PPP Loan Forgiveness and Repayment

Many businesses that received Paycheck Protection Program (PPP) loans are facing a critical deadline. Not taking action before the deadline expires could jeopardize the ‘forgiveness’ of the loan. This means that those borrowers could be responsible for repaying the full amount plus 1% interest before the maturity date. If that isn’t daunting enough, some borrowers may even face audits. In addition, the Small Business Administration (SBA) has recently released guidance regarding the expedited forgiveness process for PPP borrowers with loans of $150,000 or below.   

Just the facts…

PPP loans are generally 100% forgivable if the borrower allocates the funds on a 60/40 basis between payroll and eligible nonpayroll costs. While the nonpayroll costs initially included only mortgage interest, rent, utilities and interest on any other existing debt, the Consolidated Appropriations Act (CAA) significantly expanded the eligible non-payroll costs.

The CAA also withdrew the original requirement that borrowers deduct the amount of any Economic Injury Disaster Loan (EIDL) advance from their PPP forgiveness amount. And it provides that a borrower doesn’t need to include any forgiven amounts in its gross income and can deduct otherwise deductible expenses paid for with forgiven PPP proceeds. 

Ask for forgiveness…

A business that received a PPP loan can apply for forgiveness at any time before the loan’s maturity date. However, if a borrower does not apply for forgiveness within 10 months after the last day of the “covered period,” the PPP loan payment deferral will no longer be in effect, and loan payments must begin.

That 10-month period is coming to an end for many referred to as “first-draw” borrowers. For example, a business that applied early in the program might have a covered period that ended on October 30, 2020. That business would need to apply for forgiveness by August 30, 2021, to avoid loan repayment responsibilities.

Borrowers apply for forgiveness by filing forms with their lenders, who then submit those forms to the SBA. The specific type of form required depends on the loan amount and whether a business is a sole proprietor, independent contractor or self-employed individual with no employees. If the SBA doesn’t forgive a loan or forgives only part of it, the lender will inform the borrower as to the due date of the first payment. Interest accrues during the time from disbursement of the loan proceeds to SBA remittance to the lender of the forgiven amount, and the borrower must pay the accrued interest on any amount not forgiven.

Some businesses may have delayed filing forgiveness applications in order to maximize their employee retention tax credits. That’s because qualified wages paid after March 12, 2020, through December 31, 2021, that are taken into account for purposes of calculating the credit amount can’t be included when calculating eligible payroll costs for PPP loan forgiveness. These businesses should pay careful attention to when their 10-month period expires to avoid triggering loan repayment.

PPP loan borrowers should note that the loan amount can still be forgiven once repayment begins. Banks are required to pay the borrower back any loan proceeds already paid in the event that the loan amount is forgiven after payments have begun. Thus, we advise patience and discourage rushing the PPP loan forgiveness application. 

The audits are coming…

Borrowers should also be aware of the potential for an audit. PPP loan audits will be conducted by the SBA’s Office of Inspector General, with support from the IRS and other federal agencies. While the SBA will automatically audit every loan that’s more than $2 million after the borrower applies for forgiveness, smaller loans could be subject to scrutiny, too.

Although the SBA has established an audit safe harbor for loans of $2 million or less, that carveout applies only to the examination of the borrower’s good faith certification on the loan application that the “current economic uncertainty makes the loan request necessary to support the ongoing operations” of the business. Lenders were also recently notified that the SBA is eliminating the loan necessity requirement for loans of more than $2 million. Those borrowers will no longer need to complete a burdensome Loan Necessity Questionnaire.

All borrowers, however, still might be audited on matters such as eligibility (for example, the number of employees), calculation of the loan amount, how the funds were used and entitlement to forgiveness. Borrowers that receive adverse audit findings may be required to repay their loans and, depending on the missteps identified, could face civil penalties and prosecution under the federal False Claims Act.

The SBA can review/audit forgiveness applications for six (6) years after the date the loan is either forgiven or repaid in full. Businesses that received loans over $2 million should not wait to prepare for their audits. They should begin to work with their CPAs now to gather and organize documents and information likely to be requested. This includes the following (note that some of this documentation will overlap with that which is required when filing the application for loan forgiveness):

  • Financial statements,
  • Income and employment tax returns,
  • Payroll records for all pay periods within the applicable covered period,
  • Calculation of full-time equivalent employees, and
  • Bank and other records related to how the funds were used (for example, canceled checks, utility bills, leases and mortgage statements).

Small but mighty…

As mentioned, the SBA has also recently released an Interim Final Rule (IFR) intended to expedite the forgiveness process for PPP borrowers with loans of $150,000 or below. According to the SBA, these account for approximately 93% of all outstanding PPP loans.

The IFR streamlines the forgiveness process for smaller loans through two avenues:

  1. Direct borrower forgiveness. The SBA is providing a direct borrower forgiveness process for lenders that choose to opt in. At the time the guidance was released, more than 600 banks had opted in, enabling more than 2.17 million borrowers to apply through a new online portal scheduled to launch on August 4, 2021. Participating lenders will receive notice when a borrower applies through the SBA platform and will review applications and issue forgiveness decisions within the platform. The goal is to reduce the wait time and uncertainly associated with applying through lenders.
  1. COVID Revenue Reduction Score. The IFR also creates an alternative process for “second-draw” borrowers with loans of $150,000 or less to document their reduced revenue. To qualify for such loans, a borrower must have experienced a revenue reduction of at least 25% during one quarter of 2020 compared with the same quarter in 2019. If a borrower didn’t produce the necessary documentation when applying for the loan, they must do so on or before the date of application for forgiveness.

To make the revenue reduction confirmation process easier for such loans, an independent SBA contractor will assign every eligible second-draw loan a score based on several factors (including industry, geography, business size and current economic data). The score will be stored in the forgiveness platform and visible to lenders to document revenue reduction. If a borrower’s score doesn’t meet the value required to confirm the reduction, the borrower will be required to provide documentation. If it does, no documentation will be required.

The IFR also extends the loan deferment period for borrowers who timely appeal a final SBA loan review decision. Under the previous rule, an appeal didn’t extend the period, so borrowers had to begin making payments of principal and interest on the unforgiven amount. The IFR amends that rule to extend the deferment period until the SBA’s Office of Hearings and Appeals issues a final decision. Appeals must be filed within 30 calendar days of receipt of the final SBA loan review decision, and borrowers should notify their lenders of appeals.

What next…

With all that has happened in the last 16 or so months, it’s understandable that some business owners with PPP loans may not have been laser-focused on the dates and deadlines relevant to those loans. Now is the time to ensure that your forgiveness application is timely filed, and that you have the necessary documentation gathered to survive the SBA audit that could follow.

Have questions? We can help. Contact us at or (408) 287-7911.