Paycheck Protection Program Loan Forgiveness

Dear Clients and Friends,

So, your Paycheck Protection Program (PPP) loan was received. One loan officer described these loans as “groans”: a combination of a loan and a grant. But what should you consider doing now to maximize the “groans”, more technically your loan forgiveness?

As a reminder, forgiveness of your PPP loan depends largely on whether you use the money to pay forgivable expenses. These include (1) payroll costs (if you are self-employed, these costs include the net profit amount from your business, as reported on your 2019 tax return), (2) interest payments on mortgages incurred before February 15, 2020, (3) rent payments on leases dated before February 15, 2020, and utility payments under service agreements dated before February 15, 2020. However, according to the Small Business Administration (SBA), not more than 25% of the forgivable loan amount (the amount of the loan used to pay forgivable expenses) may be attributable to nonpayroll costs. In other words, at least 75% of the loan must be used for payroll costs.

Trap: Remember that the calculations of expenses used to determine the loan amount were for a longer period than the eight-week period allowed for calculating the loan forgiveness amount. Be careful to properly incur the allowable expenses during the eight-week period.

Some tips to help you meet these requirements include:

  • Set up a separate bank account for PPP funds, or deposit funds into your business savings account and transfer the money to checking and payroll accounts when needed. If you do not have separate payroll accounts, be especially sure to keep careful
  • Do a payroll projection. If you feel that 75% of the loan will not be used for payroll, consider modifying your payroll periods (from semimonthly to weekly, for example) or paying out bonuses toward the end of the eight-week
  • For mortgages, leases, and utilities, make sure you have back up to show that the obligations arose prior to February 15, 2020.
  • If paying by credit card expenses that are includable in the PPP calculations, pay that portion by the end of the eight-week


Be careful with the number of employees and salary levels. Make sure these numbers are accurate. For the eight weeks from the loan, if your average number of full-time equivalent employees per month is less than the average during one of two base periods, the forgivable loan amount will be reduced. The base period is either (1) February 15, 2019 through June 30, 2019, or (2) January 1, 2020 through February 29, 2020. Choose the period that produces the best result.

Trap: Your forgivable loan amount will be reduced if salary levels are cut by more than 25 percent. For each employee who earns less than $100,000, you compare total salary paid during the eight-week period to with that employee’s salary during the most recent full quarter. If the reduction is greater than 25 percent, a corresponding reduction must be made to the loan forgiveness amount. Note that this test requires the business to look at every employee individually.

Fix the Trap: If you have already laid off or furloughed workers, try to restore employee headcount and salary levels by June 30, 2020. If you do so, any headcount and salary reductions that occurred between February 15, 2020 and April 26, 2020 will be ignored. You do not have to rehire the same employees and the rehired workers do not have to perform their customary work duties.

Trap: Be careful with labor and employment laws when rehiring employees.

Record Keeping and Backup is Key. Ultimately, you must show the bank the loan was used for eligible expenses and that the expenses meet the percentage requirements above.

Consider creating an ongoing spreadsheet with backup to demonstrate:

  1. Employee headcount
  1. Payroll tax filings (both federal and state).
  1. Mortgage documents, leases, and utility
  1. Cancelled checks and payment
  1. Bank statements for the separate account used to pay forgivable If you did not set up a separate bank account, include copies of other bank statements with forgivable expenses highlighted to support the Electronic Funds Transfer (EFT) payments.


Applying for Forgiveness. You must wait until at least eight weeks after receiving your PPP loan before applying for forgiveness. At that point, an authorized representative of your business will need to certify that (1) the documentation presented is true and correct and (2) the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on a covered rent obligation, or make covered utility payments. Once the bank receives your loan forgiveness application, it has 60 days to review and either approve or deny it.

If, for some reason, only a portion of the loan is forgiven, you will need to fulfill all remaining payment obligations. The unforgiven portion of the loan will be subject to a two-year payback with a 1% interest rate. Fortunately, no payments will be due for the first six months (although interest will continue to accrue). fu addition, no collateral or personal guarantee is required, and there are no prepayment penalties.

Final Trap: The Internal Revenue Service has announced that while the forgiven amount of the PPP loan is not taxable (CARES Act§1106(i)) the otherwise deductible expenses paid for with the forgiven part of the “groan” are not deductible. Some argue that this loss of deduction is contrary to the intent of the CARES Act and the PPP loans. It remains to be seen if the IRS, Congress, or ultimately the Courts will change or clarify this deductibility issue.

This letter is an overview only and not specific legal advice. If you have any questions regarding your loan, please do not hesitate to contact us. Be safe.

Share on: