PPP Loan Forgiveness: The Complete Guide


Owen Yin


Reviewed by


July 13, 2021

This article is Tax Professional approved


After receiving a Paycheck Protection Program (PPP) loan, it’s time to start thinking about how to use the loan to receive full PPP loan forgiveness.

Here’s our comprehensive guide to make sure you’re on track to receive full forgiveness every step of the way.

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Editor’s note: Looking for PPP loan forgiveness information for contractors and sole proprietors? Check out our guide to How PPP Loan Forgiveness Works for the Self-Employed.

Note: in order to get your loan forgiven, you’ll need to fill out a PPP loan forgiveness application form. Don’t miss our walkthrough of how to fill out your PPP loan forgiveness form.

Are forgiveness applications open?

Yes! The SBA is currently taking applications, however you must first apply to your lender. Check out our overview for an up-to-date list of PPP lenders accepting forgiveness applications.

The conditions of the Paycheck Protection Program

Let’s first review the terms of using your PPP loan.

The funds from your PPP loan can be used for the following purposes:

  • Payroll—salary, wage, vacation, parental, family, medical, or sick leave, health benefits
  • Mortgage interest—as long as the mortgage was signed before February 15, 2020
  • Rent—as long as the lease agreement was in effect before February 15, 2020 (here’s what’s included in rent)
  • Utilities—as long as service began before February 15, 2020 (here’s what’s included in utilities)
  • Operations expenditures—any software, cloud computing, or other human resources and accounting needs (like Bench)
  • Property damage costs—any costs from damages due to public disturbances occurring in 2020 and not covered by insurance
  • Supplier costs—any purchase order or order of goods made prior to receiving a PPP loan essential to operations
  • Worker protection expenditures—any personal protection equipment or property improvements to remain COVID compliant from March 1, 2020 onwards

Further reading: How to Spend Your PPP Funds (Updated for 2021)

All expenses that fall under the above listed categories are eligible for forgiveness. The following conditions will also apply:

1. 8 to 24 weeks of expense coverage

Expenses eligible for forgiveness are those that are incurred over the 8 to 24 week period, starting from the day you receive your PPP loan from your lender. This is not necessarily the date on which you signed your loan agreement.

You do not need to adjust your payroll schedule. All payroll that your employees incur over the 8 to 24 week period is eligible for forgiveness, even if the actual payout date falls outside the covered period.

2. The 60/40 rule

At least 60% of your loan must be used for payroll costs. Payments to independent contractors cannot be included in the payroll costs. Your forgivable amount will scale in proportion to the percentage of your loan that you spend on payroll, up to the total loan amount.

For example, if a business gets a $20,000 PPP loan, they would need to spend at least $12,000—60% of the loan—on payroll. However, they spend only $9,000 on payroll. This is 75% of the minimum payroll cost required for full forgiveness so their forgiveness amount is 75% of the loan. This means $15,000 of the $20,000 loan is forgiven, and they have to pay back the remaining $5,000.

You can also find your maximum forgiveness amount from your payroll costs. Simply divide your total payroll costs by 0.6.

3. Staffing requirements

You must maintain the number of employees on your payroll. This is because the purpose of the PPP loan is to maintain jobs.

Here is the calculation you can use to determine if you’ve met this requirement:

First, determine the average number of full-time equivalent employees you had during:

  • The 8-week to 24-week period following your initial loan disbursement, (A)
  • February 15, 2019 to June 30, 2019, (B1)
  • January 1, 2020 to February 29, 2020. (B2)

Take A and divide that by B1. Then take A and divide by B2. Use the larger number you obtain.

  • If you get a number equal to or larger than 1, you successfully maintained your headcount and meet the staffing requirement.
  • If you get a number smaller than 1, you did not maintain your headcount and your forgivable expenses will be reduced proportionately.

Seasonal employers

For seasonal employers, you have more freedom in choosing a 12-week period that best represents your operations. Here is the calculation you must use.

First, calculate your average number of full-time equivalent employees you had during:

  • The 8-week to 24-week period following your initial loan disbursement, (A)
  • For seasonal employers only, any consecutive 12-week period between February 15, 2019 and February 15, 2020 (B)

Take A and divide by B.

  • If you get a number equal to or larger than 1, you successfully maintained your headcount and meet the staffing requirement.
  • If you get a number smaller than 1, you did not maintain your headcount and your forgivable expenses will be reduced proportionately.

You must rehire employees to maintain your employee count before you apply for forgiveness. It’s best to check this calculation throughout your covered period to make sure you’re meeting the requirement. To help, we’ve answered the most common questions around PPP rules on rehiring employees.

Exemptions on rehiring employees

Employees who were employed as of February 15, 2020, and were laid off or put on furlough may not wish to be rehired onto payroll. If the employee rejects your re-employment offer, you may be allowed to exclude this employee when calculating forgiveness.

To qualify for this exemption:

  • You must have made an written offer to rehire in good faith
  • You must have offered to rehire for the same salary/wage and number of hours as before they were laid off
  • You must have documentation of the employee’s rejection of the offer

If any of these conditions apply to an employee, you can also qualify for an exemption:

  • They were fired for cause
  • They voluntarily resigned
  • They voluntarily requested and received a reduction of their hours

You may also be required to demonstrate you were unable to hire similarly qualified employees for unfilled positions, or document that due to safety requirements, you were unable to return to normal operating levels. Note that employees who reject offers for re-employment may no longer be eligible for continued unemployment benefits.

4. Pay requirements

You must maintain at least 75% of each employee’s total salary.

This requirement applies to every employee that received less than $100,000 in annualized pay in 2019 or 2020 (depending on what year you used to calculate your PPP loan amount).

If the employee’s pay over the 24 weeks is less than 75% of the pay they received during the most recent quarter, the eligible amount for forgiveness will be reduced by the difference between their current pay and 75% of the original pay.

5. Rehiring grace period

For PPP loans distributed in 2020, any rehiring must have been done before December 31, 2020.

For PPP loans distributed in 2021, the SBA has not released any information on a potential grace period for rehiring employees. As of now, any rehiring must be done before the end of your covered period.

Further reading: Safe Harbor Rules for PPP Loan Forgiveness

Reductions in your forgiveness amount (examples)

Spending your PPP funds on the right things is straightforward enough. But things get more complicated when you don’t keep your headcount and employee pay levels the same.

Headcount reduction

Let’s say you have three full-time employees and they each made $3,000 per month, meaning your PPP loan amount was $22,500 ($3,000 x 3 employees x 2.5). You had to lay them off in February 2020 due to COVID-19.

If you only hire back two out of the three employees, your workforce is 67% (two thirds) of your original headcount.

Over the 24 weeks of the PPP coverage period, you spend $36,000 on your employees (more than your PPP loan amount). You claim the full $22,500 of your PPP loan for forgiveness. Let’s assume you do not qualify for any rehiring exemptions. When it comes to calculating your forgivable amount, it will be 67% (0.67) of your loan because of the reduction to your headcount. This means you would be able to have $15,075 ($22,500 x 0.67) forgiven.

Pay reduction beyond the 75% threshold

Let’s say you have three employees that each made $3,000 per month before COVID-19. Your PPP loan amount was $22,500 ($3,000 x 3 employees x 2.5). You had to lay them off in February 2020 due to COVID-19. You hired back all three of your employees, but at a reduced salary of $2,000 a month.

Over the 24 weeks of the PPP coverage period, you spend $36,000 on your employees (more than your PPP loan amount). You claim the full $22,500 of your PPP loan for forgiveness.

When it comes to calculating your forgivable amount, your lender looks at each employee’s individual compensation. The 75% minimum salary is $2,250 (0.75 x $3,000). You’re paying each person $250 less each month. The $250 difference is scaled up to the 24-week period ($250 x 6 months) totalling $1,500. After multiplying this by three employees, $4,500 would be deducted from the forgivable amount. This results in a total of $18,000 forgiven ($22,500 - $4,500).

A conversation with a bookkeeper can help make sense of your specific situation. This is where Bench comes in. Learn more about who we are and how we can help beyond monthly bookkeeping.

PPP forgiveness for self-employed individuals

You are entitled to use the PPP loan to replace lost compensation due to the impacts of COVID-19. You are eligible to claim 2.5 months’ worth of your 2019 or 2020 net income to replace pay. Loans received after March 3, 2021 can use their 2019 or 2020 gross income if they used their gross income to apply. If you didn’t have any other payroll expenses factoring into your PPP loan amount, this means your entire PPP loan could be forgiven for the 24-week period.

If you are using an 8-week forgiveness period, you can claim 8 weeks’ worth of your 2019 or 2020 net income or gross income as owner compensation replacement (or “proprietor costs”). The remaining PPP funds will need to be spent on other eligible expenses in order to be forgiven. Using a covered period of at least 11 weeks will let you take the full 2.5 months of net income or gross income.

In order to submit mortgage interest, rent, or utilities expenses for forgiveness, you must have claimed a deduction for those expenses on your 2019 Form 1040 Schedule C.

For example, in 2019 you worked in an office space and did not have a home office. Because you didn’t work from home, you could not have claimed a 2019 deduction for your home mortgage interest. Therefore, even if you are currently working at home now, you are not eligible to submit home mortgage interest payments for forgiveness.

If you are self-employed but received a PPP loan through multiple businesses, you are capped at $20,833 in owner compensation across all the businesses you’ve received a PPP loan through.

For example, let’s say you received a PPP loan through two businesses and you received $15,000 in owner compensation replacement from your sole proprietorship. In this case you are only eligible for $5,833 ($20,833 cap less $15,000) of owner payroll from your other business.

Further reading: Self-Employed Guide to the PPP Forgiveness Application

PPP forgiveness for partnerships

As a general partner in a partnership, your eligible compensation is based on your partnership 2019 or 2020 net earnings.

The maximum partner compensation is capped at the 2019 or 2020 Schedule K-1 net earnings from self-employment. This amount must be reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties. Once you’ve taken these reductions into consideration, multiply the value by 0.9235. This is to remove what would be the employer portion of self-employment taxes.

Further reading: PPP Loans for Partnerships: What You Need to Know

Applying for PPP loan forgiveness

Applications for loan forgiveness are processed by your lender. You need to fill out a PPP loan forgiveness application form and submit that to your lender.

After you submit your application for forgiveness, your lender is required by law to provide you with a response within 60 days.

Note: if you have received two PPP loans, you will need to apply for PPP forgiveness two separate times.

What PPP forgiveness form should I use?

There are three PPP loan forgiveness application forms available from the SBA. Each form is for a different loan use circumstance.

Which PPP forgiveness form do I use? (horizontal flow chart)

Form 3508S

The simplest of the forms, form 3508S is only for borrowers with loan amounts of $150,000 or less. Filling it out will require no calculations or documentation (but the SBA can request documents at any time).

Instead, you must certify that you have operated within the rules of the PPP. This means you:

  • used the loan to cover eligible expenses only
  • did not reduce employee pay below 75% of their pre-COVID wages
  • did not reduce your full time equivalent headcount

If the SBA finds that you lied on your forgiveness application, you may be subject to up to 30 years imprisonment and a $1 million fine.

Form 3508EZ

For borrowers who received amounts greater than $150,000, you can use the streamlined form 3508EZ if you meet certain criteria. You must certify in good faith the following:

  1. For any employees earning $100,00 or less, you did not reduce the annual salary or hourly wages by more than 25% in the covered period. You must compare the covered period to the most recent full quarter prior to the covered period.
  2. a) You did not reduce the number of employees or the average hours of employees between January 1, 2020 and the end of the loan’s covered period. You may ignore employees that refused an offer to come back to work or were fired for just cause.


  1. b) You were unable to operate to the same capacity as February 15, 2020 due to compliance with rules related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19. These rules must have been put in place by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration.

Documents detailing your payroll and other eligible expenses will be required when applying for forgiveness.

Form 3508

For any borrowers that cannot use form 3508S or 3508EZ, there’s form 3508. The longest of the forms, borrowers will have to fill out the form’s attached PPP Schedule A. The Schedule A includes tables detailing your FTE and any salary/wage reductions in the covered period. Before manually filling out this information, check to see if your payroll provider has a PPP report available. Some payroll providers have all the information you need in an easy to use document.

In addition to the PPP Schedule A, borrowers using form 3508 will have to provide documents for payroll and other eligible expenses.

Recordkeeping and required documents for forgiveness

The following are the required documents you need to collect to support your PPP loan forgiveness application. Your lender may have additional requirements.

  • Documents verifying the number of full-time equivalent employees on payroll and their pay rates, for the periods used to verify you met the staffing and pay requirements:
  • Payroll reports from your payroll provider (Learn more about how payroll providers are supplying PPP specific reports)
  • Payroll tax filings (Form 941)
  • Income, payroll, and unemployment insurance filings from your state
  • Documents verifying any retirement and health insurance contributions
  • Documents verifying that your eligible interest, rent, and utility payments were active in February 2020
  • Documents verifying your eligible interest, rent, and utility payments (canceled checks, payment receipts, account statements)

Good recordkeeping and bookkeeping will be critical for getting your loan forgiven—you’ll need to keep track of eligible expenses and their accompanying documentation over your loan’s covered period. Your lender will likely require these documents in digital format, so take the time to scan any paper documents and keep backups of your digital records.

Furthermore, your business will need to have complete financial statements at the end of your fiscal year. Your lender and the SBA have the right to request and audit your business’s financial documents and records. Read more about what you need to know about PPP audits.

If you don’t have a reliable bookkeeping solution in place, Bench can do your bookkeeping for you, all online. The best part? Our services are included as an expense that is eligible for forgiveness.

What happens if I’m not approved for forgiveness?

Your lender may allow you to provide additional documentation so they can reevaluate your request.

Otherwise, your outstanding balance will continue to accrue interest at 1%, for the remainder of the 2 to 5-year period.

There is no prepayment penalty. You can pay off the outstanding balance at any time with no additional fees.

How will PPP loan forgiveness affect my taxes?

With the passing of the second stimulus bill at the end of 2020, it was made clear that a PPP loan will not affect your taxes.

You do not need to include your forgiven amount as taxable income. Any expenses you covered using a PPP loan will still be tax deductible.

However, one possible exception to this is the taxability of owner compensation replacement (OCR) amounts. Since OCR amounts are used essentially as personal income, instead of for the business, it may be considered taxable income. If you plan to claim some or all of your PPP loan as OCR, we recommend reaching out to your CPA or tax professional for guidance.


What were the main changes of the Paycheck Protection Program Flexibility Act?

The two biggest changes rolled out in June 2020 were:

  • The eight-week period to use your PPP funds was extended to 24 weeks.
  • Previously, you had to spend at least 75% of the funds on payroll. You now need to spend only 60% of the funds on payroll.

Here is a full breakdown of the PPP Flexibility Act.

Can I get PPP expenses forgiven and deduct them from my taxes?

Yes! Any expenses covered by your PPP loan are still tax deductible.

What counts as a utilities expense?

Business expenses on electricity, gas, water, transportation, telephone, or internet access are eligible uses of PPP funds and qualifies for forgiveness.

Check out our full review of What Are Utility Costs for the PPP?

My bills are due outside the 24-week covered period. Can I claim these expenses?

Yes, as long as you pay it on the next regular billing date, any of those eligible non-payroll expenses (utilities, rent, mortgage interest) can be claimed for forgiveness, prorated to the end of the covered period.

How long do I need to keep my supporting documents?

You must retain your documents for six years after the loan is fully forgiven or fully repaid, and provide them to the SBA or the Office of Inspector General if requested.

Further reading: PPP Audits: What You Need to Know

Can I prepay my rent or mortgage?

No, prepayment is not an allowed use of the PPP and is not eligible for forgiveness.

What counts as mortgage interest?

Any interest paid on mortgage on property used for business purposes is an eligible expense that the PPP can be used for, and qualifies for forgiveness.

Acceptable examples include:

  • Mortgage interest on a warehouse you own to store business equipment
  • Auto loan interest on a car you own to make business deliveries

More COVID-19 resources

Need more information on PPP loans?

Looking for other relief programs?

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.
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