The Paycheck Protection Program (PPP) was established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. This program was designed to provide financial relief to small businesses affected by the COVID-19 pandemic. One of the most attractive features of the PPP loan is its potential for forgiveness, meaning that if certain criteria are met, the borrower doesn't have to repay some or all of the loan.

1. Understanding PPP Loan Forgiveness

PPP loan forgiveness is based on the premise that businesses will use the funds to retain employees and maintain payroll. If a business adheres to the guidelines set forth by the Small Business Administration (SBA) and the U.S. Department of the Treasury, the loan can be fully forgiven.

2. Eligibility for Forgiveness

To be eligible for loan forgiveness:

  • At least 60% of the loan must be used for payroll costs.
  • The remaining 40% can be used for mortgage interest, rent, utilities, and certain other approved expenses.
  • The business must maintain the number of full-time equivalent employees or rehire employees by a specified deadline.
  • Salaries and wages must not be reduced by more than 25% for any employee earning less than $100,000 annually.

3. Application Process for Forgiveness

To apply for PPP loan forgiveness:

  • Complete the Loan Forgiveness Application: The SBA has released several versions of the forgiveness application, including a simplified form for loans under $150,000.
  • Compile Documentation: This includes payroll records, bank account statements, tax forms, and receipts for other eligible expenses.
  • Submit the Application to Your Lender: The lender has 60 days to review the application and make a decision.
  • SBA Review: In some cases, the SBA may review the decision made by the lender. This can take up to 90 days.
  • Loan Forgiveness Decision: If approved, the SBA will remit the forgiveness amount to the lender, plus any interest accrued. If only a portion of the loan is forgiven, or if the forgiveness application is denied, the borrower must repay the remaining balance under the terms of the loan.

4. Reductions in Loan Forgiveness

The amount of loan forgiveness can be reduced if:

  • The borrower decreases the number of full-time equivalent employees.
  • Salaries and wages are reduced by more than 25% for employees earning less than $100,000 annually.
  • The borrower does not restore full-time employment and salary levels by the specified deadline.

5. Tax Implications

Originally, the IRS stated that expenses paid with forgiven PPP loans would not be deductible. However, subsequent legislation reversed this decision. As a result, expenses paid with PPP funds are deductible, and forgiven amounts are not considered taxable income.

6. PPP Second Draw Loans

In response to the ongoing economic challenges, the PPP was extended to include Second Draw Loans for businesses that had exhausted their initial PPP funds. The forgiveness criteria for Second Draw Loans are similar to the original PPP loans.

7. Tips for Maximizing Loan Forgiveness

  • Maintain Detailed Records: Proper documentation is crucial. Keep track of every expense related to the PPP loan.
  • Stay Updated: The guidelines and rules surrounding PPP loan forgiveness have evolved. Regularly check the SBA website or consult with a financial advisor to stay informed.
  • Use Funds Wisely: Prioritize payroll and avoid using funds for non-approved expenses.

Frequently Asked Questions (FAQs)

At least 60% of the PPP loan must be used for payroll costs, including salaries, wages, and certain employee benefits. The remaining 40% can be allocated towards approved non-payroll expenses such as mortgage interest, rent, utilities, and certain other approved costs.

If you reduce the number of your full-time equivalent employees or decrease salaries and wages by more than 25% for employees earning less than $100,000 annually, your loan forgiveness amount may be reduced. However, if you restore these numbers by the specified deadline, you can still be eligible for full loan forgiveness.

No, the forgiven PPP loan amount is not considered taxable income. Additionally, expenses paid with PPP funds, which were initially non-deductible, have been made deductible through subsequent legislation.

The forgiveness criteria for the Second Draw Loans are largely similar to the original PPP loans. The main difference is that Second Draw Loans were introduced for businesses that had already utilized their initial PPP funds and still needed financial assistance.

After you submit your loan forgiveness application to your lender, they have 60 days to review and make a decision. In some cases, the SBA might review the lender's decision, which can take an additional 90 days. It's essential to stay in touch with your lender and monitor any updates or requests for additional information.


The PPP loan forgiveness program offers a lifeline to businesses struggling due to the COVID-19 pandemic. By understanding the requirements and maintaining thorough records, businesses can maximize their loan forgiveness and focus on recovery.