How to Avoid PPP Loan Forgiveness Common Mistakes


You might have to pay back a portion of your PPP money, even if your business completely qualifies for forgiveness.

That’s what could happen if you make a mistake with your PPP forgiveness paperwork. If there was ever a time to dot the Is and cross the Ts, it’s with the PPP forgiveness application.

How to Avoid PPP Loan Forgiveness Mistakes

Let’s start with the basics, and then delve into common mistakes to avoid for PPP loan forgiveness.

PPP First Draw and Second Draw Terms

The terms are the same. The covered period starts on the day the PPP funds are disbursed from the lender to you.

The covered period can be from 8 to 24 weeks, or 168 days. There is an alternative covered period for borrowers who received PPP money before June 5, 2020. Those borrowers have the option to use an 8 week (56 days) covered period.

There are two main forgiveness qualifiers. First, you must have maintained the number of employees and their compensation levels. And secondly, the PPP money must have been spent on payroll and other eligible expenses.

What If You Couldn’t Maintain the Number of Employees?

This could have happened in two ways. You couldn’t rehire an individual employee, or you couldn’t hire a similarly qualified individual.

You’ll need documentation to prove this happened. In the case of inability to rehire an employee, you’ll need a written employment offer and a written rejection response from the employee. If you couldn’t find a similarly qualified individual to replace an employee, you’ll need documentation for that – paperwork that proves efforts to hire a replacement employee.

Changes in Economic Impact Disaster Loan (EIDL) Factoring

As first designed, as part of the PPP forgiveness program, borrowers who had gotten both EIDL and PPP monies had to subtract the amount of the EIDL loan from the PPP monies when calculating forgiveness. In other words, if you got a $10,000 EIDL loan and a $100,000 PPP loan, you could only apply for $90,000 forgiveness of the PPP money.

That requirement was changed by new legislation.

“The EIDL advance will no longer by deducted from the PPP loan forgiveness amount,” said Rohit Arora,, CEO of Biz2Credit, a pioneer of FinTech and a leading expert in small business lending.

What if you sent in your PPP forgiveness application before the EIDL legislation changed? Arora said that the SBA is working on processes to correct that for borrowers who were previously subject to the deduction.

Get the Correct PPP Loan Forgiveness Form

You get the form from your lender. Most small businesses will use SBA form 3508.

There are shortened version of that form, such as 3508EZ and 3508S. Those are PPP loan forgiveness applications for specific types of businesses, such as sole proprietors, independent contractors and other self-employed business owners.

Small businesses can also check to see if they’re eligible to use the SBA’s new PPP Loan Forgiveness Portal to help apply for full forgiveness on this loan.

The PPP Forgiveness Application Timeline

What is the PPP forgiveness application timeline? When can you apply?

You can apply for PPP forgiveness after all the money has been used AND within ten months of the last day of the covered period. NOT before the covered period ends.

“An overarching mistake would be either applying too soon for forgiveness – before the covered period is over,” Arora said. “Applying prematurely can lead to a premature end to the company’s covered period. Borrowers should be certain that it is optimal for them to apply at their chosen time to apply for forgiveness.”

Don’t let that 10-month deadline to apply slip past you. If you do, the PPP loan payments will no longer be deferred. You’ll have to start paying the lender. You’ll have to pay back the money before the maturity date of your loan. The maturity date of your loan would be either two or five years, depending on the terms.

It’s easy to figure out the date for your PPP loan forgiveness application. Let’s say your covered period ended on October 30, 2020. You have six months, or until August 30, 2021, to apply for forgiveness.

What Costs Qualify for PPP Forgiveness?

The short answer is that payroll and other eligible expenses qualify for PPP loan forgiveness.

To qualify for PPP forgiveness, your payroll costs had to comprise 60% of the PPP loan money you spent. The dollar number for payroll is based on gross pay, not net. You can also include health benefits and retirement contributions, as long as that money was paid by the employer.

Other types of compensation may also be included, such as tips, commissions, bonuses and hazard pay. There is a limit, however. These other types of compensation will be annualized. In other words, the compensation would be calculated on what it would have totaled during a year, based on the total during the covered period. The annualized calculation can be no more than $100,000.

“Classification of non-cash compensation is a common omission,” Arora said. “That mistake can cause the borrower to end up with a residual amount – if they did not use the funds to pay benefits like health insurance premiums or 401k contributions.”

Let’s say you pay your employees bi-weekly. What about pay periods that either started or ended outside of the covered period timeline?

That’s okay. Payroll cost may still be covered if the cost was incurred during the covered period but paid after it ended. Payroll costs incurred before the covered period and paid during it are also eligible.

What if a business reduced the pay of an employee, or employees, either as hourly or salaried?

If an employee’s hourly or salaried amount was reduced by more than 25%, that will reduce the eligible forgiveness amount. UNLESS that reduction was remedied by December 31, 2021.

If an employee’s pay was reduced because of a cut in hours, you’re okay. In other words, if you have an employee who made $20 an hour for a 40-hour week, but you had to cut hours $20 an hour for a 15-hour week, that’s okay. The hours were reduced, but not the wage.

This part of the PPP forgiveness application can be tricky.

“The classification of employees according to the SBA’s definitions of Full Time Employee (FTE) can be quite complex,” Arora said. “There are fractional employee counts based on hours worked and some unique SBA rules and standards for computing a single FTE.”

Documentation Needed to Prove Payroll Part of PPP Forgiveness Application

Here are examples of the paperwork you may need:

  • Bank statements, or statements from third-party payroll service providers
  • Tax forms which show tax filings that have, or will be, filed. Most commonly this is IRS form 941.
  • State quarterly business and independent employee wage reporting, and unemployment insurance tax filings, that have been or will be reported.
  • Payment receipts such as cancelled checks or account statements that show employer contributions to health insurance and retirement plans.

Non-Payroll Costs that Qualify for PPP Loan Forgiveness

A common mistake is submitting the cost of a mortgage payment. You can only include the cost of the interest payment on the mortgage.

Rent or lease payments on the business space qualify.

Utility payments for the business qualify, such as electricity, gas, water, transportation, telephone, or internet access. However, these services must have been contracted before February 15, 2020.

What if you’re an independent contractors or sole proprietor? You can only claim such expenses if you claimed them as deductions when you filed a Schedule C in 2019.

Pay close attention as you fill out the PPP forgiveness application section regarding non-payroll costs.

“Another common / simple error could be simply misclassifying different kinds of expenses,” Arora said. “There are different categories of allowable expenses.”

PPP Loan Forgiveness Application Complete – Now What?

One last check before you submit to the lender.

“A simple mistake could be to enter the wrong SBA or lender loan number,” Arora said. “We’ve seen this trip up many applicants in PPP round 1.”

Submit the application to your lender. The lender will submit your application to the SBA.

What if your application is in, but you haven’t heard anything? It’s the lender’s responsibility to notify the borrower with any response. You can still follow up with your lender.

You don’t have to make any PPP loan payments until the SBA has remitted either a full or partial forgiveness amount to the lender. If a balance is due, you must repay it, plus interest, before the maturity date of your loan.

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Lisa Price Lisa Price is a staff writer for Small Business Trends and has been a member of the team for 4 years. She has a B.A. in English with a minor in journalism from Shippensburg State College (Pennsylvania). She is also a freelance writer and previously worked as a newspaper circulation district manager and radio station commercial writer. In 2019, Lisa received the (Pennsylvania) Keystone Award.