By now a number of our clients have received PPP Loan funds. Once you have the loan, your focus turns to using it to maximize forgiveness. The forgiveness application and instructions were released by the SBA late on May 16th. The application and instructions provide some additional needed guidance.

Expenses that Qualify for Forgiveness. Loan proceeds must be paid or incurred on qualifying expenses during an 8-week period after you received the loan. Qualifying expenses include:

  • payroll costs (wages, salaries, bonuses, commissions, or other cash compensation up to $100k per employee annualized, employer portion of state and local taxes, employer portion of retirement benefits, and employer portion of health care benefits)
  • rent expense (lease signed prior to February 15, 2020)
  • interest on a real property mortgage (debt incurred prior to February 15, 2020)
  • utilities (power, water, gas, transportation, telephone, internet) (service began prior to February 15, 2020)

The PPP Forgiveness Application clarified a couple things about the above rules.

  1. 8-Week Period. While the 8-week period normally begins on the date the loan was funded, borrowers that run payroll every two weeks (or more frequently) have the choice to start the 8-week period beginning on the first day of its first pay period following loan disbursement. 
  2. Real or Personal Property Leases. Lease expense includes leases for real property (your space) and leases for personal property (e.g., computers and equipment)

Also, at least 75% of qualifying expenses must be for payroll costs (i.e., not more than 25% of the forgiven amount may be spent on things other than payroll costs).

We believe this 75/25 rule will be applied strictly by banks. If you can, give yourself a cushion in case some of your payroll costs aren’t allowed. There are discussions about adjusting this rule in upcoming legislation, but that hasn’t been passed yet.

Reductions in Forgiveness. Loan forgiveness may be reduced in certain circumstances (even if you spend it entirely on qualifying expenses). Your forgiveness can be reduced in two ways:

  • Drop in FTE Count. This one is complicated. Your forgiveness will only be a percentage of qualifying expenses if your headcount during the 8-week period is less than certain historical measurement periods. The percentage is determined by dividing your average number of monthly full-time equivalent employees (FTE) during the 8-week period by the lesser of:
    • average monthly FTEs from Feb 15, 2019 to June 30, 2019; or
    • average monthly FTEs from Jan 1, 2020 to Feb 29, 2020.
  • Salary Reductions. Forgiveness is also reduced by an amount equal to aggregate salary reductions in excess of 25% of the employee’s salary for the most recent full quarter (only applies to staff earning less than $100,000 per year in 2019 on an annualized basis).
  • Restored Headcount and Salaries. Both of these reductions can be avoided if headcount and salaries are restored by June 30, 2020.

The PPP Forgiveness Application clarified a few situations where reductions in headcount will not count against you. 

  1. Employee Electing Not to Return. If an employee is laid off and then elects not to return to work during the 8-week period, this reduction in headcount will not count against you for purposes of the calculation above. To qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower.
  2. Employee Terminated for Cause. An employee terminated for cause will not count against you for determining your forgiveness. Cause” isn’t defined, unfortunately.
  3. Voluntary Resignations. An employee that voluntarily resigned also will not count against the employer for purposes of determining forgiveness.

Timing of Qualifying Expenses. The PPP Forgiveness Application made clear that qualifying expenses include expenses either incurred OR paid during the 8-week period. This means that you can include payroll and other qualifying expenses that accrue during the 8-week period even though not paid until after the 8-week period. 

For example, If you normally run payroll monthly on June 30 and your 8-weeks ends June 15, then the payroll costs incurred from June 1 to June 15 apply toward forgiveness even though not paid until June 30. 

This applies to other qualifying expenses as well. For example, if your 9-week period begins May 15, then half of your rent payment made May 1 can be applied toward forgiveness.

Based on this, it should generally not be necessary to adjust the timing of payroll. You may still pay bonuses to use up any portion of your PPP loan. 

Treatment of Amounts Not Forgiven. If any portion of your PPP Loan isn’t forgiven (whether because you didn’t spend it on qualifying expenses or your amount eligible for forgiveness was reduced), the remaining amount becomes a regular loan due payable monthly over two years bearing interest at 1%. Also, payment is deferred for six months.

You may prepay this loan without penalty.

Tax Treatment. Loan amounts do not count as revenue and forgiven amounts do not count as income to the borrower. Also, the amounts spent on qualifying expenses do not count as deductions. This is spelled out in a new Revenue Notice, but really is a restatement of existing tax law.

There are discussions about adjusting this rule in upcoming legislation to make expenses deductible, but that hasn’t been passed yet.

Documenting and Requesting Forgiveness. Required forgiveness documentation is spelled out expressly on Page 10 of the PPP Forgiveness Application. It is long and thorough. Your bank may have additional specific rules so be sure to check with them.

You may consider depositing your PPP Loan in a separate account just to facilitate tracking. Whether or not you deposit into a separate account, you should build your file documenting expenses as you go. Save all invoices, check stubs, copies of canceled checks, bank statement reports, payment receipts, etc. as called for by the PPP Forgiveness Application. Build a spreadsheet totaling the amounts spent, the category of expenses, and the date of the expense or when the expense was incurred. 

You’ll need to maintain these records for at least 6 years following forgiveness.

Time to Request Forgiveness. The PPP Forgiveness Application sets a deadline of October 31, 2020 for requesting forgiveness. However, we have heard that some banks are setting deadlines much earlier than that — in some cases asking that forgiveness be requested within 14 days of the end of your -week period. Even if your bank doesn’t provide a specific date, to minimize accrued interest (which is not eligible for forgiveness), you’ll want to submit for forgiveness as soon as possible. To provide the documentation required by banks, it may be necessary to wait until your next payroll tax returns are filed with the IRS and state agencies. 

Banks must make a decision regarding forgiveness within 60 days of receiving requested documentation.


Example. To understand these rules, let’s look at an example. 

Assume Cool Agency received a PPP Loan of $200,000 on April 15. At the time of the loan application, it expected to be able to spend all of the money on qualifying expenses. At the end of the period though, it had only spent $190,000.

Since the onset of COVID-19, Cool Agency had some headcount and salary adjustments. During the 8-week period Cool Agency averaged 9 FTEs. From Feb 15, 2019 to June 30, 2019 Cool Agency averaged 10 FTEs. From Jan 1, 2020 to Feb 29, 2020 Cool Agency averaged 12 FTEs. Cool Agency also recently made some salary adjustments. Four of Cool Agency’s employees that were on track to earn $80,000 per year were reduced to annual salaries of $50,000

Cool Agency is now working through its actual expenses and applying the above rules. 

Qualifying Expenses. Cool Agency’s expenditures during the 8-week period totaled $190,000. Those expenses went $160,000 (~85%) to payroll costs and $~30,000 (15%) to rent, satisfying the requirement that at least 75% of expenditures go toward payroll costs.

Reductions in Forgiveness. 

  • Drop in FTE Count. Using the formula, Cool Agency would divide 9 by 10 (headcount in the lesser of the two measurement periods) resulting in 90%. Because Cool Agency had a reduction in headcount compared to the historical measurement periods, its forgiveness is also reduced to 90%. So, instead of $190,000 of forgiveness, it only is eligible for 90% of that, or $171,000.
  • Salary Reductions. Cool Agency’s salary reductions (from $80,000 to $50,000) also affect forgiveness. A 25% reduction would have been to $60,000 so the excess reduction ($10,000 per employee) counts against forgiveness. The total of all the excess is $40,000. This is subtracted from the forgiveness amount calculated above ($171,000) bringing the total amount eligible for forgiveness to $131,000.
  • Restored Headcount and Salaries. Cool Agency was fortunate enough to sign a client onto a long-term project before the end of June. It was able to hire one person to the team and restore salaries for the four affected employees to $70,000 per year. Based on these two moves, it eliminated the forgiveness reductions of the above two rules.

Timing of Qualifying Expenses. Cool Agency runs payroll monthly at the end of the month. Since its 8-week period began April 15, its payroll expenses from April 15-April 30 qualified for forgiveness, as did its entire payroll for the month of May. For June, Cool Agency incurred 15 days of payroll expenses before the end of its 8-week period on June 15. But, since it paid those expenses in its first payroll run after the 8-week period, it is able to count the first 15 days of June’s payroll toward forgiveness. 

Treatment of Amounts Not Forgiven. Cool Agency was only able to spend $190,000 during the 8-week period on qualifying expenses. The $10,000 remaining automatically becomes a 2-year loan at 1%. Cool Agency held on to the extra funds for a few weeks (no payments were due in any case for 6 months) until it felt comfortable that the new project was going to happen and then simply returned the excess funds (and paid accrued interest).

Tax Treatment. Cool Agency does not recognize taxable income on the forgiven amount or the portion not forgiven. However, the amounts spent on qualifying expenses do not count as deductions making Cool Agency a bit more profitable for the year (with a higher tax bill)

Documenting and Requesting Forgiveness. Cool Agency built a spreadsheet documenting the dates and amounts of all expenses during the 8-week period. Every expense incurred was backed by an invoice, receipt, canceled check, bank statement, or similar documentation meeting the requirements of the PPP Forgiveness Application.

Shortly after the 8-week period, Cool Agency filed its payroll reports for the quarter ending June 30. With those reports, its spreadsheet, bank statements, invoices, and receipts, it submitted its forgiveness package to the bank. Because Cool Agency was organized, it received confirmation that $190,000 was forgiven in just 30 days.


Last Update: May 28 2020 8:45 a.m.