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PPP Loan Forgiveness: SBA Offers Relief for Small Loan Recipients

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Most small-business clients who borrowed loans under the Paycheck Protection Program (PPP) have now spent their loan proceeds and are starting the process of calculating eligibility for loan forgiveness. That process has unfortunately become much more complicated than anyone would have imagined at the outset.

Fortunately, small-business clients who are at their wits’ end might get a bit of relief. In early October, the Small Business Administration (SBA) released a streamlined loan forgiveness application for borrowers with smaller loans.

Clients who borrowed $50,000 or less are eligible and should be advised about what this valuable option can (and cannot) do before they go any further in asking for forgiveness.

Calculating PPP Loan Forgiveness: The Basics

Complex rules about how and when loan proceeds are spent apply in calculating PPP loan forgiveness eligibility. The original CARES Act rules required loan proceeds to be used during the eight weeks following the loan origination date. The Paycheck Protection Program Flexibility Act (PPPFA) extended the eight-week period to 24 weeks from the date the lender made the first loan payment to the small-business owner.

To qualify for loan forgiveness, the bulk of the loan proceeds must be used to cover payroll costs during the “covered period.” Proceeds can also be used to cover certain non-payroll expenses, including rent, mortgage interest and utilities. The covered period for most small business clients will be a 24-week period beginning with the first day of the first pay period after the loan proceeds were received. Borrowers who took out their loans before June 5, 2020, can elect to use an eight-week period as the covered period.

Employers must maintain the same average number of employees during the covered period to qualify for loan forgiveness (the amount of a loan that can be forgiven will be prorated, not entirely eliminated, for employers who reduce staffing). Reducing compensation for employees earning under $100,000 by more than 25% can also reduce the amount forgiven.

The PPPFA gives employers until Dec. 31, 2020, to bring employees back to work and restore wage levels to continue to qualify for loan forgiveness.

Most loan forgiveness applicants are required to document the number of full-time employees employed between Feb. 15, 2019, and June 30, 2019, when compared to the same period in 2020, to determine their loan forgiveness amount.

SBA Form 3508S: Relief for Small Loan Recipients

The streamlined SBA loan forgiveness application is available to business owners who borrowed $50,000 or less in PPP funds. The streamlined process is not available for business owners who, together with their affiliates, received $2 million or more under the program. Form 3508S is designed to make the process less confusing and time-consuming for employers who borrowed relatively small amounts.

Borrowers of small loans will no longer be required to reduce their loan forgiveness value if they reduced the salary or wages of an employee earning less than $100,000 during the covered period. Similarly, these borrowers won’t be required to reduce the amount forgiven if they reduced their number of full time equivalent employees during the covered period.

That means smaller loan recipients aren’t required to provide documentation about these complex calculations with their application for forgiveness. However, they aren’t entirely off the hook. Small loan recipients are still required to calculate the amount of their forgiveness and retain applicable documentation—remembering that the SBA has years to ask for supporting documents.

Borrowers must still calculate both the eligible payroll costs and eligible non-payroll costs incurred during the covered period. Payroll costs include cash compensation, employment benefits (health benefits, retirement benefits, and state and local taxes paid by the employer) and owner compensation. Eligible non-payroll costs include eligible mortgage, rent and utilities costs. Non-payroll costs can’t exceed 40% of the total amount forgiven.

The client must submit documentation verifying the calculation of payroll versus non-payroll use of loan proceeds (bank statements, tax documents, receipts, etc.). All other documentation isn’t required to be submitted, but the business owner must keep the documents for six years after the date the loan is either forgiven or repaid.


For borrowers of relatively small amounts, the PPP loan forgiveness process just got a bit easier. However, these clients shouldn’t stop paying attention yet. The SBA continues to release guidance and rules that could impact their eligibility for forgiveness even retroactively.

— Check out PPP Loan Forgiveness Guidance: What Does It All Mean? on ThinkAdvisor.


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