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What small business owners need to know about PPP loan forgiveness

Last Updated: 5/26/2020


As of May 23, the Small Business Administration had approved 4.4 million Paycheck Protection Program (PPP) loans, with an average loan size of $116,000. That’s $511 billion in funding — and, depending on how the money is spent, many of those small business loans could be forgiven.


Small businesses have a huge incentive to follow the requirements from the Small Business Administration (SBA) and the Department of Treasury, but there are a lot of details to keep in mind. So, let’s start at the beginning.


What expenses do PPP loans cover?

PPP loans were designed to cover up to eight weeks of employment expenses for small businesses. The primary goal was to keep employees of small businesses on the payroll without causing undue burden for their employers.


So, there are three big requirements to keep in mind:


  1. The funds from a PPP loan must be spent within roughly eight weeks of when the loan was made, depending on your payroll cycle.
  2. A PPP loan may only be wholly forgiven if at least 75% of it is spent on payroll-related expenses. The remaining 25% can only be spent on things like rent, mortgage interest, or utility bills.
  3. Employers generally need to maintain their employee count and the amount of money they spend on payroll during the duration of the forgiveness period.


If a PPP loan recipient doesn’t meet one of those requirements, the amount that can be forgiven will decrease. We recommend talking to your bookkeeper or accountant to make sure you’re calculating your expenses correctly, but here’s more detail on how it works.


How do you apply for loan forgiveness?

The SBA issued its PPP loan forgiveness application and accompanying guidance on May 15, 2020. After the eight week period is complete, small business owners can complete the application and file it with their lender. The deadline for submitting a loan forgiveness application is October 31, 2020.


When does the eight-week PPP forgiveness period begin?

The new SBA guidance gives business owners two options for calculating payroll expenses: 1) They can use the eight week period immediately following the issuance of the loan; or 2) If their pay periods don’t line up exactly with the date they received their loan, business owners may use the Alternative Payroll Covered Period, which begins the first day of the first new pay period following the PPP loan disbursement date.


In its forgiveness application, the SBA offered an example that might be helpful. If a borrower “received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20.” The SBA has said that it considers payroll costs to be paid on the day that paychecks are distributed (or when the payroll-related ACH credit transaction occurs).


Non-payroll expenses

While payroll expenses may be based on the Alternative Payroll Covered Period, businesses may also seek forgiveness for expenses related to mortgage interest, rents, and utilities. Any of these non-payroll expenses must be either incurred or paid within the eight week period immediately following the date the loan was disbursed — not  the Alternative Payroll Covered Period.


How should I track PPP loan-related expenses?

Being able to track your expenses during this time period is essential if you want to apply for forgiveness. To track PPP loan-related expenses, the American Institute of CPAs recommends that small business owners or their accountants take the following four steps:


  1. Track total eligible costs: Keep a record of the following costs that were incurred and paid during the 8-week period following loan funding:
    • Payroll costs:
      • Salaries, wages, commissions or similar
      • Cash tips or the equivalent
      • Payment for leave
      • Payments for group health care benefits, including group health care coverage
      • Payment of retirement benefits
      • Payment of state and local taxes assessed on the compensation of employees
      • Tipped wages, bonuses, and hazard pay forgivable:
        • The Department of Treasury has stated that additional wages paid to tipped employees are eligible for forgiveness for the covered period. They add that employers should keep a record of those tipped wages or offer “a reasonable, good-faith, employee estimate”
        • And employee’s hazard pay or bonuses are also eligible for loan forgiveness because they are considered supplementary to salary or wages, and therefore a form of compensation. The exception here would be if the additional wages or bonuses pushed the employee over the threshold for the eight-week period.
    • Mortgage interest and rents:
      • Mortgages in effect prior to 2/15/2020
      • Rent under a leasing agreement in effect prior to 2/15/2020
    • Utilities:
      • Payment for expenses such as electricity, gas, water, transportation, telephone, or internet access.
      • Service must have been established prior to 2/15/2020
  2. Adhere to the 75/25 forgiveness rule: At least 75% of eligible expenses must be used to cover payroll, benefits, and other forms of employee compensation. If less than 75% of the loan amount is spent on payroll during the eight week period, then the amount that can be forgiven is reduced accordingly. If an employer chooses, up to 25% of the loan may also be spent on mortgage interest, rent and utility costs. Any other business expenses, such as the cost of equipment, marketing, or inventory are not eligible for forgiveness under the PPP.
  3. Calculate your number of FTEs: To have a PPP loan totally forgiven, a small business must also retain its workforce. That means it must have at least as many Full-Time Employees (FTEs) on its payroll for the eight week period of the loan that it had during one of the following periods:
    • Your choice of:
      • February 15 to June 30, 2019
      • Or January 1 to February 29, 2020.
    • Seasonal springtime businesses should use the range from February 15 to June 30, 2019.

To calculate your number of FTEs, the SBA’s forgiveness application specifies the following approach:


  • Each employee who works 40+ hours per week or earns their normal full time salary counts as one employee.
  • For each employee who worked less than 40 hours per week, divide their average number of hours worked by 40 and round to the nearest tenth.
    • For example, an employee who averaged 30 hours a week would count as .8 of an FTE after dividing 30 by 40 and rounding up from 0.75.
  • Add up your number of FTEs

If your number of FTEs during the period of the loan is less than the number you had during the previous eight week period, loan forgiveness will be reduced by the ratio of FTEs during those two periods.


  1. Calculate the reduction in payroll costs: If your payroll expenses decrease by more than 25% during the eight week period of the loan, you may lose the ability to have some of your loan forgiven.Any potential reduction in wages is analyzed by looking at each employee separately. You should compare their wages by calculating an average annualized salary (or cumulative hourly wages for each hourly employee) for the eight-week covered period, and another for the period from January 1, 2020 through March 31, 2020.If the average during the eight-week period after the loan is less than 75% of the average during the previous quarter, a reduction in forgiveness likely applies.

When the application for loan forgiveness is completed, documentation such as payroll reports, payroll tax returns, canceled checks, receipts, account statements, or other proof of payment may be required.


Check with your payroll provider to see if any reports are available to itemize and classify these expenses to meet the terms of the CARES Act, FFCRA, or PPP.



PPP loan forgiveness calculator

This calculator can help if you’d like more help getting your PPP-related expenses organized.


How much of my PPP loan can be forgiven?

According to the SBA and the U.S. Department of the Treasury, up to 100% of a PPP loan may be forgiven if all these conditions are met. Forgiveness includes both the principal and interest on the loan.


What if your PPP loan isn’t forgiven?

You will be required to pay back any outstanding portion of your loan within two years. The interest rate specified by the PPP program is just 1% per year, so it’s relatively inexpensive debt. At the same time, it’s worth making the effort to document your expenses because loan forgiveness is a much better outcome.


How does the SBA determine eligibility for a PPP loan?

Although the CARES Act does suspend the ordinary requirement that borrowers must be unable to obtain credit elsewhere, you’ll still need to certify “in good faith” that the PPP loan request is necessary for you to maintain ongoing operations — or get back up and running. Now this means that small business owners must confirm their need for the loan by certifying that the lack of funds would be “significantly detrimental” to their business.


For loans of $2 million and less, the SBA has offered additional guidance to say that it will consider owner certification that the loan was “necessary to support ongoing operations” to have been made in good faith. There have been some suggestions that this means that there will be no forgiveness reviews of loans of this size, and that has not specifically been stated by the Administration, so it’s important to continue with compliance and documentation efforts. The SBA determined that this safe harbor is appropriate because “borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment.”


What if an employee doesn’t return to work?

If employers have made a good faith effort to rehire a worker, but that employee can’t or won’t come back, the SBA has clarified that employers generally can exclude that employee as part of a reduction in full-time equivalent employee headcount. Here’s how this works:


  1. the employer made a good-faith, written offer to return or rehire the employee (or restore their reduced hours) during the covered period or the alternative payroll covered period
  2. the offer was for the same salary or wages and same number of hours as earned by the employee in the last pay period before the furlough, layoff, or reduction in hours
  3. the offer was rejected by the employee
  4. the employer maintained records documenting the offer and its rejection, and
  5. the employer informed their state unemployment insurance office within 30 days that the employee has rejected their offer of reemployment


What if your business returns the loan? Could you still be eligible for the Employee Retention Credit?

Yes. An employer that receives a PPP loan and repays the loan by the safe harbor deadline of May 18, 2020 will still be eligible for Employee Retention Credit if they meet the other eligibility requirements.


What if my business hasn’t applied for a PPP loan yet?

You can still apply by completing the Paycheck Protection Program loan application and submitting it with the required documentation to an approved lender. Here’s a downloadable copy of the application and a list of lenders participating in the Paycheck Protection Program by state. And we’ve broken down how to calculate your average monthly payroll costs for your PPP loan.


We’ll continue to update this article and our COVID-19 resource center as new developments are made public.



This article is for informational purposes only and should not be relied on for, tax, legal or accounting advice. If you have questions about how the CARES Act impacts your business, please consult your legal advisor or tax professional, or review detailed guidance about PPP payroll cost reports from the Treasury Department and from the SBA.

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