Paycheck Protection Program: Loan Forgiveness Q&A

The Paycheck Protection Program (“PPP”) authorized up to $349 billion in forgivable loans to small businesses to pay their employees during the COVID-19 crisis. All loan terms will be the same for everyone. The loan amounts will be forgiven as long as:

  • The loan proceeds are used to cover payroll costs, and most mortgage interest, rent and utility costs over the 8-week period after the loan is made; and
  • Employee and compensation levels are maintained.

Payroll costs are capped at $100,000 on an annualized basis for each employee. Due to likely high subscriptions, it is anticipated that not more than 25% of the forgiven amount may be for non-payroll costs. Loan payments will be deferred for 6 months.

1. What is involved in payroll costs?

Payroll costs include gross payroll including salary, wages, commissions and similar compensation, tips, payment for leave, severance pay, group healthcare coverage and premiums, retirement compensation and employer payment of state and local taxes assessed on compensation (i.e., state unemployment but not employer share of FICA because that is Federal).

2. What is excluded from payroll costs?

Compensation of employee whose principal resident is outside the U.S., compensation in excess of $100,000 (but this exclusion is in gross wages, not benefits), and any credits taken under the Federal Family First Coronavirus Response Act.

3. Do payroll costs for an employer that uses a Professional Employer Organization qualify?

Yes. The employer will need to include a Schedule R from form 941 of the PEO as supporting documentation for forgiveness.

4. Are distributions from a flow-through entity (S-Corps or Partnership) considered payroll costs?

Not currently.

5. How do partnerships and LLC’s determine payroll costs?

Guaranteed payments and income subject to self-employment for general active partners are includible in the payroll cost up to the $100,000 cap.

6. How are payroll costs determined for self-employed and IC (Independent Contractors)?

The PPP loan is based on line 51 of Schedule C up to $100,000. If this is a loss, the loan would be zero.

7. When does the eight-week period begin to determine forgiveness for the PPP loan?

The cycle begins on the date the lender makes the first disbursement of the loan. The lender must make disbursement within ten calendar days after loan approval. New guidance issued on 5/15 allows an alternative covered period.

8. What costs are included in determining forgiveness?

Payroll costs, health care benefits, retirement benefits, rent, utility, and mortgage interest. See our previous Advisor on Loan Forgiveness Summary for more details and we expect significant guidance in this area to be issued by the SBA before April 26, 2020.

9. Are there restrictions on determining loan forgiveness?

The loan forgiveness is limited by ratios comparing FTEs during the eight-week covered period and three other defined coverage dates. There is also a 25% wage reduction test of any employee that makes less than $100K annually that must be determined during the eight-week forgiveness period and the previous full calendar quarter. This is an employee-by-employee test. (See our Loan Forgiveness Highlights for more information). In addition, at least 75% of the forgiveness amount must be used for payroll costs. The ordering rules will also be important once more guidance is provided from the SBA.

10. How is an FTE (Full-time Equivalent) defined?

A Full-time equivalent includes employees who work 40 hours per week or more. Full-time equivalent also includes the aggregate of employees who work less than 30 hours a week, where the work hours add up to at least a 40-hour workweek. New guidance issued on 5/15 provides for two calculation options.

11. What about seasonal employers?

Seasonal employers can use an alternative base period for purposes of calculating the loan amount for which they are eligible under the PPP. Because of the disparity in program administration, seasonal employers have the option of using any consecutive 12-week period between May 1, 2019, and September 15, 2019, for determining its maximum loan amount. The Treasury has issued additional guidance on seasonal employers.

12. Are expenses determined on a cash or accrual basis?

Both, the guidance notes paid or incurred. Read details for this new guidance that was issued on 5/15.

13. Are expenses that qualify for forgiveness deductible?

There are two schools of thought here. First, if it will be forgivable and meets the definition in the CARES Act, it is not includable in gross income. The other opinion is that IRS Code Section 265 may apply, which would need guidance from the SBA and/or IRS on this issue.

14. Are rent payments to a related party includible for forgiveness?

There is nothing currently in The Act that would preclude these from inclusion in qualified expense, but this will be addressed in the SBA guidance forthcoming.

15. What documentation will be required for forgiveness?

The documents required include a borrower certification, supporting documentation in the form of checks, invoices, registers, tax returns, etc., and evidence of compliance with February 15, 2020, the date for leases, utility service, etc. See our Loan Forgiveness Highlights for more detail.

16. There are two covered periods included in the CARES Act. How do they interact?

One covered period is defined as February 15, 2020, to June 20, 2020, and the other is defined as the eight-week forgiveness period after receipt of the loan. These conflict each other depending on when the borrower’s forgiveness period begins and will need clarification from the SBA guidance.

17. Is interest expense from non-mortgage debt forgivable?

One section in the CARES Act seems to confirm but is not included in the forgiveness section. Again, clarity from the SBA is needed.

18. Are bonus payments forgivable if paid in an eight-week period?

There are no clear answers here. Current interpretation indicates that if the amount is consistent with prior practice and applies to the 60-day period, it may be forgivable. Additional guidance is still needed in this area. Regardless, if bonus payments are allowable to be included and forgiven, there is a $15,385 limit on how much you can pay an employee during the payout period and have it count toward forgiveness. This is essentially eight weeks of payroll for an employee who otherwise earns $100,000 a year. Other payroll costs such as group health insurance premiums, retirement benefits and state unemployment tax are not included in this cap.

19. How is the $100,000 compensation loan determined for the eight-week forgiveness period?

The most common calculation is the max compensation, which is $15,394 ($100,000/52 x 8). This gets confusing because of different pay cycles, accrual vs cash basis, accounting, etc. This needs to be clarified in the SBA regulation to be issued.

The Treasury has provided an FAQ sheet to help borrowers better understand the terms and conditions of the loan. If you still have questions on forgiveness of your loan or how to maximize loan forgiveness, contact your BMF Advisor.

Visit our COVID-19 Resource Center for additional information and resources for you and your business.

About the Authors

Dale A. Ruther
Dale A. Ruther
Partner Emeritus,


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