The Paycheck Protection Program (PPP) provided small businesses with loans during the COVID-19 pandemic that could be forgiven if certain criteria were met Not having to pay back these PPP loans offered a lifeline to many small businesses struggling with closures and revenue loss However, to qualify for full forgiveness, borrowers need to follow the rules. Here’s what to know about how to not pay back a PPP loan.
Overview of PPP Loan Forgiveness
You can forgive some or all of the PPP loan and get a grant instead, which is the best thing about them. However, forgiveness is contingent on meeting the program’s requirements .
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At least 60% of the funds must be used for payroll costs. This includes employee wages and benefits. For sole proprietors and independent contractors, payroll costs include their own wages.
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The remaining amount (up to 2040%) can be used to pay for other eligible costs such as mortgage interest, rent, utilities, business costs, property damage, and supplier costs.
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The 24-week or 8-week period in which costs can be incurred and paid is called the Covered Period.
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Employee and compensation levels must be maintained during the Covered Period or Loan Forgiveness may be reduced.
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Detailed records must be kept documenting how all funds were spent, including bank statements, tax filings, and invoices.
Borrowers can get their full PPP loans forgiven if they meet these requirements. If they don’t follow through, they may have to pay back some or all of the loan.
Steps to Apply for PPP Loan Forgiveness
Applying for forgiveness is a separate process from getting the initial PPP loan. It is not automatic. Here are the key steps:
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Wait to apply until after you have spent all the loan funds you want forgiven. This is usually once the Covered Period ends.
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Contact your lender and request the loan forgiveness application form – either SBA Form 3508, 3508EZ, or 3508S depending on your loan amount.
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Compile all required documentation of payroll and eligible expenses during the Covered Period. Keep detailed records.
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Complete the forgiveness application accurately based on your records. Calculate forgiveness amount correctly.
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Submit the application and documentation through your lender or the SBA Direct Forgiveness Portal.
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If requested, cooperate with any lender or SBA review of your application and provide additional information.
Following this process carefully is imperative to qualify for forgiveness and avoid repayment.
Common Reasons Borrowers Have to Repay PPP Loans
Many borrowers have been surprised to find out they have to fully or partially repay PPP loans. Here are some of the main reasons this happens:
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Not spending at least 60% on payroll. Lower payroll allocation means reduced loan forgiveness. Ensure payroll makes up 60%+ of spending.
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Not maintaining employee counts and wages. Cutting employees or wages during Covered Period lowers forgiveness amount. Avoid reductions.
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Ineligible expenses. Loan funds can only be used for approved purposes. Personal expenses won’t qualify for forgiveness.
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Lack of documentation. Detailed records are required. Missing documents can delay processing or lead to denial.
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Calculation errors. Mistakes in forgiveness calculations and worksheets can significantly impact the forgiveness amount.
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Missed deadlines. Applications must be submitted within 10 months of the Covered Period ending. Lateness can forfeit forgiveness.
Carefully following all program rules is the key to full PPP loan forgiveness. Borrowers who don’t comply lose out on this benefit and have to repay some or all of the loan.
Strategies to Avoid Repaying a PPP Loan
For borrowers who want loan forgiveness, here are some proactive strategies:
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Keep payroll at 60%+ of spending. Prioritize payroll and employee retention when using funds to maximize forgiveness chances.
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Maintain full-time employment. Avoid layoffs or wage cuts during the Covered Period that would trigger a reduction in forgiveness.
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Spend during Covered Period. Only eligible costs incurred and paid during the Covered Period qualify.
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Document everything. Organize detailed records of all eligible spending for your application. Retain all receipts and statements.
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Apply on time. Begin preparing documentation early and submit forgiveness application as soon as allowed after Covered Period ends.
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Follow up during review. Respond to any lender or SBA requests for more information in a timely manner to aid processing.
With proper planning and compliance, PPP borrowers can spend funds strategically, document them thoroughly, and submit their application accurately to help avoid any repayment of the loan.
Options If Some Repayment Is Required
Despite best efforts, some businesses may still end up having to repay a portion of PPP loan funds if they fall short of full forgiveness. This can happen due to reduced business activity or challenges retaining all employees during COVID-19.
If partial repayment is required, borrowers have the following options:
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Loan repayment terms: PPP loans can be repaid over 2-5 years at 1% interest. Longer repayment term eases cash flow impact.
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Apply for loan increase: If eligible based on previous revenue loss, borrowers can apply for a loan increase to cover partial repayment amount.
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Use tax credits: If employee retention was an issue, borrowers can claim the Employee Retention Tax Credit on 2020-2021 taxes to offset repayment costs.
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Request an appeal: If forgiveness was less than expected, borrowers can appeal the SBA’s decision by providing additional documentation if it was missing or inaccurate.
So while full forgiveness is ideal, businesses required to make some repayment have alternatives to ease the burden thanks to the loan’s generous terms and other federal tax credits.
Avoiding repayment of PPP loan funds requires carefully following all program rules, documenting expenses, and accurately calculating forgiveness amount. But for borrowers who put in the work, these loans provide critical financial support during very challenging times for small businesses without adding debt burden. Consult with your lender or SBA resource partners if you have any questions about qualifying for forgiveness on your PPP loan.
Determine your loan type
PPP loans are determined by the year they were issued:
- If you received a PPP loan in 2020, you have a Round 1 PPP loan.
- If you received a PPP loan in 2021, you have a Round 2 PPP loan.
- If you received two PPP loans, your first loan is referred to as a “first draw” PPP loan, and second loan is referred to as a “second draw” PPP loan.
For second draw PPP loans, you may need to provide documentation showing that your business had a 25% or greater decrease in revenue between 2019 and 2020, or any quarter of 2019 compared to the same quarter of 2020.
Review qualifying forgiveness determinations For more detail on PPP loan forgiveness, please consult the
For the application you’ll be asked to report payroll and non-payroll costs paid or incurred by your business during your covered period. Based on that information, we’ll let you know if you’re eligible for partial or full forgiveness. If you don’t qualify for full forgiveness yet, you may want to wait until you’ve accumulated more eligible expenses during your covered period in order to maximize your forgiveness amount.
Both Square Capital and the SBA will conduct a review of your qualifying payroll and non-payroll costs. These qualifying costs may get adjusted based on the review of documents you provided in your forgiveness application, if any. Consequently, it is possible that Square Capital or the SBA is only able to verify a subset of the qualifying costs you indicated having been paid or incurred in your application. To minimize the chance that your forgiveness amount gets reduced, make sure to report the exact costs paid or incurred by following directions outlined in your application. Also be sure to provide the required documents confirming these costs. You will be updated throughout the review process and made aware of your verified forgiveness amount.
If you applied for your PPP loan with a Form 940, 941, 944, or W-2, you may be eligible for full forgiveness if:
- Entire loan is used for qualifying costs:
- At least 60% is used for payroll
- And the rest is used for business rent, business utilities, mortgage interest on a business property, operations costs, property damage, supplier costs, or worker protection.
- You either don’t lay off employees or rehire them by the end of your covered period.
- For your employees who make less than $100,000 a year, you either don’t cut their wages by more than 25% or you restore their original wages by the end of your covered period.
- For loans under $50,000, you may still qualify for full forgiveness even if you have reduced your number of employees or decreased salaries and wages.
- For second PPP loans, you can demonstrate that your business had a 25% or greater decrease in revenue between 2019 and 2020, or a quarter of 2019 compared to a quarter of 2020.
You may be eligible for partial forgiveness if:
- Your loan is over $50,000 and you lay off employees, and don’t rehire them by the end of your covered period. If so, your forgiveness amount will be reduced by the percentage decrease in your number of employees. For example, if you lay off 20% of your employees, your forgiveness amount will be reduced by 20%.
- Your loan is over $50,000 and your total compensation for employees who make less than $100,000 a year decreases by 25% or more for each employee, the forgiveness amount the wage decrease exceeding 25%.
If you applied for your PPP loan with a Form 1040 Schedule C, your loan may be fully forgivable if you select a 24-week covered period on your forgiveness application.
If you lay off employees, the forgiveness amount will be reduced by the percentage decrease in your number of employees. If your total payroll expenses on workers making less than $100,000 annually decreases by more than 25%, the loan forgiveness amount will be reduced by the wage decrease exceeding 25%. If you laid off some employees or reduced employees’ wages, you can still be forgiven for the full amount of your payroll cost if you rehire your employees or restore their original wages by the end of your covered period. For loans under $50,000, you may still qualify for full forgiveness even if you have reduced your number of employees or decreased salaries and wages. For second draw loans, regardless of the size of your loan, you will be required to provide evidence that your business revenue decreased by at least 25% between 2019 and 2020.
These include salary, wages, tips, commissions, vacation, family or sick leave, employer contributions to employee retirement plans, employer contributions to employee health insurance, and employer state and local payroll taxes.
Wages for independent contractors do not qualify.
These include business mortgage interest, business rent, business utilities, operations costs (software or cloud computing service), property damage caused by public disturbances in 2020, supplier costs, and worker protection expenses (masks, plexiglass shields, gloves, and more).
What happens if you don’t pay back PPP?
FAQ
How to avoid paying back a PPP loan?
… a result, if you spend your loan on payroll, rent, mortgage interest, or utilities then the government will forgive your loan so you don’t have to pay it back.
Can my PPP loan be forgiven?
It’s possible to ask for loan forgiveness up to five years after the SBA issued the loan number. Oct 3, 2024.
Does the SBA ever forgive loans?
Does the SBA forgive loans? In most cases, the SBA does not forgive loans, including those distributed via its most common loan programs like 7(a) and 504. Dec 13, 2024.
What if I cannot pay back my SBA loan?
The SBA guarantees all partner lenders 50% to 80% of the loan, even if you don’t pay. In case of default, the SBA will pay up to 85% of the loan amount.