Asking for Forgiveness: You've Been Approved for Your PPP Loan, Now What?

calculating ppp loan forgiveness

6 min read

The Paycheck Protection Program kicked off on Friday, April 3rd, providing emergency loans to small businesses who need them. Companies across the country were all rushing to apply for funds, and major banks were overwhelmed. The first week was chaotic, to say the least, as everyone was trying to navigate the hurdles and follow the sparse details.

By now, eligible companies who were able to apply are starting to receive their acceptance notices and loan proceeds. And with that comes a slew of new questions, like what is forgivable and what are the tax implications?

The CARES Act lists the expenses that are subject to forgiveness, along with a calculation to determine how much of your loan should be forgiven.

We are here to make the complex simple and have put together this quick guide to help you along.

Paycheck Protection Program: Maximizing Your Benefits and Calculating Forgiveness

What is forgivable?

Four expense categories are forgivable, including payroll costs, rent obligations, utilities, and mortgage interest (if you own your building). In other words, if you spend your emergency funds on any of those categories, your loan will be forgiven.

However, there are a few caveats. You must continue to keep your employees on the payroll, maintaining the same headcount and salaries as were in place before the pandemic. You also have a “covered period” to use the funds, which is eight weeks immediately after receiving your loan amounts. Any of your PPP loan proceeds spent on things outside these essential expense categories or spent after your eight-week period has passed are not forgivable.

The SBA has also stated that 75% of the loan forgiveness amount must be used for payroll costs.

How will this be taxed?

There are no tax implications to worry about, as the CARES Act states that the forgiveness of debt under the program will not be taxable to the borrower.

There is a question, though, about whether the expenses will be deductible since they were paid for with tax-free money. More guidance is expected to come on this issue as well as other tax issues. 

Calculating your forgiveness?

The PPP loan was ultimately created as a way to support employers so they could continue to pay their employees during the coronavirus outbreak. Therefore, there are two calculations you need to complete based on your payroll to determine if there are any reductions in your loan forgiveness amount.

The first calculation is focused on your employee headcounts, while the second looks at the salaries for each employee.

Employee Headcount Analysis

A reduction to your loan forgiveness amount will be made if the number of full-time equivalents (FTEs) is reduced during the eight weeks following your loan receipt.

To calculate that amount, divide the average number of FTEs during the eight-week covered period by the average number of FTEs during the base period. The base period can either be February 15, 2019 through June 30, 2019 or January 1, 2020 through February 29, 2020, at the borrower’s discretion.

An Example to Help Illustrate How It Works:

Your loan amount is $100,000, and you spent all of the funds on qualifying expenses. The average number of FTEs that you had from February 15, 2019 to June 30, 2019 was 10. The average number of FTEs during the eight-week covered period was 5.

Calculation: 5/10 = 50%

Maximum loan forgiveness: $100,000 * 50% = $50,000

This means that you will need to repay the remaining $50,000 of the loan.

Remember, you can always use the alternate base period of January 1, 2020 through February 29, 2020 if that is more favorable.

Salary Expense Analysis

A reduction to your loan forgiveness amount will be made for each employee whose wages were reduced by more than 25% compared to the most recent quarter before the PPP loan was issued (i.e., Q1 2020). However, for this calculation, you only need to consider employees who earn an annual salary of $100,000 or less. You can avoid this reduction if you restore the employee’s wages to the pre-COVID-19 level by June 30, 2020.

We expect the SBA to issue further guidance in this area and the method of calculation. When clarification is released, we will be sure to share that with you promptly.

Also, you may need to time your payroll differently if a payroll run is scheduled to go out shortly after the eight weeks. We expect the “covered period” date to be a hard date, and the goal is to get 100% of the PPP loan forgiven.

An Example to Help Illustrate How It Works:

Your loan amount is $100,000, and you spent all of the funds on qualifying expenses. You reduced the annual salary for one FTE from $80,000 to $40,000 (i.e., in Q1 2020 the employee was making $80,000 and during the eight-week covered period the employee was making $40,000).

Calculation: ($80,000 - $40,000) – ($80,000 * 25%) = $20,000

Maximum loan forgiveness: $100,000 – $20,000 = $80,000

This means that you will need to repay the remaining $20,000 of the loan.

A Quick Recap on How You Should Spend Your Funds

Whether you have already been approved for your PPP loan or you are still in the waiting game, it’s an excellent time to get familiar with how you can maximize your benefits.

Don’t forget to use your proceeds for covered expenses and to use 75% of your funds on payroll costs. Also, be sure you understand the two calculations mentioned above and how they can reduce your forgiveness amount.

And — document everything! You can bet that your bank will request supporting documentation to validate your calculations and information. Have it on hand and ready to present. You may want to segregate the costs that you use the PPP loan amount for in your chart of accounts/financial records. This may facilitate your ability to keep track of how much of your PPP loan you have spent and aid in the documentation to support the forgivable amount.

Click Here to Access Our COVID-19 Resource Center

As always, we are here to make the complex simple. If you have any questions, please don’t hesitate to reach out to us for clarification.

April 14, 2020