A Headache-Free Intro to PPP Loan Forgiveness
Updated: May 21
If you were one of the small businesses who were able to get a Paycheck Protection Program (PPP) loan, congratulations! It was probably not an easy process, but we’re glad you did it. Now, let’s make sure you’re making the right moves to get your loan forgiven.
As I was doing my research on this topic, I found myself overwhelmed. The SBA is updating its guidelines every day and there are a lot of moving parts and technicalities so I wanted to share the three things you need to keep in mind to be on the path to maximum loan forgiveness.
Let's cut through the noise, here's what you need to keep your eye on; A) What you use PPP money for, B) whether you can maintain your average number of full-time equivalent employees (FTEs for short), and C) and whether your average employee wages are not reduced by more than 25%. Here are four things to keep in mind during your 8-week PPP forgiveness window to help you keep your eyes on the prize.
1. The PPP is primarily for payroll but also for other approved costs
Businesses that have received a PPP loan have 8 weeks to use the funds towards approved costs. To ensure loan forgiveness, it’s very important that your business uses this loan only for approved costs. Approved costs include payroll, business rent, business utilities, interest on existing debts or mortgages.
The PPP was drafted to keep workers employed and paid. To ensure full forgiveness, no more than 25% of your PPP loan can go to approved costs outside of payroll. Keeping good records of how you’re spending the PPP loan is crucial so make sure you’re working alongside an accountant, payroll processing software, or keeping your PPP loan in a separate bank account to make tracking as painless as possible.
For questions about approved costs see this fact sheet from the Treasury Department.
2. Keep that FTE number steady during the 8-week window if possible
The goal of the PPP is to help businesses keep employees. To achieve full loan forgiveness, you’ll have to prove that your average FTE number did not decrease compared to its pre-COVID baseline.
You’ve got three baseline periods you can choose from. 1) Last spring and summer (February 15, 2019 - June 30, 2019), 2) this winter (January 20, 2020 - February 29, 2020), or if you’re a seasonal business, 3) last spring/summer (March 1, 2019, to June 30, 2019). Take some time to see what these three periods looked like for you in terms of FTEs and decide which one you’d like to set as your baseline.
3. Wages should remain steady with some flexibility
In order for your PPP loan to be fully forgiven, you cannot reduce the average wage of any employee by less than 25%. To calculate the average wage for an employee, take their Q1 2020 gross wages as a baseline and divide that by the 13 weeks in each quarter. This results in that employee’s average weekly wage. This is the amount you should aim to continue paying your employees over the 8 week period with the flexibility of reducing employee wages by 25% if needed. Notably, employees who earn an annual salary of more than $100,000 in 2019 are exempt from this rule. Those wages can be reduced by more than 25% with no penalty to your PPP forgiveness.
4. Forgiveness is on a sliding scale, not all or nothing
Every business is in a unique situation. For some businesses, it may not make sense to spend 75% of their PPP loan on payroll or keep headcount and wages steady. That’s okay. PPP loan forgiveness works on a sliding scale.
For example, let’s say you took out a $20,000 PPP loan. If you only spent 65% of your PPP on payroll instead of the ideal 75%, your loan forgiveness amount would be reduced by 10%. That means you’ll have $18,000 of your $20,000 loan forgiven but you’ll be on the hook for repaying $2,000 over 2 years at a 1% interest rate. Similarly, if you reduce your FTE number, that percentage reduction will be removed from your total forgivable amount.
If you have to reduce a given employee's wages by more than 25% of their Q1 2020 average weekly wage, every dollar that you pay them below that 25% threshold will be reduced from your forgiveness total. (For a more detailed explanation of how your forgivable amount changes, see step 12 of Gusto’s PPP guide.)
While receiving full forgiveness may be your goal, keep in mind that falling short is not the end of the world. A PPP loan is meant to support businesses during this unprecedented time. As a result, their repayment terms are pretty generous. If a portion of your PPP loan isn’t forgiven you’ll need to repay the loan over a period of two years at a 1% interest rate. Managing your business during a pandemic is no easy task, but if you keep these four things in mind, you’ll be one step closer to emerging stronger on the other side.