Loan Forgiveness of Paycheck Protection Program (PPP) Loans

Over the past week, we have been formulating these solid clarifications for all our clients that either received or are to be receiving their Payroll Protection Program (PPP) loan funding in the next week or two. Here are the basics that we know as of today on what needs to be done in order to achieve the maximum PPP loan forgiveness:



Once the PPP funds hit your account, it starts an eight-week spend period. To be assured of maximum forgiveness, plan to spend 100% of those funds before the end of the eight-week period, but also understand that if you don’t spend it all the balance must be paid back within the next two-year period. The CARES Act computes forgiveness based, in part, on approved costs incurred and payments made during the eight-week period, and so far through today, there is no guidance on whether there is any leeway on the timing of these expenditures. Also, you are going to need to prove all of this later, so you must keep meticulous records of what you spent your PPP loan funds on and when.

We recommend that all recipients budget and allocate these funds once they arrive. First off, we highly recommend that a separate deposit account solely for the PPP funds is opened for you to write checks from that account. You can still have the payroll costs come out of whatever account they come out of but you should transfer funds immediately from the loan account to cover these payroll costs. Second, be sure to spend as much as you can on designated payroll costs incurred during the eight-week period – under the SBA’s interim rule, if you do not spend at least 75% of the loan proceeds on payroll costs, the dollar amount of the shortfall from 75% reduces the amount of forgiveness. Third, all remaining proceeds not spent on payroll costs should be spent on the three other approved costs: covered rentcovered utilities, and covered mortgage interest. Since you don’t have a mortgage, you can spend the funds on rent and utilities during the two month period (most likely May and June rent).

The payroll costs computation is somewhat confusing. As noted in the Interim Final Regulations, the PPP “provides a loan amount 75% of which is equivalent to eight weeks of payroll costs (8 weeks / 2.5 months = 56 days / 76 days = 74% rounded up to 75%).” So if your average monthly payroll costs (actual payroll during the period plus employee benefits) has declined at all since the 12-month period used to compute the loan amount, you most likely will struggle to reach the 75% of payroll costs for the eight week period following funding of the loan. If your payroll costs don’t quite reach 75%, then consider whether to declare bonuses to your employees during the eight week period. Just be aware that with these employee bonuses the total salaries/wages to any employee cannot exceed $8,333 for the month which relates to the $100K annual wage cap. And don’t forget that even if you don’t achieve total forgiveness the balance is a two-year loan at only a 1% interest rate and payments do not begin for six months.



The amount you manage to pay out in approved costs for the eight-week period determines your maximum forgiveness. But, this can be further reduced due to declines in headcount.

You begin by measuring the number of full-time equivalents (FTEs) during the eight-week period. The FTEs equal the average number of employees you have over a given period who work at least 40 hours per week. For example, let’s say that for a given week you had three employees who worked 40 hours that week, two who worked 20, and four who worked 10. For that week, you would have five FTEs. For longer periods, you would take the numbers of regular hours (not to exceed 40 per week per employee) divide that by the number of weeks in the period, and divide that by 40. So, if during the eight-week period you had 1,472 regular hours, divided by eight weeks, that would equate to 184 hours per week, then divide by 40 and you get an average of 4.6 FTEs. Be aware that if you have reduced some of your FTE employees’ hours down from 40 hours a week to 30 hours, these employees will still count as a FTE employees for these computations and therefore do not count against you.

After calculating your FTEs for the eight-week period, you will then compare this to the FTEs you had in either of two baseline periods. Be very careful about your selection of your baseline FTEs. The baseline period can be either 2/15/19 to 6/30/19 or 1/1/20 to 2/29/20, and you will always want to select the period with the least amount of FTEs for your base. If you had 10% fewer FTEs in the eight-week period than in your baseline period, then your loan forgiveness would be proportionately reduced by that same 10%.



Whatever forgiveness is left after the headcount reduction computation will be further reduced, dollar-for-dollar, for a major reduction in salary and wage costs (assuming a drop in excess of 25%). This is the reason that it is important to do your very best to spend at least 75% of the funds or more on payroll costs during the eight week period. To calculate the salary/wage reduction piece, you first need to identify all employees during the eight-week period whom you employed at any point during 2019 and “who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000.” For each such employee, determine their average salary/wage rate for the first quarter of 2020. If 1/8th of the total amount of salary/wages paid to the employee for the eight-week period is at least 75% of their average weekly rate during Q1 of 2020, then there is no further reduction in loan forgiveness. But if the employee suffered such a major reduction in salary/wages that their pay for the eight-week period went down by more than 25% (only factoring in the salary and wages up to the annual cap of $100,000), then the dollar amount of the portion beyond 25% reduces, dollar-for-dollar, the amount of loan forgiveness.



The statute includes a fix for the headcount-related reduction in forgiveness. If by June 30, 2020 you bring the company’s FTE levels back up to where it was at either of the base period levels as mentioned above, then that eliminates any reduction in forgiveness attributable to a drop in headcount between February 15, 2020 and April 26, 2020. (The CARES Act wording is that the employer by June 30 has eliminated that reduction in the number of FTES). We are awaiting solid guidance from the SBA on precisely what this means in practice.

The statute also includes a separate fix for the salary/wage-related reduction in forgiveness. If by June 30, 2020 you have restored the salary/wage levels of the below $100K per year employees to at least the level existing on February 15, 2020, then that too will eliminate any salary/wage level reductions which occurred between February 15, 2020 and April 26, 2020.



They say the devil is in the definitions. Here are somewhat simplified versions of key statutory terms:

  • Payroll costs are wages, salaries, commissions, tips, severance pay, health insurance and benefits – be sure to subtract out the portion of any employee’s pay exceeding $100,000 per year (annualized)
  • Covered rent is rent obligated under a leasing agreement in force before February 15, 2020, and presumably includes bona fide equipment leases in addition to office leases (copiers, postage machines, computers)
  • Covered utilities means payment for a service for the distribution of electricity, gas, water, telephone, or internet access for which service began before February 15, 2020
  • Covered mortgage interest means interest on any pre-February 15, 2020 indebtedness or debt instrument incurred by the borrower in the ordinary course of business secured by real or personal property



Most businesses today are fixated on the forgiveness feature of the PPP loans. Forgiveness is certainly an important part of the CARES Act incentives for small businesses to retain as many employees as possible and to keep up their wage levels. However, the ultimate objective for those who own and operate such a company will be to protect the long-term health of the business. If business realities are such that you are unable to achieve 100% forgiveness because you will not be hiring employees you don’t need over the next eight weeks, do remind yourself that, at worst, this is a 1% loan with a two-year payback period with no collateral and no personal guarantees. These loans offer a significant injection of cash to help support your company’s operations during this economic disaster.

Clearly the loan forgiveness features of the Paycheck Protection Program are complex and will require detailed planning, precise execution, and meticulous documentation. We have attached our Forgiveness Estimate Calculator to give you a good idea of what you can expect.

We are here to assist you through this loan forgiveness process step by step. Drop in your estimated relevant costs and estimated FTEs to determine the amount of your loan forgiveness.

Please do not hesitate to call us for assistance.

We are an Orange County CPA firm based in Irvine that is committed to providing quality tax and accounting services along with sound financial direction to clients throughout Orange County, California. We offer business development consulting, audit, tax preparation, IRS Audit, retirement planning, business roundtables, estate planning, QuickBooks consulting, Interim Chief Financial Officers, and a full range of traditional public accounting services. If you would like to learn more about how we can help you and your business improve its accounting practices during this difficult time reach out to our team. For more information on other accounting topics, check out our blog.