Payroll Protection Program Loan Forgiveness


Congress designed the Paycheck Protection Program (PPP) to help businesses maintain their workforce, and as a result, maintain employee paychecks.  In addition, the PPP allows employers to receive funds to cover a designated amount of other qualified expenses, such as payroll and others we will discuss here. To the extent your business follows the rules for PPP loan forgiveness, you may eventually apply for loan forgiveness. This article discusses the procedures related to SBA loan forgiveness.

(The various aspects of the Paycheck Protection Program discussed in this article relate to the initial CARES Act legislation.  Certain portions of the CARES Act were amended and updated by Congress in June 2020.  The updates passed in the Paycheck Protection Program Flexibility Act of 2020, (the “PPP Flex Act” or the “Flex Act”) allowed additional support for small businesses. Please see our article discussing this legislation here.

What expenses are eligible for PPP loan forgiveness?

A total of 75%* of the forgiven loan amount must be spent on payroll costs, while the remaining amount may be spent on other qualified expenses. Because of this rule, the payroll spending ultimately controls the overall amount to be forgiven. For example, consider a loan amount of $130,000.  If the payroll expenses total $75,000 only $25,000 of other qualified expenses will count and the last $30,000 of the loan will not be forgiven. See further discussion below related to the potential portion of the PPP loan that is not forgiven.

– Payroll expenses

Payroll expenses include gross pay, state employer taxes, group health insurance premiums, retirement benefits, and vacation and leave pay. Note that each employee’s gross pay is only counted to the extent that it does not exceed $100,000 on an annual basis.  The calculation of payroll costs includes the annual salary up to $100,000 and any excess over $100,000 in annual salary does not count in the calculation of payroll expenses. As mentioned above, payroll expenses must constitute no less than 75%* of total qualified expenditures in the forgiveness request. “Will the entire PPP loan be forgiven?” See below.

– Other qualified expenses

Business rent, mortgage interest, and utilities are all considered other qualified expenses under the Paycheck Protection Program.  These other qualified costs cannot exceed 25%* of all qualified expenditures in the forgiveness request. Additionally, contracts for these items must have been in place before February 15, 2020 to be eligible for the forgiveness calculations.  Here are some examples:

  • “Mortgage” interest includes interest paid on the mortgage of your business real or personal property. Thus, auto loans for business vehicles would qualify as well as any interest on an auto loan that you use to make business related deliveries.
  • Prepayments of rent or mortgage principle do not count for the forgiveness application.
  • Utilities include phone, internet, gas, water, electricity, etc.

How quickly do I have to spend the PPP Loan Proceeds?

– Eligible payroll costs spending

After you receive your PPP loan, the Paycheck Protection Program requires that you spend the loan proceeds within an 8-week period.  This 56-day period is known as the default Covered Period and generally starts on the loan disbursement date.

As an alternative, borrowers with biweekly payrolls may elect to use a Covered Period that begins on the first day of the first pay period following the loan disbursement date. This is referred to as the Alternative Payroll Covered Period.  The benefit to the borrower is that the Alternative Payroll Covered Period will align naturally with the borrower’s payroll reporting.  Using the Alternative Payroll Covered Period makes the documentation step much easier.

Under either method, the days of the last pay period that fall within the selected covered period will count as long as the payroll is paid on the usual date. This holds true even though the actual date of payment to the employees falls after the end of the 56-day time period.

An example:

    A borrower received the PPP loan on April 20. The borrower’s next pay period began on April 26.  If this borrower elects to have a covered period for payroll beginning April 26, the last day of the Alternative Payroll Covered Period is then June 20. The two-week payroll ending June 20 will count for loan forgiveness if the two-week payroll is paid according to the business’ normal payroll payment schedule, even though that payment is after June 20.

    Without the election of the Alternative Payroll Covered Period, the borrower would have to utilize parts of 5 individual pay cycles. The first pay cycle would be the last 6 days of the pay period ended April 25. The next 3 pay periods would fall within the Covered Period of April 20 to June 14.  However, only the first 8 days of the pay period ending on June 20 would fall within the Covered Period.

    The total number of days in the covered period for payroll costs is 56 days either way. However, the documentation required using the default Covered Period payroll costs is much more difficult to compile and to calculate than the documentation requirements under the Alternative Payroll Covered Period.

– Eligible nonpayroll costs spending

The default Covered Period of 56 days beginning on the date of loan disbursement applies to all eligible nonpayroll costs. These costs must be

  • paid during the Covered Period;
  • or incurred during the Covered Period and paid on or before the next regular billing date.  This applies even if the billing date is after the end of the Covered Period.

A separate bank account for the PPP loan funds is helpful for tracking expenditures and maintaining appropriate documentation.

How do I apply for PPP loan forgiveness?

After the end of your 8-week covered period, you will want to apply as soon as possible for the PPP loan forgiveness. The SBA form can be found at this link which is also included at the end of this article. You will want to gather your documents during the covered period as you incur forgivable expenditures.  Doing this will allow you to more easily complete your application for forgiveness.

The application must be submitted to the lender no later than October 31, 2020. According to the CARES Act, the lender must render a PPP loan forgiveness decision within 60 days of the PPP loan forgiveness application

What documents do I need to support the PPP loan forgiveness application?

Documentation needed for PPP loan forgiveness includes:

  • Payroll Documentation – We recommend preparing a schedule listing employees, their hours, gross payroll, and other qualified payroll amounts. This schedule should be supported by:
        • Payroll tax filings reported to the IRS;
        • State income, payroll, and unemployment insurance filings; and
        • Although not mentioned in the CARES Act, payroll registers and payroll service reports would certainly come in handy.

      The reports should be for all reporting time periods within which the covered period and base period falls. This will likely be the 2020 Q1 and 2020 Q2 reports.

    • Payment Support – Canceled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments. Because mortgages, leases, and utility agreements must have been in place on February 15, 2020, a copy of the related agreements, mortgage documents, and lease agreements should be included.

    Note that PPP loan forgiveness is not automatic.  Borrowers must request forgiveness by submitting documentation along with a completed Paycheck Protection Program Loan Forgiveness Application, SBA form 3508 (6/20).

    If you have questions on the documentation, forgiveness process, or loan application, please contact us for consultation.

    What certifications must I sign to apply for PPP loan forgiveness?

    There are several statements you must initial in the application for Paycheck Protection Program loan forgiveness. These essentially require the borrower to certify that funds were used during the appropriate covered period in a lawful manner for authorized expenses. For a detailed list of the required Representations and Certifications see SBA Form 3508, PPP Forgiveness Application.

    Will the PPP loan be forgiven completely?

    Generally, PPP loans are expected to be forgiven be forgiven if qualified payroll equals or exceeds 75%*, the remaining balance is for other qualified expenses (as explained above), and adequate supporting documentation is provided.  However, a reduction in the loan forgiveness can occur for two reasons:

    1. Under relatively convoluted rules, a reduction in the number of full-time equivalent employees may lead to a reduction in covered costs eligible for loan forgiveness. Please see SBA Form 3508, PPP Forgiveness Application for the detailed computations that are required. The form also has two safe harbors that can simplify the computations. The time periods for the various FTE computations are on the form.

      We suggest you contact your lender to see exactly how they plan to apply the FTE provision.  As a reminder, the lender is the one who must rule on the PPP loan forgiveness amount before sending it on to the SBA.

      Note that you may count rehired employees if the rehire occurs before June 30, 2020. If you make a good faith written offer to rehire an employee at the same pay level and number of hours as prior to the initial layoff, you should not be penalized for the loss of that employee.  This special exemption only applies if the employee refuses the offer. The rules require you to notify the state unemployment office within 30 days of that rejection. You may also count as employees any individual who:

      1. Was fired for cause;
      2. Voluntarily resigned; or
      3. Voluntarily requested and received a reduction in hours.
    1. Also, a more than 25% reduction in the total salary or wages of any employee in any single pay period during 2020 will result in a reduced PPP loan forgiveness amount.  However, this does not apply to reductions for an employee who earns over $100,000 on an annualized basis. The rules provide an exemption for rehired employees.

    The overall covered payroll costs are not tied to each employee.  As a result, you should be able to avoid a reduction in forgiveness as long as you maintain both your employee count and overall payroll amounts, even by making new hires, and you do not reduce the pay of those who earn less than $100,000 annualized.


    The Paycheck Protection Program loans come with documentation requirements to request loan forgiveness. In addition, you may not decrease payroll or the count of full-time equivalent employees. By doing so, your business could be subject to a reduction in the loan forgiveness amount. Take effort to gather supporting documents as expenditures are made. Some of the items that will assist the lender in determining the forgiven amount include the following: schedules of amounts spent, bank statements, payroll registers, reports that summarize qualified amounts, and reports on employee headcount. A separate bank account for the PPP loan funds is helpful.

    * Update

    The Payroll Protection Program Flexibility Act of 2020 changed the percentage split between payroll costs and non-payroll costs from 75/25 to 60/40 to be eligible for full loan forgiveness.

    Meet the Author

    Michael specializes in meeting the tax compliance, projection, and planning needs of businesses, entrepreneurs, and business owners. He is Tax Partner in PW Associates, a firm that provides CFO and outsourced tax and accounting services. Michael has regional and small CPA firm experience and ran a sole practitioner tax practice for over 25 years.

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    This communication is provided by PW Associates, PLLC for educational and informational purposes only and is not intended, nor should it be construed as tax or legal advice.  The comments in this communication are based on our understanding of applicable rules and regulations as of May 31, 2020. 

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    Useful Links

    Paycheck Protection Program Loan Forgiveness Application – SBA

    FAQ Lenders-Borrowers Support – SBA

    Guide to the CARES Act – SBA

    PPP Overview –

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