PPP Loan Forgiveness: Rules, Eligibility, And How To Apply

If you took out a PPP loan during the pandemic, you're probably wondering: can I still get it forgiven? The short answer is yes, but only if you follow the rules and submit your application.

Thousands of small business owners have already converted their loans into grants they never have to repay. This guide walks you through PPP loan forgiveness requirements, the documents you'll need, how your forgiveness amount gets calculated, and the exact steps to apply. 

Whether you received your loan years ago or you're just getting around to the paperwork, here's what you need to do next.

PPP loan forgiveness explained

Can your PPP loan still be forgiven? Yes, if you apply before your loan's maturity date. Here's what matters:

• Most PPP loans were forgiven. The SBA approved forgiveness for the vast majority of borrowers who applied and met the requirements.
• There's a deadline based on your loan. You can apply until your loan reaches its maturity date (typically 2 or 5 years from disbursement) or before repayment begins after your deferral period ends.
• Full forgiveness is possible. Spend at least 60% on payroll and follow the other rules, and your entire loan can turn into a grant.
• What to do next: Contact your lender or use the SBA's direct forgiveness portal. They'll walk you through what they need from you. 

Don't wait around. The longer you wait, the more 1% annual interest accumulates on your loan. 

What is PPP loan forgiveness?

PPP loan forgiveness turns your loan into money you don't have to pay back. When the SBA approves your application, your debt disappears—you keep the cash without owing a dime, as outlined on the SBA's PPP loan forgiveness page.

How does PPP loan forgiveness work?

You can apply through your original lender or use the SBA's direct forgiveness portal (available for most loans). Your lender or the SBA reviews everything you submit, and the SBA makes the final approval decision. Once approved, the SBA pays your lender back.

There were two types of PPP loans: first-draw and second-draw. As the SBA's PPP overview explains, first-draw went to businesses that hadn't gotten PPP money before, while second-draw went to businesses that already used their first loan and demonstrated revenue reduction. Both follow the same forgiveness rules.

Why does forgiveness exist? 

The CARES Act (Public Law 116-136) created the Paycheck Protection Program to help small businesses survive COVID-19 without crushing debt. The deal was simple: keep your team employed, use the money for payroll and other approved costs, and we'll forgive your loan.

Your forgiveness amount depends on two things: how you spent the funds and whether you maintained your workforce. The Treasury's PPP forgiveness factsheet explains that if you get it right, your whole loan gets wiped out. Miss key rules, and you might get partial forgiveness or have to repay some of it.

Who qualifies for PPP loan forgiveness?

Any business, nonprofit, or self-employed individual who received PPP funding can apply for forgiveness. The SBA's PPP overview makes clear that your business structure doesn't matter.

Sole proprietors, partnerships, LLCs, S corps, C corps—all qualify if you received a loan and followed the rules.

• Self-employed with no employees? You qualify too. The SBA's interim final rule on PPP forgiveness explains that payroll cost calculations work differently for you (based on your net profit from Schedule C), but you still need to meet SBA requirements and document eligible expenses during your covered period.
• Nonprofits and religious organizations? According to the SBA's PPP overview, you're eligible under the same rules as for-profit businesses, same application process.
• Got a second-draw loan? The SBA's second draw PPP loan page confirms you qualify for forgiveness just like first-draw recipients. If you got both loans, you'll apply for forgiveness separately for each one.

Common reasons people don't get full forgiveness

The Treasury's PPP forgiveness factsheet identifies these issues:

• Spent less than 60% on payroll (results in reduced forgiveness, not zero)
• Cut employee wages by more than 25%
• Reduced headcount without qualifying for safe harbor
• Didn't use all the funds during the covered period
• Can't document expenses properly

If any of these apply to you, don't panic. You might still qualify for partial forgiveness. Talk to your lender or accountant before assuming you're out of luck.

PPP loan forgiveness rules you must follow

Let's talk about the rules that actually matter.

The 60% payroll rule is critical. The Treasury's PPP forgiveness factsheet states that at least 60% of your forgiveness amount must come from payroll costs. If you spend less than 60% on payroll, your forgiveness gets reduced proportionally—you won't get full forgiveness, but you may still get partial forgiveness.

According to the SBA's interim final rule on payroll costs, payroll costs include:

• Employee salaries and wages
• Paid time off
• Group health insurance premiums
• Retirement contributions
• State and local employer payroll taxes

The remaining portion can only cover specific expenses. The Treasury's PPP forgiveness factsheet lists eligible non-payroll costs:

• Mortgage interest payments on business mortgages (not principal)
• Business rent or lease payments
• Business utility payments (electricity, gas, water, phone, internet)
• Covered operations expenditures
• Covered property damage costs
• Covered supplier costs
• Covered worker protection expenditures

What doesn't count: personal expenses, owner draws beyond documented compensation, loan principal payments.

You need to maintain your workforce. The SBA's loan forgiveness application Form 3508 explains that the SBA measures this through your full-time equivalent (FTE) employee count and wage levels. If you reduced your FTE count compared to your reference period, your forgiveness gets reduced proportionally. The same applies if you cut any employee's wages by more than 25%.

Safe harbor can protect you. The Treasury's PPP forgiveness factsheet outlines provisions that protect you from reductions if:

• You restored FTE count and wage levels by December 31, 2020
• You couldn't find qualified employees to hire
• You couldn't return to pre-pandemic business activity levels
• You complied with COVID-19 safety requirements that limited your capacity

Keep your records. The SBA's record retention requirements state the agency can review your loan for up to six years. Missing paperwork can mean denied forgiveness or repayment demands down the road.

{{banner-cta}}

How to apply for PPP loan forgiveness (step-by-step)

Ready to apply? Here's exactly what to do.

Step 1: Choose your application method 

The SBA's direct forgiveness portal allows you to apply through your original lender's system or use the SBA's direct portal for most loans. Check with your lender first—they may have specific requirements.

Step 2: Pick the right form 

The SBA offers three options:

• Form 3508S – The simplest. For loans $150,000 or less. Minimal calculations and documentation.
• Form 3508EZ – For borrowers who maintained salary and wage levels or meet certain safe harbor provisions.
• Form 3508 – The standard form anyone can use.

Step 3: Gather your paperwork 

The SBA Form 3508 instructions outline what you need:

• Payroll records showing wages during your covered period
• Bank statements proving payments
• Tax forms (941s or equivalent)
• Receipts for rent, utilities, and other non-payroll expenses

Having everything organized first makes this go way faster.

Step 4: Fill out your form 

Your lender's portal or the SBA direct portal will guide you through it. You'll enter:

• Loan amount
• Covered period dates
• Employee counts
• Expense totals

Take your time. Errors cause delays or trigger extra review.

Step 5: Submit everything 

Upload your completed form and supporting documents through the portal. According to the SBA's PPP loan forgiveness process page, your lender or the SBA reviews it all. They might ask questions or request more info. Once satisfied, the SBA makes the final decision.

Step 6: Wait for approval 

Most straightforward applications get decided within a few weeks to a few months. You'll get notified when the SBA makes a call. Approved? Your loan balance gets paid off and you're done. Issues? You'll get an explanation of next steps.

PPP loan forgiveness checklist: What documents you need

Let's break down exactly what paperwork you need.

Payroll documentation (this is your most important pile):

The SBA Form 3508 instructions require:

• Payroll reports showing gross wages for each employee during your covered period
• Payroll tax filings (Form 941 for federal quarterly filings)
• Bank statements or cancelled checks proving payroll transactions
• Records of health insurance premiums and retirement contributions

Non-payroll expenses:

According to the Treasury's PPP forgiveness factsheet, you need:

• Mortgage statements showing interest amounts (not principal)
• Lease agreements and cancelled rent checks
• Utility bills and payment confirmations
• Documentation for covered operations, property damage, supplier costs, or worker protection expenditures

Business tax documents:

• Business tax returns for 2019 and 2020
• Any 1099 forms for independent contractors you paid
• State and local tax records related to covered expenses

Safe harbor documentation (if claiming):

The SBA's interim final rule on safe harbors explains you need:

• Job posting records if you couldn't find qualified employees
• Documentation showing you couldn't return to pre-pandemic business levels
• Records of compliance requirements that limited capacity

Pro tip: Create one organized file with everything sorted by category. The SBA's record retention requirements state the agency can review your loan for up to six years after forgiveness, so keep digital copies secure.

How your PPP loan forgiveness amount is calculated

Here's the math behind your forgiveness amount.

Start with your total eligible expenses. The SBA Form 3508 instructions explain that you add up all qualifying payroll and non-payroll costs from your covered period. This is your potential maximum forgiveness—it can't go higher than your original loan amount.

Apply the 60% payroll test. According to the Treasury's PPP forgiveness factsheet, at least 60% of your forgiveness amount must come from payroll costs. If less than 60% is payroll, your total forgiveness gets reduced proportionally.

Calculate FTE reductions. The SBA Form 3508 instructions outline how to compare your average FTE count during your covered period to your reference period (either January 1–February 29, 2020, or February 15, 2019–June 30, 2019). If your covered period FTE dropped, your forgiveness gets reduced proportionally.

The formula: (Covered Period Average FTE) ÷ (Reference Period Average FTE)

Check for wage reductions. The SBA's interim final rule on loan forgiveness explains that you look at each employee who made less than $100,000 annualized in 2019. If anyone's wages dropped by more than 25% during your covered period compared to Q1 2020, your forgiveness gets cut by the excess reduction.

Apply safe harbor exceptions. According to the Treasury's PPP forgiveness factsheet, if you qualify for safe harbor, you skip the FTE and wage reduction calculations entirely and keep your full forgiveness amount.

That final number is what you get forgiven. Your lender or the SBA portal may have calculators built in to help you estimate your amount before completing your formal application.

Is PPP loan forgiveness taxable? Accounting and tax treatment

Good news: PPP loan forgiveness isn't taxable at the federal level.

IRS Notice 2021-20 confirms that when your loan gets forgiven, you don't report it as income on your federal tax return. Congress specifically excluded forgiven PPP loans from gross income.

• Even better: Expenses you paid with PPP funds are fully deductible. IRS Revenue Ruling 2021-02 clarifies that the Consolidated Appropriations Act of 2021 allows businesses to deduct expenses paid with forgiven PPP loan proceeds. Payroll, rent, utilities—all of it counts.
• State taxes vary. Most states follow federal treatment and don't tax forgiven PPP loans, but some states have different rules. Check with your state's Department of Revenue to understand your specific situation.
• If you claimed the Employee Retention Credit (ERC) too: The IRS FAQs on ERC and PPP explain that you can't use the same wages for both PPP forgiveness and the ERC. You need to allocate wages between the two programs.
• Recording forgiveness in QuickBooks: When you get your forgiveness notification, create a journal entry that debits your PPP loan liability account and credits a non-taxable income account for PPP loan forgiveness.

Work with a tax professional if your situation involves ERC interaction, multi-state operations, or large loan amounts.

PPP loan forgiveness deadlines and current status

Here's what you need to know about timing.

The forgiveness application deadline is tied to your loan terms. The SBA's PPP overview explains that you can apply until your loan reaches its maturity date (typically 2 or 5 years from disbursement) or before you enter repayment after your deferral period ends—whichever comes first.

But waiting costs you. According to the Treasury's PPP forgiveness factsheet, your PPP loan accrues 1% interest per year from disbursement until forgiveness is granted. The longer you wait, the more interest accumulates. Once forgiven, any accrued interest is also forgiven.

Your repayment deferral affects when payments start. The SBA's interim final rule on loan deferral explains that if you don't apply for forgiveness:

• Loans disbursed before June 5, 2020: payments deferred until the lender receives forgiveness amount remittance from SBA (or 10 months after the end of the covered period if no forgiveness application submitted)
• All PPP loans: deferral ends either when borrower receives forgiveness decision or 10 months after the end of the covered period, whichever comes first

The SBA continues processing applications. The SBA's PPP loan forgiveness portal confirms the agency hasn't announced plans to close the forgiveness program, but you must apply before your loan's maturity date.

Can you still get a PPP loan? No. The SBA's PPP program page states the Paycheck Protection Program ended on May 31, 2021. Congress hasn't reopened it or authorized new funding.

PPP loan forgiveness FAQs

Did PPP loans get forgiven?

Yes. The SBA's PPP overview reports that most PPP loans that went through the forgiveness application process were approved. The overwhelming majority of borrowers who applied and met program requirements received forgiveness, converting their loans into grants.

Are PPP loans under $50,000 automatically forgiven?

No. There's no automatic forgiveness for any loan amount, regardless of size. All borrowers must submit a forgiveness application. However, the SBA's Form 3508S shows that loans of $150,000 or less can use this simplified form, which requires less documentation and fewer calculations than the standard forms.

Who qualifies for PPP loan forgiveness?

According to the SBA's PPP overview, any business, nonprofit, or self-employed person who received a PPP loan qualifies to apply for forgiveness if they used the funds for eligible expenses and followed program rules. This includes sole proprietors with no employees, second-draw loan recipients, and nonprofit organizations.

Is there any PPP money still available?

No. The SBA's PPP program page confirms the Paycheck Protection Program ended on May 31, 2021. No new loans are available and Congress hasn't authorized additional funding. If you already received a loan, you can still apply for forgiveness before your loan's maturity date—but new applicants cannot get PPP loans.

Get your PPP loan forgiven

PPP loan forgiveness is still available if you haven't applied yet and your loan hasn't reached its maturity date. Used your loan for payroll and other eligible expenses? Kept your documentation? You likely qualify for forgiveness.

Don't let your loan collect interest when it could be a grant. Contact your lender or visit the SBA's direct forgiveness portal today to start your application.

Need help keeping your payroll organized going forward? Homebase makes it easy to track hours, run payroll, and keep the records you need, all in one place. Try it free.

‍