Small Business PPP Loan Cancellation: What is Eligible, When and How to Apply
the Paycheque Protection Program provides fully repayable loans to small businesses battling the coronavirus pandemic. But asking for this forgiveness can be daunting, especially for business owners who have limited resources at their disposal.
We’ve put together a guide to help business owners better understand the P3 loan cancellation process.
Conditions for canceling PPP loans
The loan cancellation conditions are the same for the first and the second-draw PPP loans. To qualify for full loan cancellation, you must maintain endowment and compensation levels during the period covered.
In addition, your PPP loan money must be spent on qualifying expenses (see below) during the period covered. For your loan to be fully canceled, at least 60% must be spent on staff costs.
The period covered for most loans made in 2020 is 24 weeks after your loan is disbursed, but borrowers with loans issued before June 5, 2020 can opt for the initial eight week period. Business owners who receive a first or second draw loan in 2021 can opt for a covered period of eight to 24 weeks.
Expenses eligible for loan forgiveness
Eligible expenses were originally limited to salaries and operating costs, but the Coronavirus Relief Bill passed in December 2020 expanded the list to include supplier costs, expenses related to the improved health and safety and some property damage.
The following types of expenses are now eligible for cancellation of PPP loans:
- Salary costs: This includes all salaries paid, including tips, commissions, and bonuses, as well as employer-paid benefits such as insurance, sick leave, and pension contributions. Compensation for employees who earn more than $ 100,000 per year is not eligible for pardon.
- Operating costs: This includes utilities, business software, rent, mortgage payments, and interest and accounting services.
- Supplier costs: The cost of goods essential to the operation of your business may be discounted if the purchase order or contract was in place prior to the period covered. Purchase orders for perishable goods made during the period covered are also eligible.
- Property damage: These are repairs for damage or loss due to looting, specifically related to public unrest in 2020. Costs covered by insurance are not eligible.
- Protection of workers: This includes personal protective equipment and other costs associated with health and safety requirements, such as health examinations, installing barriers or expanding alfresco dining.
A few nuances to note: costs incurred before the covered period, but paid during the covered period, are eligible for the discount. As well as expenses incurred during the period covered but paid after the end of it, provided they are paid no later than the next pay date or regular billing date.
When to request a PPP loan forgiveness
You can request cancellation of a PPP loan as soon as you have spent the funds or as late as when your loan is due. But, ideally, you would do this before needing to make a single payment.
Payments for PPP loans are deferred for 10 months after the end of the period covered (eight to 24 weeks). You will need to start making loan payments if you apply for forgiveness after this date.
Borrowers are not eligible for the rebate if they apply after the maturity of their loan – two years for loans issued before June 5, 2020 and five years for loans issued after that date.
How to apply for a PPP loan forgiveness
Contact your PPP lender when you are ready to ask for forgiveness. They can direct you to the correct loan forgiveness form. You will need to submit it along with documents showing how you spent your loan. Collecting this paper trail as you go will make it easier to ask for forgiveness. See below for the types of documentation you may need to provide.
Documents needed for PPP loan cancellation
Along with your loan forgiveness request, you will need to provide proof of how you spent your PPP loan. Remember that only funds spent on qualifying expenses will be forgiven. And at least 60% of your loan must be spent on personnel costs to be eligible for a full discount.
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Third party payroll reports.
Quarterly financial reports from states and local authorities.
Deposit of unemployment insurance by the State.
Tax documents: Form 1040 Annex C or Annex F, Form 1065 Annex K-1, Form 941, Form 944, Form W-2, Form W-3.
Payment receipts, canceled checks or account statements showing employer health and pension contributions.
Utility bills reflecting payments made.
Purchase orders, contracts and receipts for supplier payments.
Voided checks or receipts for covered expenses, such as business software, protective equipment, security modifications, and repairs for damage sustained during summer events.
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Kelsey Sheehy writes for NerdWallet. Email: [email protected]