for forgiveness immediately all loan proceeds for which the borrower is requesting forgiveness have been used. They can also apply for forgiveness at any time as long as it falls within the maturity date of the loan.

If borrowers fail to apply for forgiveness within 10 months after the last day of the covered period, note that the PPP loan payments are no longer considered deferred, and borrowers will have to start making loan payments to their PPP lender.

Since the application for Paycheck Protection Program (PPP) halted on May 31, borrowers who have already secured their funding and spent their loan proceeds on the stipulated expenses are now seeking ways to apply for loan Forgiveness.

The essence of the program was to reimburse struggling small businesses— ensuring that they can survive—by allowing them to apply for forgiveness of the PPP loans they used to keep employees on payroll and many other expenses.

Once you have arranged the necessary documents and your lender has opened forgiveness applications, you can begin uploading your information into their portal. If your lender has not started requesting forgiveness applications yet, you have to look out for emails that note when they open.

Note that you won’t have to wait until the end of the covered period to apply. Your lender will have up to 60 days to go through your forgiveness application. Have it in mind that it falls on your lender to decide on your forgiveness amount which can be up to the full loan amount.

Immediately after they are done reviewing your application and have confirmed your forgiveness amount, they will forward their decision to the SBA. At this point, the SBA is left with 90 days to evaluate your application and may even contact you directly for additional information.

Your lender will let you know the outcome of your forgiveness application. You may receive full forgiveness, or partial forgiveness, or be denied altogether. You will be informed of any remaining balance and the monthly payments expected to be paid off.

By having a PPP loan, both your lender and the SBA reserves the right to audit your business’s financial documents and records to evaluate your eligibility and loan use. You will also need to retain your supporting documents for six years after the loan is fully forgiven or fully repaid.

2nd PPP Loan Forgiveness Rules

  1. Owner Compensation Replacement

Note that this can be easier for a sole proprietor, contractor, or self-employed individual. Have it in mind that you are entitled to owner compensation replacement. PPP loans are known to come with a covered period of 24 weeks.

Within these 24 weeks, you are expected to claim 2.5 months’ worth of your 2019 net profit, as reported on line 31 of your Schedule C. However, if your PPP loan fails to include other payroll expenses, this amount would be equivalent to your entire PPP loan.

The maximum amount allowed is $20,833. But if you received a PPP loan before June 5, 2020, you may want to use an 8-week covered period, and you can claim 8 weeks’ worth of 2019 net profit instead. The maximum amount permitted is $15,385.

  1. 60/40 Rule

According to the SBA, for a PPP loan to be completely forgiven, the borrower is expected to use the funds on certain stipulated expenses. Note that at least 60 percent of the loan will have to be used to fund payroll and employee benefit costs. The remaining 40 percent can be used on other non-payroll costs, such as mortgage interest payments, rent and lease payments, and utility payments.

  1. Maintaining Salary and Wages

For each employee on payroll, their pay must have been at least 75% of what they received in the previous quarter. For salaried employees, their weekly salary over the covered period must have been 75% of what it was in the previous quarter. For waged employees, the same condition must be true for their hourly wage.

  1. Maintaining Headcount

You are also expected to have maintained an average monthly number of full-time equivalent employees within the course of the covered period. Aside from that, you must also have had to rehire any employees that were laid off due to COVID. According to SBA, you can test whether you met these criteria by using this simple calculation. First, determine the average number of full-time employees you had for:

  • The 8-week to the 24 weeks following your initial loan disbursement, (A)
  • February 15, 2019, to June 30, 2019, (B1)
  • And January 1, 2020, to February 29, 2020. (B2)

At this point, take A and divide that by B1. Also, do the same with B2. Then take the biggest number you get. If you are a seasonal employer, you must divide by B1. If you obtain a number equal to or larger than 1, you successfully maintained your headcount and meet this requirement. But if you obtain a number smaller than 1, then you failed to maintain your headcount and your forgivable expenses will be reduced proportionately.

  1. Safe Harbors

A safe harbor is a provision that can be inculcated into rules and laws to guarantee that people don’t mistakenly violate rules, especially owing to a technicality or situation that is outside their control. When it comes to PPP loan forgiveness, safe harbors help businesses qualify for forgiveness, even if they don’t meet all the criteria. They include;

Good Faith Certification Safe Harbor: This safe harbor is related to the requirement that borrowers certify on the loan application that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”

FTE Reduction Safe Harbor: If your business has a reduction in full-time equivalent employees (FTEs), your PPP loan forgiveness amount may be reduced. Finding out whether your business has reduced FTEs can be ascertained by comparing a chosen reference period to the Covered Period (or Alternative Covered Period) — the amount of time you have to spend the loan amount.

FTE Reduction Safe Harbor 1: If your business doors were mandated to be fully or partially closed, a safe harbor applies. Applying this safe harbor in your application is simple — you will more or less check a box certifying that it’s true. But it is recommended you keep documents that help support this.

FTE Reduction Safe Harbor 2: This safe harbor exempts borrowers from forgiveness reduction if they reduced their FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020.

However, the borrower will also have to restore its FTE employee levels by no later than December 31, 2020, to its FTE employee levels in the pay period that included February 15, 2020. For loans disbursed after December 27, 2020, this is extended to the end of your 8 to 24-week covered period.

Salary/Hourly Wage Reduction Safe Harbor: Another reason that PPP loan forgiveness may be reduced is if the salary or hourly wages paid to employees who earn less than $100,000 annually was reduced by over 25% within the Covered Period (or the Alternative Payroll Covered Period).

Before applying for your PPP loan forgiveness, it is pertinent you adequately understand the terms and rules of Forgiveness. Your lender is responsible for providing you with necessary details concerning your Forgiveness, including the amount paid by SBA and the date on which your first payment will be due.