Forgiveness conditions of the Paycheck Protection Program

The funds from your PPP loan can be used for the following purposes:

  • Payroll—salary, wage, vacation, parental, family, medical, or sick leave, health benefits
  • Mortgage interest—as long as the mortgage was signed before February 15, 2020
  • Rent—as long as the lease agreement was in effect before February 15, 2020
  • Utilities—as long as service began before February 15, 2020
  • Operations expenditures—any software, cloud computing, or other human resources and accounting needs
  • Property damage costs—any costs from damages due to public disturbances occurring in 2020 and not covered by insurance
  • Supplier costs—any purchase order or order of goods made prior to receiving a PPP loan essential to operations
  • Worker protection expenditures—any personal protection equipment or property improvements to remain COVID compliant from March 1, 2020, onwards

All expenses that fall under the above-listed categories are eligible for forgiveness. The following conditions will also apply:

  1. 8 to 24 weeks of expense coverage

Expenses eligible for forgiveness are those that are incurred over the 8- to 24-week period, starting from the day you receive your PPP loan from your lender. This is not necessarily the date on which you signed your loan agreement.

You do not need to adjust your payroll schedule. All payroll that your employees incur over the 8- to 24-week period is eligible for forgiveness, even if the actual payout date falls outside the covered period.

  1. The 60/40 rule

At least 60% of your loan must be used for payroll costs. Payments to independent contractors cannot be included in the payroll costs. Your forgivable amount will scale in proportion to the percentage of your loan that you spend on payroll, up to the total loan amount.

For example, if a business gets a $20,000 PPP loan, they would need to spend at least $12,000—60% of the loan—on payroll. However, they spend only $9,000 on payroll. This is 75% of the minimum payroll cost required for full forgiveness so their forgiveness amount is 75% of the loan. This means $15,000 of the $20,000 loan is forgiven, and they have to pay back the remaining $5,000.

You can also find your maximum forgiveness amount from your payroll costs. Simply divide your total payroll costs by 0.6.

  1. Staffing requirements

You must maintain the number of employees on your payroll. This is because the purpose of the PPP loan is to maintain jobs.

Here is the calculation you can use to determine if you’ve met this requirement:

First, determine the average number of full-time equivalent employees you had during:

  • The 8-week to 24-week period following your initial loan disbursement, (A)
  • February 15, 2019, to June 30, 2019, (B1)
  • January 1, 2020, to February 29, 2020. (B2)

Take A and divide that by B1. Then take A and divide by B2. Use the larger number you obtain.

  • If you get a number equal to or larger than 1, you successfully maintained your headcount and meet the staffing requirement.
  • If you get a number smaller than 1, you did not maintain your headcount and your forgivable expenses will be reduced proportionately.

Seasonal employers

For seasonal employers, you have more freedom in choosing a 12-week period that best represents your operations. Here is the calculation you must use.

First, calculate your average number of full-time equivalent employees you had during:

  • The 8-week to 24-week period following your initial loan disbursement, (A)
  • For seasonal employers only, any consecutive 12-week period between February 15, 2019, and February 15, 2020 (B)

Take A and divide by B.

  • If you get a number equal to or larger than 1, you successfully maintained your headcount and meet the staffing requirement.
  • If you get a number smaller than 1, you did not maintain your headcount and your forgivable expenses will be reduced proportionately.

You must rehire employees to maintain your employee count before you apply for forgiveness. It’s best to check this calculation throughout your covered period to make sure you’re meeting the requirement.

Exemptions on rehiring employees

Employees who were employed as of February 15, 2020, and were laid off or put on furlough may not wish to be rehired onto payroll. If the employee rejects your re-employment offer, you may be allowed to exclude this employee when calculating forgiveness.

To qualify for this exemption:

  • You must have made a written offer to rehire in good faith
  • You must have offered to rehire for the same salary/wage and number of hours as before they were laid off
  • You must have documentation of the employee’s rejection of the offer

If any of these conditions apply to an employee, you can also qualify for an exemption:

  • They were fired for cause
  • They voluntarily resigned
  • They voluntarily requested and received a reduction of their hours

You may also be required to demonstrate you were unable to hire similarly qualified employees for unfilled positions, or document that due to safety requirements, you were unable to return to normal operating levels. Note that employees who reject offers for re-employment may no longer be eligible for continued unemployment benefits.

  1. Pay requirements

You must maintain at least 75% of each employee’s total salary.

This requirement applies to every employee that received less than $100,000 in annualized pay in 2019 or 2020 (depending on what year you used to calculate your PPP loan amount).

If the employee’s pay over the 24 weeks is less than 75% of the pay, they received during the most recent quarter, the eligible amount for forgiveness will be reduced by the difference between their current pay and 75% of the original pay.

  1. Rehiring grace period

For PPP loans distributed in 2020, any rehiring must have been done before December 31, 2020.

For PPP loans distributed in 2021, the SBA has not released any information on a potential grace period for rehiring employees. As of now, any rehiring must be done before the end of your covered period.

Reductions in your forgiveness amount (examples)

Spending your PPP funds on the right things is straightforward enough. But things get more complicated when you don’t keep your headcount and employee pay levels the same.

Headcount reduction

Let’s say you have three full-time employees and they each made $3,000 per month, meaning your PPP loan amount was $22,500 ($3,000 x 3 employees x 2.5). You had to lay them off in February 2020 due to COVID-19.

If you only hire back two out of the three employees, your workforce is 67% (two-thirds) of your original headcount.

Over the 24 weeks of the PPP coverage period, you spend $36,000 on your employees (more than your PPP loan amount). You claim the full $22,500 of your PPP loan for forgiveness. Let’s assume you do not qualify for any rehiring exemptions. When it comes to calculating your forgivable amount, it will be 67% (0.67) of your loan because of the reduction to your headcount. This means you would be able to have $15,075 ($22,500 x 0.67) forgiven.

Pay reduction beyond the 75% threshold

Let’s say you have three employees that each made $3,000 per month before COVID-19. Your PPP loan amount was $22,500 ($3,000 x 3 employees x 2.5). You had to lay them off in February 2020 due to COVID-19. You hired back all three of your employees, but at a reduced salary of $2,000 a month.

Over the 24 weeks of the PPP coverage period, you spend $36,000 on your employees (more than your PPP loan amount). You claim the full $22,500 of your PPP loan for forgiveness.

When it comes to calculating your forgivable amount, your lender looks at each employee’s individual compensation. The 75% minimum salary is $2,250 (0.75 x $3,000). You’re paying each person $250 less each month. The $250 difference is scaled up to the 24-week period ($250 x 6 months) totaling $1,500. After multiplying this by three employees, $4,500 would be deducted from the forgivable amount. This results in a total of $18,000 forgiven ($22,500 – $4,500).

A conversation with a bookkeeper can help make sense of your specific situation.

PPP forgiveness for self-employed individuals

You are entitled to use the PPP loan to replace lost compensation due to the impacts of COVID-19. You are eligible to claim 2.5 months’ worth of your 2019 or 2020 net income to replace pay. Loans received after March 3, 2021 can use their 2019 or 2020 gross income if they used their gross income to apply. If you didn’t have any other payroll expenses factoring into your PPP loan amount, this means your entire PPP loan could be forgiven for the 24-week period.

If you are using an 8-week forgiveness period, you can claim 8 weeks’ worth of your 2019 or 2020 net income or gross income as owner compensation replacement (or “proprietor costs”). The remaining PPP funds will need to be spent on other eligible expenses in order to be forgiven. Using a covered period of at least 11 weeks will let you take the full 2.5 months of net income or gross income.

In order to submit mortgage interest, rent, or utilities expenses for forgiveness, you must have claimed a deduction for those expenses on your 2019 Form 1040 Schedule C.

For example, in 2019 you worked in an office space and did not have a home office. Because you didn’t work from home, you could not have claimed a 2019 deduction for your home mortgage interest. Therefore, even if you are currently working at home now, you are not eligible to submit home mortgage interest payments for forgiveness.

If you are self-employed but received a PPP loan through multiple businesses, you are capped at $20,833 in owner compensation across all the businesses you’ve received a PPP loan through.

For example, let’s say you received a PPP loan through two businesses and you received $15,000 in owner compensation replacement from your sole proprietorship. In this case you are only eligible for $5,833 ($20,833 cap less $15,000) of owner payroll from your other business.

PPP forgiveness for partnerships

As a general partner in a partnership, your eligible compensation is based on your partnership 2019 or 2020 net earnings.

The maximum partner compensation is capped at the 2019 or 2020 Schedule K-1 net earnings from self-employment. This amount must be reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties. Once you’ve taken these reductions into consideration, multiply the value by 0.9235. This is to remove what would be the employer portion of self-employment taxes.

 

Want more? Visit the SBA website for PPP Loan Forgiveness.