Maybe you scored a piece of the more than $349 billion in Paycheck Protection Program (PPP) funding initially made available as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Or perhaps you’re anxiously waiting to hear if you’re getting a slice of the additional $310 billion PPP pie Congress authorized in the latest relief package. As of May 6, 2020, more than 2.4 million loans, worth more than $183 billion, have been approved as part of the second round of PPP funding, according to SBA data. 

A PPP loan, which can be made in amounts of up to $10 million, can be a lifeline for a business struggling to survive in the COVID-19 era. And for some, the appeal of a PPP loan increases if they believe they’ll have their loan forgiven. But the key is meeting all of the criteria. 

When the SBA first announced who was eligible to apply for a PPP loan, the government released general guidelines on how to qualify for forgiveness. The rules are the same regardless of business size, type or industry. At least 75% of the loan must be used by the recipient for payroll purposes, and the remaining amount must be used for utility payments, rent and/or mortgage interest payments.

But after reports that many PPP recipients were not the small businesses the program was intended for, U.S. Treasury Secretary Steven T. Mnuchin and U.S. Small Business Administrator Jovita Carranza released a statement on April 28 stating that loans over $2 million would be subject to strict review to ensure they qualify for forgiveness.

Additional details from the SBA are forthcoming. In the meantime, here’s what you can do now to improve your chances of PPP loan forgivenes.

Make Sure Your Business Truly Qualifies for PPP Funding

A PPP loan isn’t free money. As an applicant, you must prove that you need the funds to continue operating. U.S. Treasury guidelines, updated on April 24, require borrowers to certify that they have no access to additional sources of capital and that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant.”

In the days following the first disbursements of PPP loans, several large companies applied for and accepted PPP funds, even though they likely had access to other ways of raising capital. Many companies then announced that they were returning their loans. To encourage other businesses to return funds they may not truly need, the SBA released a safe harbor deadline, which was extended to May 14, allowing a business to return PPP funds without penalty. 

“At a minimum a borrower should check to make sure they’re eligible,” says Gregory Fryer, partner at New England-based law firm Verrill Dana LLP. Fryer is also the co-author of several papers on how to interpret the PPP guidelines as they are currently set forth. “We do know that companies will continue to be evaluated.”

Although it’s not yet clear what the penalties might be for a company that is found to have fraudulently accepted PPP funds, the best thing to do is make sure that you can use the funds in the spirit in which they were intended. If not, make arrangements to return your PPP loan through your lender as soon as possible.

Use At Least 75% of the Loan For Payroll Expenses

The CARES Act specifies that starting on the date a business receives PPP loan funding, it has the next 56 days to use at least 75% of the money for payroll expenses.

For employers, this means you must:

• Pay your employees at current salary levels without any reductions in wages or headcount, or
• Rehire any employees you may have furloughed or laid off as a result of the pandemic-related economic downturn and pay them the same amount they were earning during the weeks prior.
• If you pay yourself, that amount must be limited to eight weeks’ worth of the amount you made in 2019. For independent contractors, this means you have to be prepared to show proof that you were in operation as of February 15, 2020, and provide documentation of how you earned wages.

Not sure what counts as eligible compensation? The SBA says eligible payroll costs can include salary, wages and tips, up to $100,000 of annual pay per employee (for eight weeks, a maximum of $15,385 per individual); and covered benefits for employees (but not owners), including health care expenses, retirement contributions and state taxes on employee payroll paid by the employer (including unemployment insurance premiums.) 

If you use less than 75% of your funds for qualified payroll expenses, then the difference will be subject to loan repayment terms. In other words, if you use 70% of your loan for payroll, 25% for rent and 5% to order supplies, you’ll have to pay back that 5% at an interest rate of 1%.

One wrinkle that the U.S. Treasury addresses in its online FAQ—last updated May 1—is what happens when an employer offers a laid-off employee their job back and the employee declines. In this case, as long as the employer has made a “good faith” effort to rehire that former employee and has documentation of the rejected offer, loan forgiveness should not be affected.

Use the Rest for Other Eligible Expenses

PPP loan forgiveness rules also dictate that you can use any remaining funds, after what you’ve spent on payroll, on any combination of the following:

• Payments of interest on mortgage obligations incurred before Feb. 15, 2020
• Rent payments on lease agreements in force before Feb. 15, 2020
• Utility payments under service agreements dated before Feb. 15, 2020

You can also use the proceeds from a PPP loan to refinance an SBA Economic Injury Disaster Loan made between Jan. 31, 2020 and April 3, 2020. But at least 75% of the PPP loan amount must be used for eligible payroll costs.

There’s still a lot of grey area surrounding what is considered an eligible nonpayroll expense. For example, if you paid business rent on May 1, but you received your loan funds on May 4, it’s still unclear if you can count that May rent payment as an eligible expense, or if you have to prorate it from May 4 through the end of the month. 

“Until we get further guidance, we figure the rent is incurred the day it’s due. This is an attempt to be as conservative as possible,” says Fryer. In other words, the safest thing to do might be to not count any payments made prior to the day your funds were received, even if they cover expenses that fall within the eligible eight-week period. 

Keep Detailed Records

The only way to prove you used your loan in a manner that qualifies for forgiveness is to have the paper trail to back up your claim.  

“All small businesses should hold onto their PPP documentation for the foreseeable future, because the SBA hasn’t announced when the audit period is,” says Travis Miskowitz, manager of the CFO advisory group at accounting and business advisory firm Wiss & Company, LLP, based in Florham Park, New Jersey. “It could be anywhere from three to six years after the loan is forgiven.”

The lender has to make a decision on your forgiveness application within 60 days, so the more complete an application you submit, the better. You’ll have to supply the following as part of your loan forgiveness application:

• Documentation verifying the number of full-time equivalent employees on payroll, and their pay rates
• Payment verification for covered mortgage obligations, lease obligations and utility payments 
• Certification that the documentation presented is true and correct, and that the amount for which forgiveness is requested was used for eligible expenses
• Any other related paperwork the lender requests  

Be aware this may only be a portion of what the SBA ultimately asks for from borrowers hoping to qualify for forgiveness.

“We are still waiting for guidance on the forgiveness process and it’s a concern of ours because… businesses are not sure what they should do,” a spokesperson for the American Banking Association wrote in an email to Forbes. 

The spokesperson shared a letter with Forbes that the American Bankers Association sent to Secretary Mnuchin and Administrator Carranza on May 7, stressing the need for more details. The association urged the government to “release clear, bright-line guidance on loan forgiveness as soon as possible. Without this critical guidance, small businesses cannot take the necessary steps to best utilize their Paycheck Protection Program (PPP) loans.”

What Happens If Your Loan Isn’t Approved for Forgiveness?

The good news is that PPP loan forgiveness is not all or nothing. It’s possible to have the portion of your loan that fit the criteria forgiven, and that the remaining funds must be paid back. If you do have to pay back some of your loan, know that payments are deferred for six months, and you’ll have two years from then to pay it off. The interest rate on PPP loans is 1%, making it one of the lowest-cost loans you can get for your business.