Overview

When disasters strike, small businesses often rely on emergency credit to cover payroll, rent, and operating costs. Some of those emergency programs include forgiveness features that relieve borrowers from repaying part or all of what they received. Understanding which programs offer forgiveness, how forgiveness is administered, and the tax consequences is critical to getting relief without creating new problems.

This article explains the main forgiveness paths used by small businesses since recent major disaster responses, what documentation lenders and agencies expect, common mistakes to avoid, and practical next steps. It cites primary sources such as the U.S. Small Business Administration (SBA) and the Internal Revenue Service (IRS) for guidance current as of 2025 (SBA; IRS).

Which disaster loans have forgiveness options?

  • Paycheck Protection Program (PPP) loans: PPP was a federal emergency program with explicit forgiveness rules tied to eligible uses and documentation. Borrowers who met the program’s conditions could have some or all of their PPP loan forgiven. While the PPP lending window closed years earlier, borrowers remain able to submit forgiveness applications for outstanding PPP loans if they have not already done so. See SBA guidance for current processing instructions (SBA).

  • EIDL advances (COVID-era grants) and similar emergency advances: Throughout the pandemic, EIDL advances were disbursed as grant-like payments that did not require repayment. Standard long-term SBA Economic Injury Disaster Loans (EIDL) are generally loans, not forgiveness grants, though specific advances or targeted grants in special programs may be non-repayable. Check the SBA program notices for the latest status (SBA).

  • Program-specific grants and state or local relief funds: Some state, county, or nonprofit disaster relief funds include forgivable grants or loan-forgiveness components. Terms vary by program.

Note: Most traditional disaster loans (EIDL loans, SBA 7(b) disaster loans, state emergency lending programs) are loans and not automatically forgiven. Always confirm program details with the lender or the administering agency.

How forgiveness works for the most common programs

1) PPP loan forgiveness (how it worked and what to expect now)

  • Eligibility and covered uses: PPP forgiveness was based on how borrowers used the loan proceeds during a covered period—primarily payroll costs and secondarily certain mortgage interest, rent, utilities, and other eligible operating expenses. The program included a payroll minimum (historically 60% minimum for payroll-related uses) to maximize forgiveness. Borrowers needed to use funds for eligible items and maintain employee and compensation levels to qualify for full or partial forgiveness.

  • Application and documentation: Forgiveness required submitting a forgiveness application to the lender (or SBA when applicable) plus payroll reports, payroll tax filings, bank statements, rent/mortgage and utility invoices, and documentation of employee headcount and compensation. Lenders reviewed the package and either approved forgiveness or forwarded it to the SBA for final action.

  • Current status: The PPP program itself is closed, but forgiveness processes remain important for borrowers who received PPP loans and have not completed forgiveness. Check the SBA’s current forgiveness instructions and your lender’s portal for the required forms and status updates (SBA).

2) EIDL advance and EIDL loan differences

  • EIDL advance: Disbursed during the pandemic as a grant-like advance to provide immediate relief; advances were not required to be repaid. They were treated differently than traditional EIDL loans.

  • EIDL loans: Long-term loans designed for working capital and other qualifying needs after a disaster. Standard EIDL loans generally are not forgivable; repayment terms depend on the loan agreement and SBA policies.

3) Other forgivable disaster grants or targeted relief

  • Federal, state or local targeted grant programs sometimes include disaster assistance that functions like forgiveness. Terms, eligible expenses, and application processes differ by program and year, so verify specific program notices.

Tax treatment and reporting (practical summary)

  • Federal income tax: Legislative changes during the COVID response clarified that forgiven PPP proceeds are excluded from gross income for federal tax purposes and that expenses paid with forgiven PPP funds are deductible for federal tax purposes. Rules for other programs (state grants, EIDL advance) may differ and depend on subsequent legislation and IRS guidance. Always confirm the current IRS position and consult your tax advisor (IRS guidance).

  • State tax differences: States may treat forgiven debt differently. Several states adopted conformity rules to exclude PPP forgiveness from taxable income, but not all did. Check state tax guidance or your tax professional.

  • Recordkeeping for tax audits: Keep all supporting documentation for forgiven amounts—payroll records, cancelled checks, invoices, and loan documents—because tax authorities and lenders may request proof years after the fact.

For detailed tax considerations, see our related resource: Tax Consequences of Loan Forgiveness: What to Expect (internal link).

What lenders and agencies will look for in a forgiveness application

  • Proof of eligible uses: Payroll registers, IRS Forms 941 or equivalent payroll tax filings, payroll bank statements, and reports showing wages paid during the covered period.

  • Proof of non-payroll expenses: Lease or mortgage statements, utility bills, vendor invoices, and cancelled checks showing payment of qualifying costs.

  • Employee and compensation records: Headcount comparisons, documents showing restoration of employee levels (if applicable), and documentation supporting any salary reductions.

  • Accurate calculations: Reconcile loan amounts to the forgiveness worksheet or lender portal calculations and explain any non-eligible uses.

Common mistakes and how to avoid them

  • Treating every emergency loan as forgivable: Many disaster loans are not forgivable. Confirm program rules before assuming forgiveness.

  • Poor documentation: Missing payroll reports, unsigned invoices, or inconsistent bank records are the most common reasons forgiveness requests are delayed or reduced. I advise clients to keep a single folder (digital and physical) for every grant or loan payment and tag documents by eligible expense category.

  • Timing errors: Using funds outside the program’s covered period or misapplying the covered period rules (for PPP) can disqualify expenses.

  • Overlooking tax consequences: Assuming forgiven debt is always tax-free can lead to surprises, especially at the state level.

Practical checklist to pursue forgiveness

  1. Identify the program and read the current SBA/agency guidance for that program (SBA).
  2. Gather payroll tax filings, payroll ledgers, and bank statements covering the loan’s covered period.
  3. Collect evidence of non-payroll eligible expenses: rent/mortgage, utilities, and vendor invoices.
  4. Work with your lender or the administering agency to submit the correct forgiveness application or claim.
  5. Save copies of every submission and request written confirmation of final forgiveness decisions.
  6. Consult a CPA or tax attorney before filing your tax return to confirm income/tax treatment and deductions.

Helpful related pages on this site:

Real-world example (typical scenario)

A neighborhood café received a PPP loan of $30,000 during a declared emergency. To pursue full forgiveness the owner kept detailed payroll ledgers and used $19,000 (63%) for payroll during the 24-week covered period, and the remainder for rent and utilities. They submitted payroll tax returns, bank statements showing payroll deposits, lease invoices, and utility bills. The lender approved forgiveness after verifying the documentation; the café avoided repayment and retained staff.

In my practice advising small business owners, the most common success factor is early organization: tracking each expense the moment the check clears and reconciling payroll and vendor payments monthly.

When forgiveness is not available — alternatives

If a particular disaster loan is not forgivable, consider these options:

  • Ask the lender for forbearance or modified payment schedules.
  • Explore state or nonprofit grants targeted at disaster recovery.
  • Prioritize renegotiating leases and vendor terms to reduce cash burn.

See our guide on Emergency Relief Loans: How Short-Term Government Programs Work for additional context (internal link).

Final recommendations and disclaimer

Forgiveness can deliver essential relief, but it is program-specific and documentation-heavy. Start early, retain detailed records, work with your lender, and consult a tax professional before claiming tax benefits.

This article is educational and does not replace legal, accounting, or tax advice for your unique situation. For official program rules and current processing steps, refer to the U.S. Small Business Administration (sba.gov) and the Internal Revenue Service (irs.gov), and speak with your CPA or attorney.