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Paycheck Protection Program Loan Forgiveness Application - What Businesses Need to Know to Qualify for Forgiveness

By: Chris J. Roe ,CPA/PFS

Did you receive an SBA Paycheck Protection Program Loan ("PPP")?  Still up in the air as to how the forgiveness works.  You are not alone.  

On May 15, 2020, the SBA released the Loan Forgiveness Application and provided some much-needed clarifications.[1]  Here is a link to the Loan Forgiveness Application.  Furthermore, information about the PPP Loan and forgiveness rules can be found at the U.S. Treasury Website.

Our clients are asking many questions surrounding the loan forgiveness.  Two of the most pressing questions are: 1.) Does payroll costs incurred need to be paid in the 8-week loan period to qualify for forgiveness? or 2.) What if eligible non-payroll costs are incurred during the 8-week loan period, but are not due until after the 8-week period ends, do these costs still qualify for forgiveness?  

The SBA has taken a giant step to address these key questions.  Now, let’s break down the key areas of loan forgiveness.

How Does a Business Determine Its Eligible Payroll Costs?

Many businesses are struggling to answer: “Should I accelerate my payroll to the day before the 8-week period ends to make sure I get forgiveness?”   Well, before the forgiveness application was released, most of us where flying blind to answer this question.  But fortunately, the SBA came through with relief.

Originally, there was just one period defined as the “Covered Period”.   This is an 8-week period beginning on the day the business receives loan proceeds.[2]

However, the SBA creates the “Alternative Payroll Covered Period”[3] designed to align business payroll cost incurred and pay dates with their 8-week loan period.  For example, your business received loan proceeds on Monday, April 20, and the first day of a new payroll period following the loan disbursement is on April 26.  The Covered Period begins on April 20, but the Alternative Payroll Covered Period will run from April 26 to June 20.[4] 

When the CARES Act passed, it stated that only “costs incurred, and payments made” during the 8-week loan period are eligible for forgiveness.  This is where most businesses struggled not only with payroll but other non-payroll eligible costs.  Fortunately, the SBA clarified that payroll costs that are paid or incurred during the Covered Period, or Alternative Covered Period, generally are eligible for forgiveness.

The above clarifications eliminate the need for businesses to change their last pay period date to ensure paid within the Covered Period.

The SBA also provides the prorated limit for employees with annual salaries in excess $100,000.  The prorated amount per employee for the 8-week Covered Period is a total of $15,385.

Eligible Payroll Costs for Owner-Employees

Any self-employed business owner having employees shall calculate their employee payroll costs just like any other business.  However, the self-employed person’s payroll, is treated as a replacement net earnings from self-employment.  The replacement is limited to the lesser of 8-weeks’ worth of 2019 Net Earnings from Self-Employment or $15,385.  If 2019 net earnings was over $100,000, the maximum self-employed replacement compensation is limited to the $15,385 or $1,923.13 weekly.

Furthermore, owners are not considered for purposes of calculating full-time employee equivalents or wage reductions.

How Does a Business Determine its Eligible Non-Payroll Costs?

The SBA has come to the rescue to answer two important questions businesses have: 1.) What if I incurred an eligible cost before the loan, but pay it during the 8-week period?  Is the cost still eligible to be included as part of the forgiveness application? and 2.) What if the cost is incurred during the 8-weeks but not pay it paid till after the 8-week period, is it still eligible for forgiveness?

Well, the SBA answered these two questions to the relief of business owners.  Eligible non-payroll costs must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing cycle, even if it is after the end of the Covered Period.[5]  

Additionally, the SBA provides a listing of eligible non-payroll costs to include:

  • Rent, leases and payments of interest on mortgages and loans apply to both real and personal property used in business; and 
  • Utilities, such as gas, water, sewage, transportation, telephone and internet.

How Does a Business Determine Its Loan Forgiveness Amount?

In determining forgiveness, businesses add together all eligible payroll and related costs, business mortgage or loan interest, rent or lease payments and utility payments.  The total of these substantiated expenses incurred and paid during or shortly thereafter the Covered Period will be subject to loan forgiveness.  However, there are a few rules that cause the forgiven amount to be reduced. 

Let’s dig into these rules. 

75%/25% Rule

Treasury stated that 75% of the forgiveness must be related to eligible payroll costs while limiting eligible non-payroll costs to no more than 25% of the total forgiveness.  Many business owners feared that if the business violated this ratio; then, forgiveness on the entire loan is lost .  The SBA clarified the 75%/25% rule.  If a business violates this ratio, the amount forgiven is just reduced. 

Reducing Full-Time Equivalent Employees[6] 

The second rule that requires a forgiveness reduction is if the business reduces full-time equivalent employees during the loan period.

In the forgiveness application, detailed steps are provided for a forgiveness reduction, as a result of, reducing full time equivalent employees.  Businesses may use the Alternative Payroll Covered Period for the calculation.

Also, the application outlines specific exceptions to exclude full time equivalent employees.  These exceptions are: 1.) employee rejects a written offer to be rehired and position is not filled; or 2.) employee was fired for cause, voluntarily resigned or voluntarily requested and received an hours’ reduction during the Covered/Alternate Period so long as their position was not filled by a new employee.[7]

If the business restores headcount to February 15, 2020 level by June 30, 2020, then the loan forgiveness amount is not reduced.[8]

Reducing Wages

The third rule that requires a reduction in the forgiven loan amount is reducing salaries/wages.  If the business reduces salaries or wages of certain employees by more than 25% during the Covered Period (or the Alternative Covered Period) compared to the first calendar quarter of 2020, then the forgiveness amount is reduced.   

However, there is a safe harbor and it states: “If by June 20, 2020, the business restores average annual salaries or hourly wages to their February 15, 2020 levels; then, the loan forgiveness is not reduced”.

What Does a Business Need to Provide For Forgiveness Support?

The SBA lays out a listing of documents that should be submitted along with the loan forgiveness application including:

  • Payroll records;
  • Payroll tax returns; 
  • Cancelled checks, invoices, account statements documenting employee health and retirement contributions. 
  • Lease agreements, amortization schedules and invoices and cancelled checks for utility payments.

A list of information is also provided in the Application’s instructions that must be maintained by the business although not needing to be included with the application.  All supporting documents must be retained by the business for six years after the date the loan is forgiven or repaid in full.[9] 

Should you want to consult us about your specific situation, please contact us.


[1] SBA Form 3508

[2] See Page 1 of SBA Form 3508

[3] SBA Form 3508, Page 1 – Alternative Payroll Covered Period

[4] Note Borrowers who elect to use the Alternative Payroll Covered Period must apply consistently to wherever in the application calls for the “Covered Period” or Alternative Payroll Covered Period”

[5] See SBA Form 3508, Page 2

[6] See pages 7&8 of SBA Form 3508

[7] See Page 8 of SBA Form 3508

[8] Ibid

[9] See Page 10 of the SBA Form 3508


2020 All Rights Reserved.  This content is developed from sources believed to be providing accurate information, and provided by Rx Wealth Advisors, LLC for general informational purposes only.  It may not be used for the purpose of avoiding any federal tax penalties and in no way is meant to provide specific tax, legal or financial advice.  Please consult legal, financial or tax professionals for specific information regarding your individual situation.  The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any financial advice or investment security.