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Financial Planning > College Planning > Student Loan Debt

Navigating the Twists in PPP’s Loan Forgiveness Rules

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Events escalated and unfolded quickly in the wake of the COVID-19 pandemic. Government relief also came quickly in the form of the Paycheck Protection Program (PPP) loan program—and many business owners immediately rushed to apply.

As things begin to calm down and businesses move toward reopening, small business clients must now turn to the question of loan forgiveness. These clients should be advised to pay close attention to the new small business administration (SBA) form loan forgiveness application, as well as the recent Paycheck Protection Program Flexibility Act (which modifies the CARES Act rules and was released after the SBA application). The need to continue monitoring ongoing guidance is also important—as we have recently learned that elements of emerging guidance may be effective retroactively.

Paycheck Protection Program Loan Forgiveness Parameters

PPP loan forgiveness is determined based on how the small business client spent the loan proceeds. Importantly, at least 60% of the loan must be used for payroll costs (note that this 60% threshold was reduced from 75% under the CARES Act by the Paycheck Protection Program Flexibility Act (PPPFA), passed in early June).

Under the terms of the CARES Act, amounts used to cover eligible expenses could be forgiven if used during the eight-week period following the loan origination date. The PPPFA extended the eight-week period to 24 weeks from the date the lender made the first loan payment to the small business owner. Unless Congress acts again, the funds must all be spent by December 31, 2020, in order to be eligible for forgiveness.

Eligible expenses (other than payroll costs) include operating costs like rent, mortgage interest, interest on outstanding debt, utilities, employee retirement benefits and health insurance costs. Compensation that exceeds $100,000 per employee, as pro-rated for the period, is excluded from the definition of payroll costs for loan forgiveness purposes.

The amount forgiven can also be reduced if the employer impermissibly reduced staffing or employee compensation levels (although the PPPFA gives employers until December 31, 2020, to bring workers back to work/restore wage levels and continue to qualify for loan forgiveness (extended from prior law, which set the deadline at June 30)). Reducing compensation for employees earning under $100,000 by more than 25% can also reduce the amount forgiven.

The SBA Loan Forgiveness Application

Every PPP lender can use its own version of the SBA form application. At the most basic level, after the small business owner completes the application for loan forgiveness, the lender has 60 days to decide whether the borrower qualifies. The SBA then has an additional 90 days to providing funding for the lender.

Importantly, the original SBA loan forgiveness application mentions the original eight-week period, which has now been extended. Presumably, the application will be updated to reflect this change.

There is also a divergence between the SBA loan application and the actual terms of the PPPFA. While the SBA loan forgiveness application indicates that 75% of the “forgiveness amount” had to be used for payroll costs, the terms of the new law, which was released after the application, says that 60% of the “loan amount” must be used for payroll costs. This difference can be significant for small business clients who only anticipated requesting forgiveness for part of the loan. (However, there are rumors that the IRS will release business-favorable guidance to clear up the divergence.)

The loan application also now requires employers to certify whether they received loans in excess of $2 million (also considering loans by affiliates). (Generally, if the loan amount was $2 million or less, the government will presume that it was made in good faith—i.e., that the borrower did not have a viable alternate liquidity source).

Employers must certify that loan amounts were used to cover eligible expenses and that the borrower has accurately confirmed payments made for both payroll costs and non-payroll costs.

The application itself contains a worksheet to help small business clients calculate their loan forgiveness amount, as well as any reductions that may be necessary because the employer reduced its workforce or employee salaries. The document also provides a cure provision for employers who impermissibly reduced workforce (and may wish to bring employees back to work) or salary levels.

Required Documentation for PPP Loan Forgiveness

The employer must provide documentation to show the payroll costs it paid out during the relevant period—whether in the form of bank records or reports from a third-party payroll service. IRS payroll tax filing forms (i.e., Form 941) and state quarterly wage reporting forms, as well as payment receipts, cancelled checks or other account statements showing contributions to employee retirement accounts or healthcare are also necessary.

Importantly, employers will be required to document the number of full-time employees employed between February 15, 2019, and June 30, 2019, when compared to the same period in 2020. Two methods are available for counting FTEs: employers can elect to (1) assign “1” for every employee working at least 40 hours per week and “0.5” for all other employees, or (2) divide the average number of hours worked weekly by each employee by 40, rounding up to the nearest tenth (up to a maximum of “1” per employee).

For employers that used funds to pay costs such as rent or mortgage interest, copies of lender amortization schedules, account statements and/or lease agreements must be submitted with the application.

Small business clients should also be advised of the need to maintain all PPP records for at least six years after the date they have repaid the loan or received confirmation that their loan was forgiven.


The SBA loan forgiveness guidance to date has answered many small business clients’ questions—but some issues have not yet been addressed. Clients should be advised to take the application seriously and to maintain detailed records of the rationale behind any assumptions or interpretations that the client made. This can be key to avoiding problems down the road.

(Related: SBA Issues Revised PPP Loan Forgiveness Application)



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