Guidelines offer clarity on PPP loan forgiveness for small businesses

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 05/20/20


The Paycheck Protection Program (PPP) is one of the centerpieces of the CARES Act, designed to help small businesses meet payroll and other expenses during the pandemic.

To date, Congress has allocated roughly $600 billion toward the program in two rounds of funding. According to the Small Business Administration, the average loan size for the first round of funding was $200,000. This allocation was quickly depleted shortly after the passage of the CARES Act. In the most recent allocation, the average loan size is $70,000.

One of the reasons for the program’s popularity is that, depending on the circumstances, a large percentage of the loan can be forgiven. Also, the amount forgiven is not considered taxable income to the business. Any remaining funds not forgiven are subject to repayment based on the loan terms – two years at an annual interest rate of 1%.

Note: Different rules on loan forgiveness apply to self-employed business owners and independent contractors.

*Cash compensation includes wages, salary, tips, vacation or family leave (excluding tax credits from the Family First Coronavirus Response Act ), and funds associated with a separation agreement.

SBA releases application for PPP loan forgiveness

Last week, the SBA released an application for business owners applying for loan forgiveness. Once the loan funds have been disbursed, an eight-week period begins where business owners must track costs eligible for forgiveness.

The new application provides clarity in three key areas for those seeking forgiveness:

1. Calculating costs over the eight-week period

  • Clarification on the meaning of costs “incurred or paid” during the eight-week period following disbursement of the loan proceeds
  • For example, compensation paid to employees during the first few days of the eight-week period will still qualify for forgiveness even if those wages applied to hours worked for the previous payroll cycle. Or, payroll costs not technically paid but accrued during the 8-week period will be eligible for forgiveness
  • Also, business owners have the option of choosing an alternative date for beginning the eight-week period in order to align with their normal payroll cycle. The alternative date would begin with the date of the first day of the next payroll cycle following receipt of the loan proceeds
2. Extra bonuses paid to owner/employees may not count toward forgiveness
  • Owner/employees or partners cannot pay themselves more during the eight-week period to maximize loan forgiveness
  • The application limits forgiveness to cash compensation for these individuals to a maximum of $15,384 (based on the cash compensation limit of $100,000 annually), or the equivalent of their compensation over eight weeks for 2019, whichever is lower
  • Additionally, owner/employees or partners are not eligible to receive forgiveness for payment toward their own health and retirement-related benefits
3. Options for determining employee headcount
  • Business owners applying for loan forgiveness must calculate their average headcount over the eight-week forgiveness period and compare that with prior periods to report any reduction in staffing, which will reduce the amount of loan forgiveness
  • For example, if staffing is reduced by 30%, the amount of the loan forgiveness amount will generally be reduced by 30%†
  • The new application and instructions clarify the definition of “full-time equivalent,” or FTE, by basing one FTE on a 40-hour work week
  • The application also allows for a streamlined option for calculating FTEs. Every employee who works at least 40 hours a week counts as one FTE, and others automatically count as 0.5 FTE

† An employer can avoid a reduction in the forgiveness amount if staffing can be restored (by June 30, 2020) to levels in place prior to the pandemic. Additionally, if the employer can provide written certification that an offer of employment was extended but subsequently rejected, then there will not be a reduction in the forgiveness amount for that former employee.

Work with a tax professional

The Paycheck Protection Program includes a set of detailed and complex rules which are best navigated by working with a qualified tax professional. Additionally, to make the tracking of expenses eligible for loan forgiveness easier, business owners may want to hold PPP loan proceeds in a separate account.

Additional resources regarding the Paycheck Protection Program from the Small Business Administration include “Rules and Regulations on the PPP,” and “FAQs on the PPP.”

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