9 ways to maximize PPP loan forgiveness (important 2021 tips)

In this 7-minute read:

  • Ways to maximize and help you get your PPP loan forgiveness

Over 10 million businesses, independent contractors, sole proprietors, gig workers, and self-employed individuals have applied for and received their first (or second) PPP loans, and the SBA has approved over $780 billion in these forgivable loans. As the current phase of the PPP winds to a close, the next step for these borrowers after the funds are spent is to apply for loan forgiveness. But how can you maximize your loan forgiveness and take the steps to make sure that it happens? 

Follow our guide to make the most out of your PPP loans and get them forgiven at the end of your covered loan period. 

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1. Spend at least 60% of your loan on payroll costs

If you’ve received the PPP loan, you are probably familiar with this rule—but it is such an important one for us to reiterate. A huge purpose of the PPP loan’s original intent is to help employers keep their employees on staff and keep the economy moving forward. 

If you are self-employed or a contractor/gig worker/sole proprietor without employees, you can pay up to 100% of your funds to yourself (this qualifies as “payroll costs), and still qualify for full loan forgiveness.

If you have employees, your PPP loan has been calculated in such a way that allows you to pay your employees (and yourself) for at least two months. 

Along with paying your employee wages, payroll costs can also include benefits that you currently offer your employees:

  • Paid leave
  • Contributions to group health care, dental, disability, and vision insurance for your employees
  • Contributions to qualified retirement plans
  • Employee state and local taxes that are withheld from their paychecks

Make sure you use your PPP funds to help pay for all of these expenses that come up. That will help keep employee morale up, business operations running smoothly, and set you up for loan forgiveness. 

Just remember that the most that you have received for any given employee doesn’t exceed $100,000 annually. So if you have any employees who were making more than that, the PPP loan only covers a portion of their pay—$8,333 per month or $1,923 per week. 

It is also important to note that payroll costs do not include the following:

  • Employees who live outside the United States
  • Independent contractors
  • Employer portion of Social Security payroll taxes

Again, if you don’t have any employees, spending your funds on payroll costs just got a lot easier because you can use your entire loan to pay your own income if you choose to do so. 

2. Determine your full-time equivalent employee headcount

Part of your loan calculation is determined by the number of full-time equivalent (FTE) employees you have. This isn’t just the number of full-time employees you can count, this includes part-time employees too. (Of course, for sole proprietors, independent contractors without employees, gig workers, and self-employed people, this is an easy calculation.)

To determine your FTE employee count, you can follow this calculation:

For each employee you have, take the average number of hours they are paid per week, divide that by 40, and round to the nearest tenth. This number can’t exceed 1.0 for each employee. 

To simplify this, you can also choose to assign a 1.0 to employees who work at least 40 hours per week and 0.5 for employees who work fewer hours. 

Keep records to show your calculations for the number of FTE employees you have. 

Your loan forgiveness will be roughly based on how well you were able to maintain that number of FTE employees by taking the difference between the number of FTEs during your covered loan period and the number of FTEs during certain baseline periods (whichever is lowest):

  • February 15, 2019 to June 20, 2019
  • January 1, 2020 to February 29, 2020
  • Or if you are a seasonal business, you may choose one of the periods above or any 12-week period that falls between May 1, 2019 and September 15, 2019

An example that reflects a reduction in your loan forgiveness could be that if you had 30% fewer FTE employees during your covered loan period than you had during your baseline period, you could receive 30% less for your loan forgiveness. 

3. Rehire and avoid layoffs (see 2021 and other exceptions below)

The original intent of the PPP was to keep businesses open and save American jobs. For this reason the initial rules required all borrowers to maintain your employees on staff and keep compensation levels within a certain limit to qualify for loan forgiveness. So businesses had to be sure to rehire any laid off employees (or replacement employees). 

Fore 2021, and for smaller loans, there are definitely exceptions to this rule though. And the SBA recognizes that there are legitimate reasons for employee dismissal outside of budget cuts. 

The current exceptions to the “maintain employee headcount and compensation” rule include:

  • If you received a PPP loan of $50,000 or less, you are exempt from having to maintain employee and compensation levels for loan forgiveness (though you do still need to spend at least 60% of your loan on payroll costs)
  • PPP Loans received after December 27th, 2020 are not required to “rehire” any employees in order to receive forgiveness. You will, however, need to maintain current payroll levels during the forgiveness period. (Exceptions to this would include employees who resign or are terminated with cause).
  • If you don’t meet the exceptions above, and any employee quit, retired, or was fired (with just cause), or refused your offer to be rehired, then you can still qualify for full loan forgiveness. You’ll just need to provide written proof or documentation that supports these situations

4. Don’t cut wages

Along with keeping your employees on staff (see important exceptions in #3 above) you must also maintain their compensation levels. This means you can’t cut their wages back if you wish to receive loan forgiveness. Your loan is calculated based on their wage levels prior to COVID-19 so that you can continue to pay them those levels of compensation at least throughout your covered loan period. 

5. Make sure anything that isn’t spent on payroll is spent on other eligible business expenses

Outside of the 60% of your PPP funds that must go towards payroll expenses, you can spend up to 40% of the funds on other eligible business expenses. Those include:

  • Mortgage, rent, and utilities
  • Interest payments on business-related debts
  • Operational expenses (business software or cloud computing services that are essential for the operation of your business)
  • Supplier costs associated with purchase orders or contracts that were in place before your covered loan period began
  • COVID-19 costs that help your business adhere to public health guidelines (PPE, sneeze guards, business expansions, cleaning supplies, etc.)
  • Property damages caused by the riots in 2020 and weren’t covered by insurance

6. Set up a separate bank account

It can be helpful to set up a separate bank account from which you can manage your PPP funds. Having everything in one place, separate from your other business accounts, can help you make sure those funds are allocated appropriately for loan forgiveness. 

7. Document how you spent your PPP funds

Keep a record of how your PPP loans are spent. Create a plan before you start spending your funds and stick to it. Then as you spend those funds, make sure you save receipts, invoices, lease agreements, cancelled checks, etc. to show that your funds were spent on authorized expenses. 

You may find this helpful: Tracking PPP expenses to maintain forgiveness (tools and tips!) 

8. Apply for loan forgiveness

Once your covered loan period is over and your funds have been spent, the last (and most crucial) step is to apply for loan forgiveness. All communication for your PPP loan forgiveness will go through your lender. Follow these steps to submit your application:

  1. Ask your lender for the correct forgiveness application. There are several applications depending on your type business, so your lender will make sure you use the right one. 
  2. Fill out your application and gather all documentation that you need to verify how you spent your funds. (NOTE: most PPP lenders now use automated/online systems to complete loan and forgiveness applications. Be sure to follow their guidance.)
  3. Your lender will process your application with the SBA. 
  4. Once a decision has been made, your lender will notify you of that decision. 

9. Keep operating your business as normal

Don’t let the fear of not getting your loan forgiven dictate important business decisions. It won’t be the end of the world if you need to pay back some or all of the loan, and the interest rates are very favorable at only 1%. Plus, you can defer your loan payments for at least 10 months (and in some cases longer) and the PPP loan doesn’t have to be paid back for at least 2 years if you received it in 2020, and it doesn’t have to be paid back in full for 5 years if you received it in 2021. 

That being said, the SBA has been pretty lenient on granting forgiveness, so as long as you follow the basic guidelines set on where to spend your loans, you’ll likely have most or all of your loan forgiven and won’t ever have to pay that back. 

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