Business Update – New Guidance on PPP Loan Forgiveness Calculations

The SBA has released the 15 page initial draft of the PPP Loan Forgiveness Application. This application is much more complicated than the initial application was. I expect that our office will continue to be overwhelmed with questions over the next few months. Please be patient with us. Keep in mind that the new tax deadline is occurring simultaneously with the loan forgiveness applications. This will continue to significantly delay turnaround times. If you have not sent in your tax info, please hurry. We will do our best to complete every return on time. If you wait too long to send in your tax info be prepared to file an extension.

Based on this new guidance, I think we all need to prepare for the possibility that not every loan dollar will be forgiven and there is not much we can do about it. All we can do is navigate through these guidance updates as they come out and do our best to optimize what will be forgiven. It is still a great program even if you don’t get to keep the entire loan amount. Remember, this is not your money until it is forgiven.

Many uncertainties of the program have been clarified within the latest forgiveness application instructions. The forgiveness application can be found at the following website address:

I have highlighted my observations below.

Taxability of PPP Loan Forgiveness

The forgiven amounts of the PPP Loans are not supposed to be taxable income. The IRS has taken the position that the costs used for your forgiveness calculations will not be deductible. Therefore, the PPP Loan Forgiveness will increase your taxable income in the form of reduced deductions. Plan accordingly.

Keep in mind that you may not get all your loan proceeds forgiven. However, it is still a great program and you can always repay the unforgiven amounts at the end of the eight-weeks or over two years at 1%.

June 30th Deadline

Previously it was unclear if you would be able to utilize eight complete weeks of expenses when your loan advance occurred less than eight-weeks from June 30, 2020. This application allows for your eight-week covered period to go beyond June 30, 2020. Since form 941 is a required document to be submitted with the forgiveness application, you may have to wait until the end of Q3 before you can complete your forgiveness application due to payroll occurring in that quarter.

Forgiven Payroll Costs

According to the instruction’s, payroll costs are covered when they occur within eight-weeks of the funding date of the loan. Prior to this latest guidance it was unclear whether the pay date or the pay period was to be used for this eight-week period calculation. For many employers, the pay date can occur a week after a pay period ends. Hence, the confusion. The original applications defined the payroll costs based on pay date only. Pay period was not a consideration. Guidance at the time of applying for these loans explained that the definition of payroll costs for the forgiveness was the same as the definition for the initial application. The forgiveness application calls for pay period payroll. It also indicates that a pay date can fall outside of the eight-week period if it is paying for pay periods that occur within the eight-week period. To qualify the pay date must occur on the next regular payroll cycle. Payrolls will have to be prorated where loan funding dates occur in the middle of a pay period.

An alternative payroll cycle is allowed for companies with a payroll frequency of 14 days or less. A borrower with a payroll frequency period of 14 days or less can elect to wait to start their eight-week period on the first day of the first pay period beginning in the covered period. For instance, if you received your loan proceeds on April 20th and your first pay period begins on April 26th, then April 26th can be day one of the eight-week period (ends on June 20th) for payroll costs. You still need to follow the original cycle (April 20th – June 14th) for non-payroll related costs used for forgiveness.


Owner’s compensation (including owner-employees, a self-employed individual, or general partners) is capped at the lower of $15,385 or the eight-week equivalent of applicable compensation for 2019. This means that we will not be able to use additional compensation to owners above and beyond what was paid to them in 2019 for the forgiveness. The form does not expand the definition of owner’s compensation to include dependents and spouses of owners at this time.

Forgiven Non-Payroll Costs

Certain non-payroll costs can be used to cover up to 25% of your forgiveness. These include mortgage interest, rent, and utilities. There was much confusion over whether costs had to be incurred and paid over the eight weeks or just paid over the eight weeks. These costs are usually paid days after the cost is incurred and sometimes even prepaid (such as rent). According to the guidance these costs can be any costs paid over the covered eight-week period OR incurred during the period. Incurred costs need to be paid on or before the next regular billing date even if it is paid after the eight-week period.

Example 1: If you were behind on rent, those late rent payments will count as forgivable as long as they are paid in the eight-week period. Prepaid rent payments occurring within the eight-week period will not count if the rent covers dates outside of the eight-week period.

Example 2: Your cell phone bill that is paid after the eight weeks will be acceptable if the costs were incurred within the eight-week period.

Rent Expenses

Rent expenses are not limited to real estate rents. Your vehicle rent and equipment rent payments qualify as well.

Mortgage Interest Expenses

Mortgage interest expenses have been expanded to include interest on vehicle and equipment loans. It does not appear to cover credit card interest and line of credit interest.

Utility Expenses

Transportation costs are included in the definition but have not been defined by SBA or Treasury related guidance. I have read from non-authoritative sources that these would be costs for fuel and maintenance on your business vehicles. If you are planning to include transportation costs in your forgiveness application, I would verify with your lender that these costs qualify.

EIDLE Loan Advance

If you received an EIDLE loan advance, your loan forgiveness will be reduced by the loan advance amount. You won’t have to repay the Eidle loan advance itself. The reduction in your forgiveness will have to repaid based upon the PPP Loan terms. Those terms are 2 years at 1% interest.

Full-Time Equivalents Demystified

Loan forgiveness may be further reduced due to a requirement to maintain your full-time equivalents. The look back period for testing this is February 15, 2019 to June 30, 2019 OR January 1, 2020 to February 29, 2020. Your average full-time equivalents during the eight-week period must be equal to or greater than the smaller of the two look back periods.

Full-Time equivalents are generally equal to 40 hours worked in a week. The application caps an FTE at 40 hours per employee. Therefore overtime hours may not help your calculation of FTEs. You do get to net the overtime hours with part time hours over the eight-week covered period. Overtime one week can be added to partial time in a later week. The average for the entire period is limited to 40 hours (1.0 FTE) per employee. Previous calculations of the look-back period may need to be redone to determine your requirements for the eight-week covered period (or alternative covered period).

Average hours less than 40 hours per week are rounded to the nearest .10. To calculate part time FTEs you will need to take the average number of hours paid per week and then divide that by 40, and round to the nearest 10th.

Full-Time Equivalents Reduction Exceptions

Any FTE reductions because of the following cases can be added back to your eight-week FTE count.

  • Any positions where you made a good faith, written offer to rehire an employee during the covered period which was rejected by the employee
  • Any positions where the employee was fired for cause or voluntarily resigned
  • Any positions where the employee voluntarily requested and received a reduction of their hours.

Full-Time Equivalency Safe Harbor – Rehire by June 30

They changed the RULES!! The Safe Harbor is no longer determined by the same FTE lookback periods used in your FTE reduction calculation above. The safe harbor exempts companies FTE requirement for reduced loan forgiveness as follows:

  • The company reduced its FTE employee levels in the period beginning February 15, 2020 and ending April 26, 2020; AND
  • The company then restored its FTE levels by not later than June 30, 2020 to its FTE employee levels in the pay period that included February 15, 2020.

This is a very specific requirement. If both cases are NOT true then the Company does not qualify for safe harbor.  You are not protected by the June 30, 2020 offer to rehire. That needs to be done in your eight-week covered period (see above). Which may end sooner than June 30, 2020.

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