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The Paycheck Protection Program (PPP) was created in March 2020 as part of the CARES Act, with revisions in June 2020 and December 2020. — Getty Images/martin-dm

This story was updated 1/8/21: The Paycheck Protection Program (PPP) will re-open the week of January 11 for new borrowers and certain existing PPP borrowers. To promote access to capital, initially only community financial institutions will be able to make First Draw PPP Loans on Monday, January 11, and Second Draw PPP Loans on Wednesday, January 13. The PPP will open to all participating lenders shortly thereafter.

One of the most extensive ways the federal government sought to aid businesses suffering from coronavirus-related shutdowns and disruptions was implementing the Paycheck Protection Program (PPP).

After its creation in March 2020, the program has been modified several times to ensure more businesses could participate, with the SBA approving more than 5 million loans worth more than $525 billion throughout 2020.

What made the program so popular was the ability for businesses to have their loans forgiven, effectively making them grants. However, the loans were issued with specific criteria that needed to be fulfilled to have them forgiven. Below we will outline requirements for loan forgiveness, how to get a forgiveness application and other important details for those businesses hoping to have their PPP loan forgiven, including the latest revisions issued by the federal government in December 2020.

Background on the Paycheck Protection Program

First, let’s explain briefly how the PPP works to better explain the forgiveness aspect. The PPP was created in March 2020 as part of the federal government’s $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act. On top of tax breaks and changes in the CARES Act, the PPP was designed to provide a simple way for businesses to keep their employees on payroll and cover some additional expenses.

The PPP program was further modified with major revisions in June 2020 and December 2020 to add more flexibility for how borrowers spend loan funds. The December bill also reopened the PPP program so more businesses could apply for a first-time loan and created the ability for businesses to potentially obtain a second PPP loan.

Generally speaking, PPP loans carry generous terms. All PPP loans have an interest rate of 1%, with loans issued prior to June 5 maturing after two years and loans issued after June 5 maturing after five years. Basically, PPP loans issued before June 5, 2020, must be paid back in two years, and loans issued after that must be paid back in five years. No collateral or personal guarantees were required for the loan and no fees were charged to small businesses by the banks or credit unions authorizing the loans. While the loan terms were generous, the best aspect of them was that they could be forgiven.

The Treasury Department said it plans to automatically audit all PPP loans larger than $2 million. Smaller loans most likely won’t be targeted for audit, but some “spot checks” will occur. Additionally, banks including JPMorgan Chase & Co. (the single largest lender of PPP

loans) said they would investigate instances of borrowers misusing PPP funds.

Requirements for loan forgiveness

To qualify for PPP loan forgiveness, businesses must fulfill various requirements. The terms regarding forgiveness were last updated in December 2020.

Effectively, forgiveness is granted to employers that have kept or rehired employees while also maintaining salary levels from before the pandemic. Employers can still be eligible for partial forgiveness if they don’t meet all of these criteria, such as if full-time headcount declined or salaries decreased somewhat.

Requirements for full forgiveness include:

  • At least 60% of the loan must be used for payroll costs.
  • The remaining 40% of the loan can be spent on the following expenses: (1) qualifying mortgage interest or rent obligations; (2) utility costs; (3) operations costs such as business and accounting software; (4) property damage such as destruction from civil unrest that was not insured; (5) supplier costs on essential goods; and (6) worker protection expenditures such as personal protective equipment (PPE) and sneeze-guards.
  • While the loan is being used, employers must attempt in good faith to maintain similar levels of employment and pay what they had prior to the pandemic.

Loan forgiveness reduction from EIDL

The December 2020 stimulus bill revised how Economic Injury Disaster Loan (EIDL) grants impact PPP loan forgiveness. Originally, PPP loan forgiveness would be reduced by the amount a business received in EIDL grants. That has been changed so that loan forgiveness will not be reduced regardless of whether a business received an EIDL grant.

Complete a loan forgiveness application

As long as you have abided by the rules and requirements provided by the SBA, then businesses can submit a loan forgiveness application. Businesses will need to submit an application to the financial institution from which they received their PPP loan. (Small businesses with employees can use this standard PPP forgiveness application as a guide for what information they need to provide, while sole proprietors, independent contractors and self-employed people who have no employees can use this EZ version of the application as a guide.)

For small businesses with employees, the application asks businesses to submit details such as payroll and nonpayroll costs, adjustments for wage reductions and potential forgiveness amounts. Additionally, you’ll use the application to certify that the loan funds were used as intended, that you verified payments to employees and generally that the forms and information submitted to the SBA are true.

The loan forgiveness application also includes measures to “reduce compliance burdens and simplify the process for borrowers,” including:

  • The ability for borrowers to calculate payroll costs using an “alternative payroll covered period” that better aligns with a borrower’s normal payroll cycles.
  • The flexibility to include some payroll and nonpayroll expenses paid or incurred during the 24-week period after receiving their PPP loan (meaning employers would not be limited only to costs in the original two-month timeline).
  • An exemption from loan forgiveness reduction for any borrowers who made a “good-faith, written offer to rehire workers” that was later declined.

The deadline for submitting a forgiveness application is 10 months after the end of the “Covered Period” of the loan, which is between 8 and 24 weeks. As such, after the period where you use the loan funds ends, you should submit a timely application with your lender.

Once the loan forgiveness application has been submitted, then businesses wait to find out if it has been accepted. Notably, as long as a business submits a loan forgiveness application within 10 months of their loan being used, they are not required to make any payments on the loan. If the loan is then fully forgiven, then the business does not need to make any payments at all. If the loan is only partially forgiven or not forgiven at all, the loan must be paid off in full before its maturity date.

Simple forgiveness for PPP loans under $150,000

Revisions to PPP in the December 2020 coronavirus relief bill require that any business that had a loan worth less than $150,000 can fill out a simplified one-page application. The modified application will likely be available soon from the SBA.

However, in the meantime, any business that received a PPP loan worth less than $50,000 can fill out a one-page application (Form 3508S) and then submit it to their lender for approval. Small businesses that qualify for simple forgiveness Form 3508S ultimately require fewer calculations and less documentation than the standard forgiveness application. Still, the SBA “may request information and documents to review those calculations as part of its loan review process.” More information about filing instructions regarding the Form 3508S can be found on the SBA’s website.

More questions and answers

If you’re looking for more information on the December 2020 changes to PPP, the U.S. Chamber released an updated guide to Guide to Small Business COVID-19 Emergency Loans. Additionally, it would be smart to contact your financial advisor or accountant to review all of your PPP details before submitting a forgiveness application.

For more information on the new stimulus package, watch our Small Business Update with U.S. Chamber of Commerce Chief Policy Officer Neil Bradley, which breaks down how the new legislation impacts PPP loans, taxes and more.

For more resources from the U.S. Chamber of Commerce:

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published December 28, 2020