Paycheck Protection Program (PPP) Loan Forgiveness: Learn More About How it Works


Business owners can now apply for forgiveness directly with the Small Business Administration (SBA). This option is only available to borrowers with loans of $150,000 or less -- which is 95 percent of all loans issued in 2021.

The new forgiveness platform for loans $150,000 or less began accepting applications from borrowers on August 4th, 2021, here:

SBA Forgiveness Portal

Borrowers that need assistance or have questions should call the SBA at (877) 552-2692, Monday – Friday, 8 a.m. - 8 p.m. EST.

If your PPP amount is over $150, 000 and you received your PPP loan through a bank in the SmartBiz network, your bank will be contacting you directly about applying for Forgiveness. Otherwise, you should reach out to your lender for information about when you can apply with them.

SBA Administrator Isabel Casillas Guzman shares additional details in an SBA press release:

“These entrepreneurs are busy running their businesses and are challenged by an overly complicated forgiveness process. We need to deliver forgiveness more efficiently so they can get back to enlivening our Main Streets, sustaining our neighborhoods and fueling our nation’s economy.”

Missed out on PPP? Pre-Qualify for other funding!

The government’s efforts to aid businesses during the coronavirus pandemic and resulting economic downturn has resulted in favorable terms for Paycheck Protection Program (PPP) loans. This program was designed by the Small Business Administration (SBA) to reduce burdens on small businesses.

There have been two rounds of Paycheck Protection Program (PPP) loans for small business owners. Those who have been successfully funded once or twice have the opportunity to get their loans fully or partially forgiven. There are lots of questions about forgiveness swirling around. This article provides an overview of details found on the SBA website.

Loan forgiveness details

Employers can apply for full or partial forgiveness if they spend their loans on qualifying expenses over the eight weeks after receiving a loan. Qualifying expenses include:

  • Payroll costs or individual salaries
  • Insurance benefits
  • Employee salaries and/or commissions
  • Rent payments and/or mortgage payments
  • Utilities
  • Software or cloud computing costs for business operations
  • Costs related to property damage and vandalism or looting due to public disturbances not covered by insurance or other compensation
  • Costs of the supply of goods that are essential to business operations
  • Covered worker protection expenditures that help adapt business activities to COVID safety requirements

What if I cut employee headcount?

A reduction in full time employees (FTE) employees during the Covered Period reduces the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees. If the average number of FTE employees during the Covered Period is less than during the reference period, the total eligible expenses available for forgiveness is reduced proportionally by the percentage reduction in FTE employees.

A business owner with a PPP loan of $50,000 or less is exempt from any reductions in the borrower’s loan forgiveness amount based on reductions in FTE employees unless the borrower together with its affiliates received First Draw PPP Loans totaling $2 million or more or Second Draw PPP Loans totaling $2 million or more.

What if I cut employee salaries?

The Act also reduces loan forgiveness if an employer cuts employee compensation.

To get its baseline compensation figure, an employer should include all salaries and wages for employees up to $100,000 (the maximum amount of an employee’s compensation that an employer may count for monthly payroll purposes).

If the employer reduces compensation below that number during the eight weeks after getting a loan, forgiveness may be reduced. This reduction is more flexible than the reduction for headcount, as the reduction begins only after the employer reduces compensation by more than 25%.

For a close look at payroll calculation, read Payroll Cost Calculation for Paycheck Protection Program Loans. Information includes what is included in payroll costs and what is excluded along with 5 steps to help you calculate.


How does PPP loan forgiveness affect a tax credit?

You cannot get both a small business loan under the PPP and also claim a tax credit.

If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200 to request an advance payment of employer credits due to COVID-19.

See Claiming CARES Act Tax Credits To Keep Employees for more information.

Why would a PPP forgiveness application get denied?

There are several instances in which you may not qualify or only qualify for partial PPP loan forgiveness. Review these reasons and avoid issues with the forgiveness application.

  • Failure to meet the 60/40 split
  • Failure to maintain Full Time Employee headcount
  • Failure to restore reduced compensation

How to manage unforgiven PPP loan amounts

If you applied and were approved for your loan after June 5, 2020, any unforgiven amounts automatically convert to a five-year loan at a 1% rate. Loans approved before June 5, 2020 convert to a two-year loan at a 1% rate, but you can apply for an extension to five years from your PPP lender.

Your loan payments are postponed until:

  • The date that the SBA remits the approved forgiveness amount to the lender
  • The SBA determines that a loan is not eligible for forgiveness
  • Your time to seek forgiveness lapses (although interest will accrue)

If you do have unforgiven loan amounts from your PPP funding, you have several options.

Repay your loan immediately

Depending on the amount of funds that are unforgiven and how you spent them, it might be wise to pay back your loan as soon as possible. You can do this without incurring any prepayment penalties or other fees. Paying off your loan promptly enables you to avoid additional interest accruing over time.

Take advantage of generous loan terms

With a 1% rate, your PPP loan has even more favorable terms than standard SBA loans. It may be better for your business to carry any unforgiven loan amount for the two- or five-year period allowed. Since you didn’t have to put up collateral for the loan or have impeccable credit to qualify, this can give you some breathing room as you figure out what comes next for your business.

If your PPP loan forgiveness is denied, contact the lender who funded your loan. You may be able to submit extra documentation to help with the approval process. You can request the SBA review a lender’s decision denying forgiveness within 30 days of the denial.

Additional resources

The SmartBiz team is regularly updating our resource center to help address questions top-of-mind for small business owners. Visit the SmartBiz Small Business Blog for resources to help you thrive in 2021 and beyond.