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An Update on PPP Loan Forgiveness

Where the Program Stands and Unanswered Questions

Anchin AlertApril 20, 2020
An Update on PPP Loan Forgiveness

The Paycheck Protection Program (“PPP”) is intended to support employers to continue to pay their workers. Congress’ intent in this section of the CARES Act was to protect employees’ compensation while many businesses face COVID related challenges. 

The CARES Act provides that PPP loans can be forgiven, on a federally tax-free basis, up to 100% of the amount borrowed if the company meets certain criteria, including:

  • Loan proceeds are used to cover “payroll costs”, mortgage interest, rent paid on leases, and utility costs that are paid over the eight-week period that begins the date the loan proceeds are received (the “benefit period”);
  • Employee headcounts are maintained;
  • Compensation levels are maintained for employees earning $100,000 or less; and
  • Not more than 25% of the loan amount is used for qualified non-payroll costs.


It is unknown at this time if any states will decouple from the tax-free treatment of PPP loan forgiveness.  We will monitor state announcements on this topic.  It is also not known whether the qualifying expenses covered by the forgiven loan proceeds will still be tax deductible.  It appears that further clarification will be needed from the IRS.

The maximum amount of your PPP loan that is eligible for forgiveness is equal to the amount of costs incurred and payments made for qualifying expenses during the eight-week benefit period.  Further clarification is needed from the SBA as to how “costs incurred and payments made” under the CARES Act will be defined in practice. 

Qualifying expenses include:

  • “Payroll costs” including salary, wages, active partners’ income and commissions (up to a maximum annualized amount of $100,000 per employee), plus employee group healthcare benefits, medical or sick leave (excluding sick leave covered by tax credits received under the Families First Coronavirus Response Act (FFCRA), retirement benefits, and state or local taxes assessed on the compensation of employees. Payroll costs should also include severance pay and bonuses, subject to the annualized cap and further SBA guidance.
  • Interest on mortgage obligations (for mortgages originated prior to February 15, 2020)
  • Rent under a lease agreement (for leases in force prior to February 15, 2020)
  • Utilities (electricity, gas, water, transportation, telephone and/or internet – placed in service prior to February 15, 2020)

It is noted that many companies may own the property that their business occupies, often in a separate affiliated entity.  It is not yet known whether the qualifying expense in this scenario will be the rent paid to the affiliate or the interest on the mortgage the affiliate pays, which is likely a smaller amount.  Hopefully, the SBA will provide clearer instructions in their final guidance to be issued.

It also appears that by “mortgage obligations” the SBA meant any debt secured by real or personal property.  Watch for further guidance on this issue from the SBA.

The amount of the loan forgiveness will be reduced based on the following calculations:

  • Loan Forgiveness Reduction Based on a Decrease to Employee Headcounts 
    A reduction to the loan forgiveness will be made if the average number of full-time employee equivalents (FTEs) per month during the eight-week period is less than the average number of employees per month during the look-back period (which can be February 15, 2019 to June 30, 2019, or January 1, 2020 to February 29, 2020, at the borrower’s discretion).  The average number of FTEs per month is calculated based on the average number of FTEs for each pay period falling within a month.  The term FTEs has not been defined in the CARES Act.

    See the Anchin Alert dated March 31, 2020 for details on this calculation.

    The reduction in loan forgiveness related to the reduction in headcount can be avoided if the reduction in FTEs that was made during the period between February 15, 2020 and April 26, 2020 is restored by June 30, 2020.

  • Loan Forgiveness Reduction Based on Reduction in Salaries For Each Employee
    There will be a reduction to the loan forgiveness amount for each employee - who earned annualized wages during 2019 of less than $100,000 (or $8,333.33 per month) – by the percentage reduction in annualized wages of more than 25% during the eight week benefit period, as compared to their most recent full quarter (i.e., Q1 2020).

    The reduction in loan forgiveness for a reduction in wages can be avoided if the borrower restores, by June 30, 2020, the same wage rate the employee was earning as of February 15, 2020 as compared to wages paid between February 15, 2020 and April 26, 2020.

  • Loan Forgiveness Reduction Based on Use of Funds - Payroll Costs vs. Non-Payroll Costs
    Pursuant to U.S. Treasury and the second Interim Rule, at least 75% of the loan proceeds must be used for payroll costs. Pursuant to the first Interim Rule, the amount of PPP loan forgiveness will be reduced to the extent loan proceeds are used for qualified non-payroll costs in excess of 25% of the total amount eligible for forgiveness.  The way borrowers must compute these limitations needs further clarification. 

    Watch for clarification and further guidance on loan forgiveness reduction from the SBA.

    It is noted that many businesses have effectively shut down, hopefully temporarily, due to the Pandemic.  Many have asked if they are “really supposed to pay their people to not work”.  The answer would appear to be “Yes.”  If the borrower does not have payroll costs during the 8-week period, they will not qualify for any forgiveness.  While many specific industry groups continue to lobby for relief for such businesses, it is not known whether there will be any exceptions to this requirement.  It is the Paycheck Protection Program, after all.

PPP Loan Forgiveness Application

A PPP loan recipient seeking loan forgiveness will be required to submit the following to their lender:

  • A formal application, yet to be released by the SBA;
  • Documentation verifying the number of full-time equivalent employees on payroll and pay rates for the referenced periods including payroll tax filings to the IRS, state income, payroll and unemployment insurance filings and payroll registers, among other support;
  • If you work with a PEO, you should save your payroll invoices supporting the payroll costs, employee benefits, and retirement benefits paid;
  • Documentation supporting other covered expenses (mortgage interest, rent, utilities) including canceled checks, payment receipts, account statements, invoices, and/or other documents;
  • Certification from your company representative that the documentation presented is true and correct, and the amount for which forgiveness is requested, was used to retain employees, and /or make payments on a covered expense (interest on a mortgage, rent or utilities); and
  • Any other documentation the SBA determines necessary.

The PPP lender is required to make a decision on loan forgiveness no later than 60 days after an application has been submitted. 

The CARES Act also offers an opportunity for businesses to defer payment on their half of the Social Security tax due on their payroll, beginning March 27, 2020.  The Act prohibited this deferral for recipients of PPP loans who intended to file for forgiveness.  However, the IRS recently clarified that applicants/recipients of PPP loans may also defer these tax payments through the date on their application for loan forgiveness is approved.  The amount deferred through that date will be due at least 50% by December 31, 2021 with the balance due no later than December 31, 2022.

The Treasury and the SBA continue to update, change and clarify the guidance related to the PPP Loan Program. Anchin’s COVID-19 Resource Team continues to monitor the PPP Loan Program rules. Please contact your Anchin Relationship Partner for more information. Additional updates can be found at our Anchin COVID-19 Update Center.

Disclaimer: Please note this is based on the information that is currently available and is subject to change.

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