Get answers to some of your big questions about how PPP loan forgiveness is calculated for small business owners.
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What small business owners need to know about PPP loan forgiveness

Last Updated: 8/9/2020


As of June 4, the Small Business Administration had approved 4.5 million Paycheck Protection Program (PPP) loans, with an average loan size of $113,228. 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?

The primary goal of PPP loans is to keep employees of small businesses on the payroll without causing an undue burden for their employers. The current rules governing PPP loans were created by the CARES Act on March 27, 2020, and updated by the Paycheck Protection Program Flexibility Act June 4, 2020. They specify that PPP loans may be forgiven if the loan is spent on payroll expenses within a 24-week “Covered Period” after receiving the loan. The covered period for those expenses cannot extend beyond December 31, 2020.


Important things to note:

  • The PPP initially specified an eight-week Covered Period when it was created by the CARES Act. That period has now been extended, but any company may use an eight-week period instead of 24 weeks to calculate forgivable expenses.
  • The deadline for filing a PPP loan application was August 8, 2020.



So, there are three big requirements to keep in mind to determine whether a PPP loan may be forgiven:


  1. The funds from a PPP loan must be spent within the 24-week Covered Period. The Covered period may either begin the date the loan was received, or employers can start calculating expenses using the “Alternate Payroll Covered Period”, which starts at the beginning of the first payroll cycle after the loan is received. See more on this below.
  2. PPP loan borrowers should spend at least 60% of the loan amount on payroll costs. However,  employers will remain eligible for partial forgiveness even if they do not spend at least 60% of the loan funds on payroll costs. The remaining 40% 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. For example, if full-time equivalent employee headcount is not restored by December 31, 2020, there may be penalties (although there are a few exceptions, detailed below). 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?

There are two applications available for small business owners to use to apply for PPP loan forgiveness. The SBA updated its PPP loan forgiveness application and accompanying guidance on June 16, 2020. It is similar to the initial 11-page version of the form, but it does not contain all of the instructions in the new five-page format. Other updates include:


  • All borrowers will now have the option to use a 24-week Covered Period. If loans originated prior to June 5, 2020, loan recipients can elect to use the initial 8-week Covered Period. The updated application instructs the borrower to choose their Covered Period — either eight or 24 weeks.
  • Health insurance costs for S corporation owner-employers cannot be included when calculating payroll costs nor are they eligible for forgiveness.
  • Retirement costs for S corporation owners are eligible costs. Clarification issued on June 22, 2020 from the SBA explained that the employer portion of retirement plan funding for owner-employees of S-Corporations and C-Corporations is now capped at 2.5 months’ worth of the 2019 contribution amount.
  • Prior to this latest guidance, owner compensation was limited to eight weeks’ worth (8/52) of 2019 net profit up to $15,385. PPP loan borrowers using the 24-week Covered Period can now include 2.5 months’ worth (2.5/12) of 2019 net profit up to $20,833.
  • Borrowers don’t have to wait until December 31, 2020 to apply for forgiveness to use safe harbors for excluding salary and hourly wage reductions and reductions in the number of FTE employees from loan forgiveness reductions. Safe harbors can be applied for on the date the loan forgiveness application is submitted.
  • Payroll costs including salary, wages, and tips are still capped at $100,000 of annualized pay, but now instead of a max of $15,385 per individual ($100,000/52 x 8), the new maximum forgiveness cap $46,154 ($100,000/52 x 24) per employee for 24 weeks.

The SBA also released the PPP Loan Forgiveness Application Form 3508EZ (Form EZ) at the same time. The EZ Form is a simplified version of the application and is an option for PPP loan recipients who are able to certify they have met any one of the following conditions:


  1. They are sole proprietors, independent contractors, or self-employed individuals with have no employees.
  2. They did not reduce the salaries or wages of their employees by more than 25% and did not reduce the number or hours of their employees.
  3. They experienced reductions in business activity as a result of health directives related to COVID-19 from the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, the Occupational Safety and Health Administration, or standards of sanitation, social distancing, and any other work or customer safety requirement related to COVID-19 and did not reduce the salaries or wages of their employees by more than 25%.

When can I apply for loan forgiveness?

Employers can apply for forgiveness at any time on or before the loan maturity date. However, if an employer applies for forgiveness before the end of the Covered Period and has reduced any employee’s salaries or wages by more than 25 percent, the employer will need to account for the excess salary reduction for the full 8-week or 24-week Covered Period. Consult your accountant or tax advisor for any disadvantages to applying for loan forgiveness early.


When does the PPP forgiveness period begin?

The new SBA guidance gives business owners two options for calculating payroll expenses: 1) They can use the Covered 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 for when the Covered Period may begin. 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 Covered Period that begins 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 Covered 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. Note: Healthcare costs paid on behalf of owner-employees of S-Corporations are not eligible for forgiveness.
      • Payment of retirement benefits. Note: The employer portion of retirement plan funding for owner-employees of S-Corporations and C-Corporations is now capped at 2.5 months’ worth of the 2019 contribution amount.
      • 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 60/40 forgiveness rule: 60% of eligible expenses should be used to cover payroll, benefits, and other forms of employee compensation. If less than 60% of the loan amount is spent on payroll during the Covered Period, then the loan may only be eligible for partial forgiveness. If an employer chooses, up to 40% 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 Covered 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.
    • Or, if you prefer, you have the option to assign 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.
  • 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 period preceding the loan, loan forgiveness will be reduced by the ratio of FTEs during those two periods. Exceptions to these headcount reduction penalties may be made if:


  • Employees who turned down rehiring at the same wage and hours
  • Employers are unable to find or hire qualified workers
  • A business is unable to restore business operations due to COVID-19 related operating restrictions.

For the purposes of PPP forgiveness, an employer has until December 31, 2020 to build up their PPP numbers to match the period preceding the loan.


  1. Calculate the reduction in payroll costs: If your payroll expenses decrease by more than 25% during the 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 Covered Period, and another for the period from January 1, 2020 through March 31, 2020. If the average during the Covered 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 US 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?

A borrower has up to five years to pay off any portion of a PPP loan that’s not forgiven. 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 the 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 received a PPP loan and repaid 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?

The deadline for PPP loan applications was August 8, 2020. 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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