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PPP Loan Forgiveness Guidance: What Does It All Mean?

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Many Paycheck Protection Program (PPP) loan recipients have already received and are in the process of spending down their loan proceeds. Now, these small-business clients are likely turning toward unpacking the details of maximizing their loan forgiveness entitlement.

The Small Business Administration (SBA) and Treasury have released substantial guidance to help clients understand whether they will be eligible for loan forgiveness and how to calculate the amount that can be forgiven.

Some of that guidance will work in favor of certain owner-employees — while other aspects of the interim final rule might come as a surprise to clients who didn’t anticipate having trouble qualifying for loan forgiveness.

As clients begin to navigate the tricky process of obtaining loan forgiveness, it’s critical that they receive up-to-date information in order to maximize their loan forgiveness potential.

Related: Navigating the Twists in PPP’s Loan Forgiveness Rules

SBA Revised Owner-Employee Compensation Rule

Loan forgiveness for owner-employee compensation is more limited than in the case of wage payments made to traditional employees. Assuming the loan recipient uses a 24-week “covered period,” loan forgiveness on payments to owner-employees is limited to the lesser of $20,833 (2.5 months of a $100,000 annual salary); or 2.5/12, multiplied by the owner’s 2019 compensation.

By way of clarification, the SBA interim final rule provides that owner-employees who own less than 5% equity in a C corporation or S corporation are not treated as owner-employees. These owner-employees are eligible to take advantage of the more generous cap, which limits loan forgiveness to $46,154 (which works out to 24 weeks of a $100,000 annual salary).

Loan recipients should also be sure to pay close attention to the headcount and wage reduction rules. To ensure that the business owner has not impermissibly reduced its workforce, the client should compare its headcount on Feb. 15, 2020, to the earlier of the date of the loan forgiveness application, or Dec. 31, 2020.

Employers are permitted to rehire laid-off or furloughed employees by the end of the year in order to qualify for forgiveness. There’s also an exception for employers who are unable to rehire people who were employees as of Feb. 15, 2020, or similarly qualified employees for open positions as of Dec. 31.

Related-Party Rent or Lease Payments

Small business owners who rent space from a related-party entity should also be aware of new restrictions on loan forgiveness for proceeds spent on rent. Amounts spent on rent or lease payments to a related party can be forgiven, but only to the extent that those amounts do not exceed the amount of mortgage interest that the related party owes on the property during the covered period.

Additionally, the mortgage and the lease had to have been executed prior to Feb. 15, 2020, for payments under the arrangement to qualify for forgiveness. Actual mortgage interest payments made to business owners simply because of the business structure cannot be forgiven.

Loan recipients who are subject to the related-party rule will be required to submit mortgage documents to substantiate the amount of their payments. For purposes of these rules, any commonality in ownership between the parties is sufficient to subject the borrower to the related-party rules.

Additionally, household expenses of a home-based business are not eligible for loan forgiveness. Similarly, amounts attributable to a sub-tenant or tenant are not eligible for forgiveness. For example, if the client leases office space for $10,000 per month and rents a portion to a subtenant for $2,500 per month, the client can only include $7,500 on the loan forgiveness application.


Guidance on PPP loan forgiveness has been spotty and sporadic to say the least. Small business clients who are assuming they will qualify for loan forgiveness should carefully review their expenditures, especially if they’re dealing with the related-party rules. Because the rules remain unclear in many areas, it’s important for these small business clients to pay close attention for forthcoming guidance that could provide clarity or modifications to the existing rules.


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