By Raffi Yousefian | Published 03/26/2020; Updated 11/11/2020 11:04:52 AM

There is free money issued by the government, but you must navigate through a maze to get to it. You have a short amount of time, and the maze changes each time you think you’ve figured it out. 

We feel your pain, which is why we’ve drafted this post. Key word, drafted. We have been updating it every evening since March 25th, a couple of days before the CARES Act was passed. We’re hoping this post will summarize everything you need to know about the Paycheck Protection Program (PPP) and its loan forgiveness component. It is meant to be timeless and updated as soon as new legislation is passed or even discussed. Keep an eye out for the time stamp above to know when the post was last updated. 

On March 27, 2020, the CARES Act was signed into law. This piece of legislation, contained a special gift for small businesses, known as the PPP. Through this program, the federal government would issue nearly $660 billion in collateral free loans to small business employers between February 15, 2020 and August 8, 2020. We’ll walk you through the components. 

The “Loan”

The loan application was posted on 4/2/20 and can be found here, along with additional resources for borrowers and lenders from the Treasury. A small business employer includes:

  • For-profit business with less than 500 employees
  • 501(c)(3) and 501(c)(19) nonprofit organizations with less than 500 employees
  • Sole proprietors, self-employed individuals, and independent contractors with less than 500 employees

Restaurants, caterers, hotels, or other businesses operating under NAICS code 72, will be subject to the <500 employee limit by location. This is obviously very favorable for restaurant groups and hotel chains. 

The loan amount will be limited to the lesser of:

  •  The sum of:
    • average monthly payroll costs for 2019 or the 1-year period up to the date of the loan application times 2.5**, and;
    • any disaster loan that has been refinanced into a paycheck protection loan
  • $10 million.

It’s very important to understand the definition of payroll costs in this context. Payroll costs include:

  • For Employers:
    • Gross wages to employees
      • wages for employees in excess of $100k (annualized) must be excluded
      • wages for employees not living in the US must be excluded
      • includes officer’s compensation 
    • Self-employment income (including guaranteed payments) of partners in a partnership or LLC taxed as a partnership
    • Tips paid
    • Paid time off
    • Severance
    • Medical benefits
    • Retirement benefits
    • State and local taxes assessed on employee compensation (aka SUI)
  • For Sole Proprietors, Independent Contractors, and Self-Employed Individuals:
    • Self-employment earnings not more than $100,000 annualized, plus payroll costs from above if the individual has employees. Refer to Schedule C, line 31 of your 1040 to understand the calculation.  

*Payroll taxes are not included in payroll costs. This doesn’t mean you back out employee tax withholding from gross payroll, it simply means you don’t add the employer portion of Social Security and Medicare to the total of wages. 

**If you are seasonal, then the average monthly payroll cost is the average amount you paid from February 15, 2019 to June 30, 2019, or at your election March 1, 2019 to June 30, 2019. Under the interim final rule released on 4/28/20, seasonal employers may also elect to use any consecutive 12-week period between May 1, 2019 and September 15, 2019. 

The loans will be administered through the SBA’s 7(a) loan program and will have a maturity of 2 years (if made before June 5, 2020) or 5 years (if made after June 5, 2020 or made before June 5 but mutually agreed upon between lender and borrower), an interest rate of 1%, and will allow for a deferral period of greater than 12 months (explained later). The “credit available elsewhere” test that is normally applicable to SBA loans will be waived. 60% of the loan proceeds must be used to cover payroll costs (as defined above), the remainder can be used to cover mortgage interest, rent, utilities, interest on any other debt that was incurred before Feb 15, 2020, and refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020. 

To qualify, you must certify that:

(1) you were in operation during February 15, 2020;

(2) the uncertainty of current economic conditions makes necessary the loan request to support ongoing operations;

(3) acknowledge funds will be used to cover the expenses mentioned in the previous paragraph;

(4) you can provide payroll tax documentation to support your payroll calculations; and

(5) you do not have another substantially similar loan application pending during Feb 15-Dec 31;

Businesses that are ordinarily not eligible for SBA loans, are also not eligible for PPP loans. This includes real estate investment firms, firms involved in speculative activities, firms involved in lending activities, pyramid sales plans, foreign businesses, gambling businesses, private clubs, and other passive investment companies.

If you received an SBA EIDL loan from January 31, 2020 through April 3, 2020, you can still apply for a PPP loan. If your EIDL loan was not used for payroll costs, it does not affect your eligibility for a PPP loan. If your EIDL loan was used for payroll costs, your PPP loan must be used to refinance your EIDL loan. 

The lender must make a one-time, full disbursement of the PPP loan within ten calendar days of loan approval; for the purposes of this rule, a loan is considered approved when the loan is assigned a loan number by SBA. You will not have to make any payments towards principal or interest following the date of the disbursement of the loan until forgiveness is determined (explained later) or 10 months after the 24 week period following the loan (whichever is later). There will be no prepayment penalties, guarantee fees, or yearly fees. 

On May 13, 2020 the SBA clarified a few ambiguities. First, if a partnership received a PPP loan that only covered employee payroll costs and eligible operating expenses, and NOT partner compensation, the lender may increase the PPP loan amount to include appropriate partner compensation even if the loan had already been disbursed, assuming form 1502 has not been submitted to the SBA. Second, they extended the safe harbor repayment date (the date you can give the loan back if you decide you shouldn’t have taken it) from 5/14 to 5/18. Third, any borrower + affiliates receiving PPP loans with $2m or less in principal will be deemed to have made the required certification of loan necessity in good faith.

Now, that’s all great, 100% federally guaranteed loans at a very reasonable interest rate with an extended payment deferral period. 

But wait, it gets better!

Loan Forgiveness

These loans will be forgiven, thus classifying it as a grant, to the extent that payments from the proceeds of the loan are expended on the following, during a 24-week* period beginning on the date of the disbursement of the loan through December 31, 2020:

  • Payroll costs (must account for 60% of the amount forgiven) 
  • Mortgage interest on mortgage obligations incurred before 2/15/20
  • Rent on leases dated before 2/15/20
  • Utility payments under service agreements dated before 2/15/20

*This is considered the covered period. Borrowers who received loans prior to June 5, 2020, can elect an 8-week covered period instead. 

The 60/40 spending ratio requirement is a proportional limit on nonpayroll costs as a share of the borrower’s loan forgiveness amount, rather than as a threshold for receiving any loan forgiveness. Alternatively, the 24 -week period (related to payroll expenses only) can begin on the first day of the first weekly or biweekly pay period after the loan has been disbursed. This is referred to as the Alternative Payroll Covered Period and is meant to simplify the calculation of eligible payroll costs.

Payments of interest on business mortgages on real or personal property (such as an auto loan) are eligible for loan forgiveness. Interest on unsecured credit is not eligible for loan forgiveness because the loan is not secured by real or personal property. Although interest on unsecured credit incurred before February 15, 2020 is a permissible use of PPP loan proceeds, this expense is not eligible for forgiveness.

Utility payments for these purposes include electricity, gas, water, transportation, and telephone/internet on contracts that began before February 15, 2020. Other common utilities such as garbage collection or security monitoring may also be classified as a utility, but a borrower should confirm with their bank before including those amounts in their forgiveness amount. 

The amount of loan forgiveness requested for nonpayroll costs may not include any amount attributable to the business operation of a tenant or sub-tenant of the PPP borrower. For example, assume you rent space for $10k per month, then sublease 25% of that space for $2.5k per month, or get a $2.5 reimburse from another business who shares the space with you. Only $7.5k of the $10k would be eligible for forgiveness. Also, if you’re a home-based business, the amount eligible for forgiveness would be the same amount that you would use for the home office deduction on your 2019 or 2020 personal returns. Assume you work from home, pay $10k in rent over the 24 weeks, and have a home office (10% of your home) that is solely dedicated to your business. 10% of your rent will be eligible for forgiveness. 

Costs Paid or Incurred

To qualify for forgiveness, expenses must be paid or incurred during the covered period. Incurred means accrued, and paid means payment is issued. For example, if a payroll period covers 5/18 – 5/24, and payment is issued to employees on 5/27, then the expenses for this payroll are incurred between 5/18 and 5/24, and paid on 5/27. 

For expenses to be eligible for forgiveness, they must be either:

(1) paid during the covered period; or

(2) incurred during the covered period and be paid by its next regular due date (for non-payroll costs) or by the next regular pay date (for payroll costs).

For example, if you issued payment to employees during the 24-week period for work performed before the 24-week period, then this payment would qualify for forgiveness. However, payroll costs and nonpayroll incurred in the 24-week period but paid outside of the 24-week period must be paid on or before the next regular pay date or next regular billing date respectively. This means you could potentially prepay or pay overdue amounts for qualified nonpayroll costs and have the amounts forgiven. However, Treasury has clarified that advance payments of interest on mortgage obligations are not eligible for forgiveness.

It is important to remember that payroll costs include the employer portion of health benefits and retirement contributions. However, forgiveness is not provided for employer contributions for retirement benefits accelerated from periods outside the Covered Period or Alternative Covered Period. 

What will impact the amount that is forgiven?

Workforce Reduction 

  • If you reduce your workforce during the covered period
    • This is calculated by comparing the number of average full-time equivalent (FTE) employees for each pay period during the covered period to the average number of FTE employees between either January 1, 2020 – February 29, 2020, or February 15, 2019 – June 30, 2019. Seasonal employers can choose either of those two date ranges or any 12-week period between 5/1/2019 and 9/15/2019. A seasonal employer that elects to use a 12-week period between May 1, 2019 and September 15, 2019 to calculate its maximum PPP loan amount must use the same 12-week period as the reference period for the calculation of any reduction in the amount of loan forgiveness. 
    • The reduction in loan forgiveness for reducing your workforce will not apply if the borrower:
      1. eliminates the reduction in full-time equivalent employees by December 31, 2020; or 
      2. makes a good-faith, written offer to rehire or restore the reduced hours of an employee during the covered period, the offer was rejected, and the borrower has documentation of the offer and rejection; or
        1. The employee must have been fired for good cause; or
        2. The employee must have voluntarily resigned; or
        3. The employee requested and received a reduction of their hours; and
        4. The borrower in good faith can document the inability to rehire individuals who were employees on February 15, 2020 and hire similarly qualified employees for unfilled positions on or before December 31, 2020 or the date of the application for forgiveness
      3. In good faith is able to document an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.
        • Borrowers using this exception are required to certify that they have documented in good faith that their reduction in business activity during the covered period stems directly or indirectly from compliance with sanitation, social distancing or any other worker or customer safety requirement related to COVID-19.
  • If you reduce the salaries/wages to employees making less than $100k annually by more than 25% during the 24 week period.
    • The forgivable amount is reduced dollar for dollar by any wage reduction greater than 25%. The reduction for hourly wages is based on an hourly basis, not on total wages paid, so as long as you maintain the same hourly wage rate then you shouldn’t have any reduction for that employee. 
    • The reduction in loan forgiveness for reducing your employee’s wages beyond 25% will not apply if you reduced the wages between February 15, 2020 and April 26, 2020 (30 days after the enactment of the CARES act), then eliminated the reduction in wages at any point before December 31, 2020.
    • For purposes of calculating reductions in the loan forgiveness amount, the borrower should only take into account decreases in salaries or wages. 

The average # of FTEs during the covered period and the other relevant time periods is calculated by dividing the total number of hours worked by each employee per week, by 40 hours. The max number per employee is 1.0 per week. Alternatively, you can use a simplified method which considers any employee with 40+ hours as 1 FTE, and any employee with less than 40 hours as .50 FTE.

If you laid off or furloughed your staff, there’s nothing in the bill that states you’re required to rehire the same workforce or for the same purpose. You can hire employees who would be more suited for your current operations. For example, if you need delivery drivers instead of bartenders, then you could either hire delivery drivers or repurpose your bartenders as delivery drivers in order to meet forgiveness requirements.

Owner’s Pay

The amount of loan forgiveness for owner-employees, self-employed individuals, and managing partners is limited to the lesser of

  • (1) $20,833 ($100k annualized over 2.5 months) during the 24-week covered period or;
  • (2) 2.5/12 x 2019 compensation.

If you choose to use 8 weeks as your covered period, then this amount is limited to the lesser of

  • (1) $15,385 ($100k annualized over 8 weeks) or;
  • (2) 8/52 x 2019 compensation.

Payroll costs for C-corp and S-corp owner-employees as stated above is generally calculated the same way as other employees. Since an S-corp owner’s health insurance contributions are reported as W-2 wages, you should be careful not to count these contributions towards the forgiveness amount twice. 

2019 compensation for Schedule C filers is based on their 2019 net profit, which is line 31 of your 2019 schedule C. If your 2019 Schedule C line 31 was showing a loss then the amounts you pay yourself are not eligible for forgiveness.

2019 compensation for General partners or managing partners is the amount of their 2019 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235. 

Owner-employees with less than a 5 percent ownership stake in a C- or S- Corporation are not subject to the owner-employee compensation rules. This exemption is intended to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated.


Proceeds from any advance up to $10,000 on the EIDL loan will be deducted from the loan forgiveness amount on the PPP loan.

Applying for Forgiveness

To qualify for forgiveness, the borrower must complete and submit the Loan Forgiveness Application (SBA Form 3508, 3508S, 3508EZ, or lender equivalent) to its lender any time on or before the maturity date of the loan if the borrower has used all of the loan proceeds for which they’re requesting forgiveness. Payments of principal and interest on the loan are not due until the lender determines the loan forgiveness amount. If a borrower does not submit the application for forgiveness within 10 months after the END of your covered period, payments on the loan will begin at that time.

A borrower may submit a Loan Forgiveness Application before the end of the 8-week or 24-week covered period, provided that the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness and the borrower’s loan forgiveness application accounts for any salary reductions in excess of 25 percent for the full covered period. If the borrower applies for forgiveness before the end of the covered period and has reduced any employee’s rate of pay (annual salary or hourly wage) in excess of 25 percent, the borrower must account for the excess salary reduction for the full 8-week or 24-week covered period.

If a borrower submits the completed application before the covered period, and a lender has processed the borrower’s forgiveness application, the borrower is no longer bound to the FTE restrictions. The covered period ends when the borrower successfully applies for forgiveness, and any subsequent reductions to FTEs will not affect the forgiveness amount. 

Sole proprietors, independent contractors, and self-employed individuals who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll in the Borrower Application Form automatically qualify to (and should) use the PPP Loan Forgiveness Application Form 3508EZ.

Borrowers of PPP loans of less than $50k can use form 3508S to apply for forgiveness. Form 3508S offers a streamlined way to apply for forgiveness because these borrowers are not required to submit forgiveness calculations or reduce the amount eligible for forgiveness if the borrower reduced the salary/hourly wages of an employee or reduced the FTE during the covered period.

If the borrower does not apply for loan forgiveness within 10 months after the last day of the covered period, or if SBA determines that the loan is not eligible for forgiveness (in whole or in part), then the PPP loan is no longer deferred and the borrower must begin paying principal and interest. If this occurs, the lender must notify the borrower of the date the first payment is due. 

The lender has 60 days after the application has been submitted to issue a decision and request for pay off of the debt to the SBA. SBA will, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to SBA. If the forgiveness is denied, the lender will notify the borrower. 

The loan forgiveness will trigger the extinguishment of debt income, which will not be subject to income tax. The expenses attributable to the forgiveness amount will be deemed nondeductible so taxpayers are not receiving a double benefit.

The following documents need to be submitted to substantiate the request for loan forgiveness:

  • Documentation verifying the number of FTEs on payroll and pay rates for the following periods:
    • 8 week or 24 week covered period after the loan was disbursed
    • 2/15/2019 – 6/30/2019
    • 1/1/2020 – 2/29/2020
    • 2/15/2019 – 6/30/2019 (for a seasonal employer)
    • 2/15/2020 through 4/26/2020 
  • Quarterly Form 941 and state unemployment reports or payroll processing records will satisfy these requirements 
  • Evidence of any retirement and/or health insurance contributions such as cleared checks, payment confirmations, or bills for the 8-week period. 
  • Evidence of business rent, business mortgage interest payments on real or personal property, or utility payments for the 8-week period.

For PPP loans over $2M, the borrower will need to submit a loan necessity questionnaire. The questionnaire form is provided from the lenders to the borrowers. Borrowers must return the completed form to the lender within 10 business days of receiving the notice. If the questionnaire is not submitted, the SBA may determine the borrower was ineligible for either the PPP loan, PPP loan amount, or forgiveness, at which point the SBA may seek repayment of the loan or pursue other available remedies. 

If the lender decides that the entire amount will not be forgiven, and that decision is affirmed by the SBA, then the borrower can request that the SBA review the lender’s decision through a process that is TBD. If the lender and SBA decide that the loan was ineligible or forgiveness is entirely ineligible, then you have the right to an appeal with the SBA Office of Hearings and Appeals (OHA). The appeal process is out of the scope of this article, but you can read more here

This post will be constantly updated with new developments. We suggest following our blog for daily updates on taxes and relief available for small businesses and nonprofits. We hope that this information has been helpful, please don’t hesitate to contact us if you have questions or need guidance.

Raffi Yousefian is a licensed CPA who advises small to enterprise level businesses on accounting and tax issues in his role as Managing Principal at RY CPAs.