PPP Loan Guide: Eligibility, Forgiveness and key 2023 updates

Introduction

The PPP Loan means Paycheck Protection Program. The Paycheck Protection Program (PPP) loan played a key role in the U.S. pandemic relief initiatives, providing forgivable loans to assist small businesses in keeping their employees and remaining operational. Although the program concluded in 2021, its effects persist as businesses deal with forgiveness, compliance, and audits. Whether you’re a borrower handling repayment, a freelancer looking into options, or just gathering information about the program, this guide will provide you with all the essential details regarding PPP loans. We will clarify eligibility criteria, forgiveness stipulations, and important updates for 2023—in straightforward, actionable language. Let’s get started!

What was the PPP Loan Program?

In April 2020, the CARES Act introduced the PPP Loan, also known as the Paycheck Protection Program. It was run by the Small Business Administration (SBA) and offered low-interest, forgiveable loans to small firms that were affected by COVID-19. The Goal is to assist firms in meeting essential operating expenses and payroll during lockdowns and revenue losses.

Key Features of PPP Loans:

• Full or partial forgiveness: Loan may be forgiven in full or in part if at least 60% of the money were used for payroll and 40% for approved non-payroll expenses.
• 1% Fixed Interest Rate: Over a five-year period, any amount that cannot be forgiven will accrue interest at a rate of 1%.
• No costs or collateral: In contrast with standard loans, PPP loans did not need collateral, and lenders were not permitted to impose application costs.
• Two Funding Rounds: The first round, which was an initial loan , and the Second Draw, which was an extra fundraising round in 2021.
• More than $800 billion had been distributed to 11.8 million enterprises by the programs end in May 2021.

More than $800 billion had been distributed to 11.8 million enterprises by the programs end in May 2021.

Who Qualified for a PPP Loan?

PPP loans were intended for independent contractors, nonprofit organizations, small businesses, and self-employed individuals. Below is a summary of eligibility:

1. Company Size:

• Businesses with less than 500 workers (or those that fit the SBA’s size requirements for sectors like hospitality).
• single proprietors, gig workers, and independent contractors.

2. Operational Timeline:

• Companies had to be up and running prior to February 15, 2020.

3. Impact of COVID-19:

• Candidates had to attest that the loan was required due to economic instability

Excluded Organizations:

• firms that are publicly traded (with few exceptions).
• companies that shut down for good before 2020.

How PPP Loans Worked: A Step-by-Step Overview

Though applications are closed, understanding the process clarifies forgiveness and compliance.

Step 1: Partner with an SBA-Approved Lender

Banks, credit unions, and fintech platforms (e.g., PayPal, Kabbage) processed loans. Existing banking relationships often sped up approvals.

Step 2: Calculate Your Loan Amount

• First Draw: 2.5 × average monthly payroll costs (based on 2019 or 2020 data).

• Second Draw: 2.5 × average monthly payroll (3.5× for restaurants/hotels).

Step 3: Submit Documentation

• Payroll reports (Form 941, bank statements).

• Tax returns (2019/2020 Schedule C for self-employed).

• Proof of operations (leases, utility bills).

Step 4: Receive and Use Funds
Loans were typically disbursed within 2–4 weeks. Funds had to be spent during an 8–24 week “covered period” on approved expenses.

PPP Loan Forgiveness: A Detailed Guide

The PPP’s defining feature was forgiveness, but strict rules applied. Here’s how to qualify:

Eligible Expenses

• Payroll (minimum 60%): Salaries, wages, tips, benefits (healthcare, retirement), and state/local taxes.
• Non-Payroll (Up to 40%): Rent, mortgage interest, utilities, and operational costs (e.g., software, protective equipment). 

Steps to Apply for Forgiveness

1. Track Expenses Diligently: Use accounting software or spreadsheets to document every expense.

2. Choose the Correct Forgiveness Form:

   • Form 3508S: Simplified process for loans ≤$150,000.

   • Form 3508EZ: For businesses that maintained staffing and salaries.

   • Form 3508: Standard form for larger loans.

3. Submit to Your Lender: Include payroll reports, bank statements, and receipts.

4. Respond to SBA Inquiries: Some loans undergo random reviews or audits.

Deadline Reminder: Apply within 10 months of your covered period ending. Miss this, and repayments start!

Common Reasons for Partial or Denied Forgiveness

• Spending less than 60% on payroll.

• Reducing staff headcount or wages by over 25%.

• Incomplete documentation (e.g., missing payroll records).

2023 Updates for PPP Loan Recipients

While the program has ended, borrowers should note these key updates:

1. Forgiveness Deadlines:

• Most businesses must apply by December 31, 2023, if they haven’t already.

2. Audit Preparedness:

• The SBA may audit loans over $2 million and randomly select smaller loans. Retain records for 6 years.

3. Tax Implications:

• • Forgiven PPP loans are not taxable income (IRS Notice 2020-32).

  • Expenses paid with forgiven funds are tax-deductible (per Congressional action in late 2020).

Alternatives to PPP Loans in 2023

If you missed the PPP window, consider these funding options:

1. SBA 7(a) Loans: General-purpose loans up to $5 million for working capital, equipment, or refinancing.

2. SBA Economic Injury Disaster Loans (EIDL): Long-term, low-interest loans for disaster recovery (still available for COVID-19 impacts).

3. State and Local Grants: Many states offer grants for small businesses (e.g., Illinois Business Interruption Grant).

Top 5 PPP Loan Mistakes (And How to Avoid Them)

1. Ignoring the 60/40 Rule: Always allocate ≥60% to payroll to maximize forgiveness.

2. Missing Deadlines: Apply for forgiveness early to avoid repayment.

3. Poor Documentation: Save payroll reports, invoices, bank statements, and lease agreements.

4. Misusing Funds: Avoid non-eligible costs like bonuses, renovations, or personal expenses.

5. Overlooking Tax Guidance: Consult a tax professional to ensure compliance with IRS rules.

Final Thoughts:

The PPP loan program provided critical support to businesses during an unprecedented crisis. While applications are no longer accepted, borrowers must stay proactive about forgiveness deadlines, documentation, and compliance. By understanding the rules and avoiding common pitfalls, you can maximize forgiveness and minimize financial strain.

For more resources on small business financing, tax strategies, or SBA programs, explore our blog or subscribe to our newsletter for updates!