PPP Loan Forgiveness Rejected: What to Do When Your Application Is Denied

You applied for PPP loan forgiveness, expecting relief from repayment—but instead, you received a denial letter. Whether it's partial or full rejection, the shock and confusion are real. The good news? A denial doesn't mean the end of the road. Understanding why forgiveness was rejected and knowing your next steps can help you navigate this challenging situation and potentially overturn the decision.

This comprehensive guide walks you through the reasons for PPP forgiveness denials, your appeal rights, and practical steps to take when your application doesn't go as planned.

Understanding Why PPP Forgiveness Gets Rejected

The SBA and your lender review PPP forgiveness applications against strict criteria. Rejections typically fall into several categories, each with specific triggers and consequences.

The 60/40 Payroll Requirement

One of the most common reasons for reduced forgiveness is failing to meet the payroll threshold. At least 60% of your loan must be used for eligible payroll costs. If you spent 50% on payroll and 50% on rent, you won't receive full forgiveness—even if all expenses were otherwise eligible.

Important nuance: Payments to independent contractors don't count toward the 60% payroll requirement. Many business owners mistakenly include 1099 contractor payments when calculating their payroll percentage, leading to unexpected shortfalls.

The forgiveness amount scales proportionally. If you only spent 45% on payroll instead of the required 60%, your forgiveness will be reduced accordingly, not eliminated entirely.

Full-Time Equivalent (FTE) Headcount Reductions

The SBA requires businesses to maintain comparable employee levels during the covered period. You must compare your FTE count during the forgiveness period to either:

• February 15 – June 30, 2019, or
• January 1 – February 29, 2020

Any reduction in your FTE headcount during the covered period triggers proportional forgiveness reductions. If your FTE dropped by 25% compared to your reference period, your forgiveness amount could be reduced by 25%.

Safe harbor exemptions exist for certain situations, including:

• Employees who turned down good-faith rehire offers
• Employees who voluntarily reduced their hours
• Documented inability to find qualified replacements
• Business activity reductions due to COVID-19 compliance requirements

Document these exemptions thoroughly. Keep records of rehire offers, employee communications, recruitment efforts, and any applicable health directives.

Salary and Wage Reduction Penalties

For each employee earning less than $100,000 annually, you must pay at least 75% of their annualized salary or wages during the covered period compared to the reference period.

If an employee earned $50,000 annually and you reduced their salary to $30,000 (only 60% of the original), the wage shortfall ($7,500) reduces your forgiveness amount dollar-for-dollar.

This rule applies per employee. Multiple wage reductions across your workforce can significantly impact total forgiveness.

Improper Use of Funds

Forgiveness is tied directly to how you used loan proceeds. Only specific expense categories qualify:

• Payroll costs (salaries, wages, tips, commissions, benefits, retirement contributions)
• Mortgage interest on business real property
• Rent on business real property or equipment
• Utilities (electricity, gas, water, telephone, internet)
• Covered operations expenditures
• Covered property damage costs
• Covered supplier costs
• Covered worker protection expenditures

Common mistakes include:

• Using funds for owner draws beyond allowed compensation limits
• Paying down principal on mortgages (only interest qualifies)
• Purchasing new equipment or inventory
• Paying non-covered utility types
• Compensating owners above the caps ($20,833 for 8-week period or $46,154 for 24-week period)

The SBA scrutinizes documentation. Vague expense categorization or missing receipts can trigger denials.

Documentation Discrepancies

Even when you used funds correctly, documentation errors can derail forgiveness. The most problematic discrepancies include:

Payroll Record Mismatches: When W-2 figures don't align with quarterly payroll tax returns, red flags appear immediately. If you corrected payroll errors after filing taxes but didn't amend your returns, the SBA sees inconsistencies.

Financial Statement Conflicts: Total wages on your income tax return must match your W-2s, W-3 forms, and payroll journals. Any variance—even small bookkeeping differences—creates doubt about accuracy.

Employee Retention Credit (ERC) Overlap: Payroll funded by PPP cannot also be claimed for ERC. Some businesses accidentally double-dipped, claiming the same wages for both programs. The SBA catches this during forgiveness review.

Bank Statement Gaps: If your bank statements don't clearly show how you spent loan proceeds, the SBA may question whether funds were used appropriately. Commingling PPP funds with other business funds without clear tracking creates verification challenges.

SBA Administrative Errors

Not all denials stem from borrower mistakes. The SBA has made its share of errors:

• Misapplying affiliation rules, incorrectly determining business relationships
• Mixing up borrower information between unrelated applicants
• Misinterpreting their own Interim Final Rules (IFRs)
• Communication breakdowns between SBA and lenders
• Applying the "Exclusion Rule" incorrectly to businesses in lending-adjacent industries

If you believe your denial resulted from SBA error rather than your application issues, document the mistake thoroughly. These cases often succeed on appeal.

The Review and Decision Process

Understanding who makes forgiveness decisions helps you know where to direct your attention.

Lender's Initial Review: Your lender conducts the first review, examining your forgiveness application and supporting documentation against SBA guidelines. They verify calculations, check documentation completeness, and assess whether you met the program requirements.

SBA's Final Review: After your lender approves forgiveness, they submit their determination to the SBA. The SBA conducts its own review, focusing on fraud detection, eligibility verification, and guideline compliance. The SBA can override lender approvals if they find issues.

The Decision Letter: If forgiveness is denied (fully or partially), you'll receive a formal decision letter explaining:

• The specific amount denied
• The reason(s) for denial
• Which requirements you failed to meet
• How to appeal the decision
• The deadline for filing an appeal

Read this letter carefully. The stated reasons determine your appeal strategy.

Immediate Steps After Receiving a Denial

Receiving a denial letter triggers a countdown. Take these actions immediately:

1. Note the Receipt Date

Your appeal deadline starts when you actually receive the decision letter, not the date printed on it. Document when you received the letter—this establishes your 30-day appeal window.

2. Contact Your Lender

Call your lender's PPP department immediately. Ask for clarification on:

• The specific deficiencies identified
• Whether they recommended the denial or if it came from the SBA
• Any additional documentation they reviewed
• Whether you can provide clarifying information

Sometimes denials result from missing documents or miscommunication. Your lender might say, "We never received your Form 3508," when you thought it was submitted. Quick communication can sometimes resolve issues before formal appeals become necessary.

3. Gather Your Complete PPP File

Assemble every document related to your loan:

• Original loan application
• Loan agreement and promissory note
• Forgiveness application (whichever form you used: 3508, 3508EZ, or 3508S)
• All supporting documentation submitted with your forgiveness application
• Payroll records (payroll reports, tax filings, W-2s, W-3s)
• Bank statements showing fund deposits and expenditures
• Receipts and invoices for eligible expenses
• FTE calculation worksheets
• Any correspondence with your lender or the SBA

Organize these chronologically. You'll need them to evaluate your appeal prospects.

4. Analyze the Denial Reason

Compare the denial letter's stated reasons against your documentation. Ask yourself:

• Is the denial factually accurate?
• Did I actually fail to meet the requirement cited?
• Is there documentation I didn't submit that proves compliance?
• Did the SBA or lender misinterpret my submitted information?
• Are there calculation errors in their determination?

Be honest in this assessment. If you genuinely didn't meet requirements, focus on whether safe harbors or exemptions apply rather than disputing facts.

5. Calculate the Financial Impact

Determine what the denial means financially:

• How much forgiveness was denied?
• What's the unforgiven balance that must be repaid?
• When does repayment begin?
• What are the loan terms (interest rate, maturity date)?
• Can you afford the repayment schedule?

For unforgiven amounts, PPP loans have favorable terms:

• 1% fixed interest rate
• 2-year or 5-year term (depending on when you received the loan)
• No prepayment penalties
• 10-month deferment from loan disbursement before payments begin

If your loan deferment period is ending, understand when payments will start. Filing an appeal extends the deferment until the appeal is resolved.

The Appeal Process: Your Rights and Deadlines

If you disagree with the denial decision, you have the right to appeal through the SBA's Office of Hearings and Appeals (OHA).

Who Can Appeal

Only the borrower entity can file an appeal. This means:

• The business that received the loan must file
• Individual owners cannot appeal on their own
• Lenders cannot appeal on your behalf

If your business is an LLC, the LLC files. If you're a sole proprietor, you file as the business owner.

The 30-Day Deadline

You have exactly 30 calendar days from the date you received the final SBA loan review decision to file your appeal. This deadline is strict—late appeals are rejected without consideration.

Count carefully. If you received the letter on March 1st, your appeal must be filed by March 31st. Don't wait until day 29 to start preparing.

Where and How to File

All PPP appeals must be filed electronically at appeals.sba.gov. Appeals submitted by mail, email, or any other method may be rejected and not docketed.

Create an account on the appeals portal if you don't have one. The system will guide you through the submission process.

What Your Appeal Must Include

Your appeal petition must contain:

1. A Copy of the SBA's Final Decision Letter: Include the complete letter showing the denial determination and reasons.

2. A Full and Specific Statement: Explain exactly why you believe the SBA's decision is wrong. Vague statements like "I disagree with the decision" won't suffice. You need specific factual and legal arguments:

• "The SBA incorrectly calculated my FTE count because they didn't account for the safe harbor exemption for employees who declined rehire offers, as documented in Exhibits A-C."
• "The decision letter states I spent only 55% on payroll, but my attached bank statements and payroll records (Exhibits D-G) show 62% payroll expenditure."
• "The SBA misapplied the affiliation rules under 13 CFR § 121.301(f) because my relationship with XYZ Company is a management agreement, not a controlling investment."

3. Supporting Evidence: Attach all documents that support your arguments:

• Corrected calculations with supporting worksheets
• Previously unsubmitted documentation that proves compliance
• Correspondence showing SBA misunderstandings
• Legal authorities or SBA guidance supporting your interpretation
• Expert opinions or professional advice you relied upon

Organize exhibits clearly. Label them sequentially and reference them in your statement.

Notify Your Lender

Provide your lender with a copy of your appeal petition. This extends your loan deferment period until OHA issues a final decision. Without this notification, your lender may begin demanding repayment.

What Happens During the Appeal

After filing:

1. Docketing: OHA dockets your appeal and assigns it a case number
2. SBA Response: The SBA files a response defending its decision
3. Your Reply: You may file a reply to the SBA's response
4. Review: An administrative judge reviews all submissions
5. Decision: OHA issues a written decision either upholding or overturning the denial

The process typically takes several months. Your loan remains in deferment throughout.

Appeal Outcomes

OHA can:

• Uphold the denial: The SBA's decision stands, and you must repay the unforgiven amount
• Overturn the denial: You receive the forgiveness you originally sought
• Modify the decision: You receive partial forgiveness different from both your request and the SBA's denial
• Remand to SBA: Send the case back to the SBA for further review with specific instructions

If you win your appeal, forgiveness is granted retroactively. If you lose, repayment obligations begin.

When Not to Appeal: Evaluating Your Chances

Appeals cost time, effort, and often legal fees. Sometimes accepting the denial and planning for repayment makes more sense.

Consider not appealing if:

You Actually Didn't Meet Requirements: If you genuinely spent only 50% on payroll when 60% was required, and you have no documentation to show otherwise, an appeal won't succeed. The law is clear, and OHA can't forgive non-compliance.

The Denied Amount Is Small: If only $2,000 of a $50,000 loan was denied, the cost of appealing (legal fees, time) might exceed the benefit. Simple repayment could be more economical.

You Lack Documentation: If you can't prove you met requirements because records were lost, destroyed, or never created, you're unlikely to prevail. Appeals require evidence.

You Made Obvious Errors: If you accidentally claimed owner compensation above the limits or paid loan principal instead of interest, these clear violations won't be overturned on appeal.

Instead of appealing, focus on:

• Negotiating a repayment plan you can afford
• Making extra payments to reduce the balance quickly (no prepayment penalty)
• Ensuring proper financial tracking going forward

Repayment Strategies for Unforgiven Amounts

If forgiveness is denied and you don't appeal (or your appeal fails), you'll need to repay the unforgiven balance.

Understanding Your Loan Terms

PPP loans have borrower-friendly terms:

• Interest Rate: 1% fixed
• Maturity: 2 years (loans disbursed before June 5, 2020) or 5 years (loans disbursed June 5, 2020 or later)
• Deferment: Payments deferred until 10 months after the end of your covered period (or until your forgiveness decision, whichever comes first)
• Prepayment Penalty: None—you can pay early without fees

Repayment Options

Standard Repayment: Make the monthly payment calculated by your lender based on the loan amount, interest rate, and term.

For example, a $50,000 loan at 1% interest over 5 years has monthly payments of approximately $854.

Accelerated Repayment: If your cash flow allows, pay more than the minimum. Even small additional amounts reduce the total interest paid. A $1,000/month payment on that same $50,000 loan saves $175 in interest and pays it off 10 months faster.

Lump Sum Payment: If you receive a tax refund, sell an asset, or have other cash available, consider making a large payment to reduce the principal. No penalties apply.

Communicate with Your Lender

If you're struggling to make payments:

• Contact your lender before missing a payment
• Explain your financial situation honestly
• Ask about deferment extensions or payment plans
• Get any agreements in writing

Lenders prefer working with borrowers proactively rather than dealing with defaults.

Tax Implications

PPP loan proceeds that aren't forgiven are not taxable income (you received a loan, not a grant). However, the expenses you paid with unforgiven amounts may affect your tax deductions.

Consult a tax professional about:

• Whether expenses paid with unforgiven PPP funds are deductible
• How to handle tax filings if your forgiveness status changed mid-year
• State tax implications (some states have different rules)

Preventing Future Issues: Lessons Learned

If you're planning to apply for other government assistance programs or anticipate potential PPP-related audits, these lessons can help:

Maintain Meticulous Records

Keep detailed records of:

• How you calculated eligibility and loan amounts
• Documentation supporting all claims
• Communications with lenders and government agencies
• Professional advice you received and relied upon

Store these records for at least six years after loan forgiveness or repayment.

Reconcile Financial Statements Regularly

Ensure your payroll records, tax returns, W-2s, and bookkeeping all align. Conduct quarterly reconciliations to catch discrepancies early.

Get Professional Help Early

CPAs, bookkeepers, and attorneys familiar with SBA programs can help you:

• Calculate loan and forgiveness amounts correctly
• Organize documentation properly
• Understand complex requirements like affiliation rules
• Respond to SBA inquiries effectively

Professional fees are an investment that can prevent costly mistakes.

Don't Assume Anything

If you're uncertain about whether an expense qualifies or how to apply a rule, research it thoroughly or get professional guidance. The SBA's Interim Final Rules, FAQs, and guidance documents provide authoritative answers.

Assumptions based on informal information or "what I heard" lead to compliance problems.

When to Seek Legal Counsel

Some situations warrant hiring an attorney experienced in SBA matters:

• Complex Denials: If the denial involves affiliation rules, eligibility disputes, or legal interpretations of regulations
• Large Amounts at Stake: When denied forgiveness exceeds $50,000, legal fees are proportionally small compared to potential recovery
• SBA Errors: If you believe the SBA misapplied its own rules or made factual errors
• Fraud Allegations: If the denial letter suggests potential fraud investigation or criminal referral
• Multiple Issues: When the denial involves several different requirements and requires coordinated legal and factual arguments

Attorneys can:

• Evaluate your appeal prospects objectively
• Draft persuasive appeal petitions
• Navigate procedural requirements
• Represent you in OHA proceedings
• Negotiate with the SBA

Look for attorneys with specific PPP appeal experience, not just general business law practitioners.

Simplify Your Financial Management

Whether you're dealing with PPP loan repayment, managing business cash flow, or preparing for future financial challenges, maintaining clear and accurate financial records is essential. Too many business owners face denied forgiveness because their bookkeeping was disorganized, incomplete, or inconsistent.

Beancount.io offers plain-text accounting that gives you complete transparency and control over your financial data. Unlike traditional accounting software with proprietary formats and black-box systems, plain-text accounting ensures you always have full access to your data, can version-control your financial records, and maintain the detailed documentation that programs like PPP require. Get started for free and see why developers and finance professionals are choosing transparent, auditable financial management.

Moving Forward After a Denial

A PPP forgiveness denial feels like a setback, but it's not the end of your business. Thousands of businesses are successfully repaying their loans while continuing to operate and grow.

Take stock of your situation:

• Understand why forgiveness was denied
• Exercise your appeal rights if you have a valid case
• Plan realistically for repayment if forgiveness won't be restored
• Strengthen your financial record-keeping to prevent future issues

The PPP program helped millions of businesses survive unprecedented disruption. If you can't achieve full forgiveness, the loan's favorable terms still provided breathing room during crisis—and that value remains even if repayment is required.

Stay informed, communicate openly with your lender, and seek professional guidance when needed. With the right approach, you can navigate this challenge and move your business forward.