Preparing for PPP Loan Forgiveness: 5 Essential Steps to Take Right Now

If you received a Paycheck Protection Program (PPP) loan during the pandemic, the forgiveness process might still be on your mind. While lenders continue to process applications and the SBA maintains forgiveness portals, many borrowers are still waiting or preparing their documentation.

The good news? You don't have to sit idle while waiting for your lender to open their forgiveness portal. There are concrete steps you can take right now to prepare for a smooth application process and maximize your chances of full forgiveness.

Why Prepare Now?

Even though you technically have up to five years from your loan origination date to apply for forgiveness, waiting too long can have consequences. Interest may begin accruing after the initial deferment period, and the longer you wait, the harder it becomes to locate necessary documentation and recall specific details about your spending.

More importantly, preparation now means less stress later. When your lender's portal opens or when you're ready to apply, you'll have everything organized and ready to go.

Step 1: Review the PPP Forgiveness Rules

Before diving into your records, make sure you understand the fundamental requirements for PPP loan forgiveness. The rules might seem complex, but they boil down to four key areas:

Eligible Expenses

Only certain costs qualify for forgiveness:

• Payroll costs (salaries, wages, tips, commissions, paid leave, health insurance, retirement contributions)
• Utilities (electricity, gas, water, transportation costs, telephone, internet)
• Rent (for property used in business operations)
• Mortgage interest (not principal payments)

Note that payroll costs include health insurance premiums, retirement plan contributions, and state and local taxes assessed on employee compensation. However, expenses like independent contractor payments, employer FICA taxes, and federal payroll taxes do not count toward payroll costs for forgiveness purposes.

The 60/40 Payroll Rule

At least 60% of your PPP loan must be spent on eligible payroll costs to qualify for full forgiveness. The remaining 40% can cover utilities, rent, and mortgage interest. If you spend less than 60% on payroll, your forgiveness amount will be reduced proportionally.

Maintain Your Workforce

You'll need to demonstrate that you maintained your staffing levels during your covered period compared to a baseline period (typically either February 15 - June 30, 2019, or January 1 - February 29, 2020, depending on your business).

Significant reductions in employee headcount can reduce your forgiveness amount, though there are safe harbor provisions and exceptions for employees who declined rehire offers or resigned voluntarily.

Preserve Salary Levels

For each employee who earned $100,000 or less annually in 2019, you must maintain at least 75% of their salary or hourly wage during the covered period. Reductions beyond 25% can decrease your forgiveness amount.

Understanding these rules helps you identify potential issues early and determine whether you need to make any adjustments before applying.

Step 2: Analyze Your PPP Spending

Now it's time to dive into your financial records and examine exactly how you used your PPP funds during your covered period.

Determine Your Covered Period

Your covered period began on the date you received your PPP loan funds and extends for either 8 or 24 weeks, depending on when you received your loan and which period you elected. Most borrowers benefit from the longer 24-week covered period, as it provides more flexibility in meeting the forgiveness requirements.

Track Every Dollar

Create a detailed breakdown of your spending during the covered period:

1. Payroll expenses: Compile gross wages, salary, tips, and commissions paid to employees. Include employer contributions to health insurance, retirement plans, and state and local taxes on employee compensation.

2. Non-payroll expenses: Document payments for utilities, rent, and mortgage interest made or incurred during the covered period.

3. Calculate your ratios: Add up your total eligible payroll costs and divide by your total eligible expenses to ensure you meet the 60% payroll threshold.

Many borrowers are surprised to find they spent more or less on payroll than they initially thought. This analysis helps you understand your position before you apply and identify any potential shortfalls.

Step 3: Study the SBA Forgiveness Forms

The SBA offers three primary forgiveness application forms:

• Form 3508: The standard form for most borrowers
• Form 3508EZ: A simplified version for borrowers who meet certain criteria (maintained salaries and headcount, or couldn't operate at pre-pandemic levels due to government orders)
• Form 3508S: The shortest form for loans of $50,000 or less

Download the form that applies to your situation and read through it carefully. Understanding the questions you'll need to answer helps you identify what documentation to gather and whether you qualify for any of the simplified forms.

The forms ask detailed questions about:

• Your loan amount and lender information
• The covered period you selected
• Your payroll and non-payroll expenses
• Your average full-time equivalent (FTE) employee counts
• Salary and wage reductions for specific employees
• Safe harbor exemptions you're claiming

By familiarizing yourself with the form now, you'll avoid surprises during the actual application process.

Step 4: Organize Your Documentation

Documentation is the foundation of your forgiveness application. The SBA requires specific records to verify your expenses and demonstrate compliance with PPP rules.

Essential Payroll Documents

Gather the following payroll-related records:

• Payroll reports: Detailed reports showing gross wages, tips, and commissions for each employee during the covered period
• Tax forms: IRS Form 941 (Quarterly Federal Tax Return) for the covered period quarters
• State wage reports: State quarterly wage reporting forms
• Payment proof: Bank statements showing payroll withdrawals or payment processor records
• Health insurance and retirement records: Documentation of employer contributions made during the covered period

For self-employed individuals with no employees, you'll need:

• 2019 or 2020 Form 1040 Schedule C
• 2019 or 2020 Schedule K-1 (if applicable)
• 2019 or 2020 Form 1099-MISC (if applicable)

Non-Payroll Documentation

For utilities, rent, and mortgage interest, collect:

• Utility bills: Electricity, gas, water, internet, and telephone bills during the covered period
• Rent or lease agreements: Current lease agreements and proof of rent payments (cancelled checks or bank statements)
• Mortgage statements: Loan statements showing interest paid (not principal) during the covered period
• Payment proof: Bank statements or cancelled checks verifying you paid these expenses

Additional Supporting Documents

Depending on your specific situation, you may also need:

• Business licenses or registrations: To verify you were operating during the covered period
• Offers of rehire and rejections: If employees declined to return to work
• Documentation of government orders: If you're claiming a reduction in business activities due to COVID-19 restrictions

Create both physical and digital copies of all documents. Organize them by category (payroll, utilities, rent, etc.) and chronologically within each category. This organization will make completing your application much faster and reduce the risk of errors.

Step 5: Monitor Your Lender's Communication

Your lender is responsible for processing your forgiveness application and submitting it to the SBA. Staying in touch with your lender ensures you're ready when they open their forgiveness portal.

What to Watch For

• Email announcements: Many lenders send email updates when they're ready to accept forgiveness applications
• Dedicated PPP portals: Check your lender's website for a dedicated PPP forgiveness section with instructions and resources
• Customer service updates: If you have a relationship manager or business banker, reach out proactively to ask about their forgiveness timeline
• SBA announcements: While your lender manages your application, the SBA occasionally releases guidance that affects the process

Set Reminders

Create calendar reminders to:

• Check your lender's website weekly for updates
• Review your email regularly for lender communications
• Follow up with your lender if you haven't heard anything in several weeks
• Verify your contact information is current with your lender

Some borrowers have missed important deadlines or opportunities simply because their lender had outdated contact information.

Common Questions and Concerns

What if I didn't spend all my PPP funds during the covered period?

You can still receive partial forgiveness for the eligible expenses you did incur during the covered period. Any unforgiven amount converts to a low-interest loan (1% annual interest rate) that must be repaid.

Can I apply for forgiveness if I already started making payments?

Yes. Even if you've begun repaying your loan, you can still apply for forgiveness. If approved, the SBA will reimburse your lender for any payments you made.

What happens if my forgiveness is denied?

If your application is denied, you have the right to appeal the decision. You'll receive information about the appeals process from the SBA. Common reasons for denial include insufficient documentation, failure to meet the 60% payroll requirement, or material errors in the application.

Do I need to hire an accountant or consultant?

While many borrowers successfully complete the forgiveness application independently, complex situations may benefit from professional guidance. Consider consulting an accountant if you:

• Have a large workforce with multiple pay rate changes
• Experienced significant staffing fluctuations during the covered period
• Used PPP funds across multiple business entities
• Have questions about which expenses qualify

The Bottom Line

Preparing for PPP loan forgiveness doesn't have to be overwhelming. By taking these five steps now—reviewing the rules, analyzing your spending, studying the forms, organizing documentation, and monitoring your lender—you'll position yourself for a smooth application process when the time comes.

Remember: the goal isn't perfection, but thoroughness and accuracy. The SBA and lenders understand that the pandemic created unprecedented circumstances. As long as you made a good-faith effort to use your PPP funds appropriately and can document your expenses, you're on the right track.

Don't let procrastination cost you money in interest charges or stress. Start preparing today, and you'll thank yourself when your lender's forgiveness portal finally opens.

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This article provides general information about PPP loan forgiveness and should not be considered legal or financial advice. Consult with a qualified accountant or attorney for guidance specific to your situation.