How to ensure loan forgiveness under the Paycheck Protection Program

As most small businesses are aware, the $350 billion that the government originally approved to fund the Paycheck Protection Program (PPP) was depleted, and Congress agreed this week to add another $310 billion to the fund so more businesses can take advantage of its benefits.


One of the most enticing aspects of PPP is the government’s plan to forgive these loans under certain circumstances, which effectively turns them into grants. However, the forgiveness aspect of these loans is not absolutely guaranteed — you must meet certain criteria for your loan to be forgiven.


Consider the following strategies to ensure your loan can eventually be forgiven.

Know which expenses are forgiven

You can’t take out a PPP loan and expect to use it on anything you’d like. To qualify for forgiveness, you must use the loan proceeds to cover payroll costs, as well as most mortgage interest, rent, and utility costs over the eight week period after the loan is made; and you must maintain employee and compensation levels, the government says in its Borrowers Information Sheet.


Wondering what constitutes “payroll costs?” Fortunately, the Department of the Treasury breaks that down as follows:


• Salary, wages, commissions or tips (capped at $100,000 on an annualized basis for each employee);


• Employee benefits including costs for vacation, parental, family, medical or sick leave; allowance for separation or dismissal; payments required for the provisions of group health care benefits including insurance premiums; and payment of any retirement benefit;


• State and local taxes assessed on compensation; and


• For a sole proprietor or independent contractor: wages, commissions, income or net earnings from self-employment, capped at $100,000 on an annualized basis for each employee.


If you’re using PPP funds to pay rent, utility and mortgage costs, you must meet the following requirements:


• Interest on mortgage obligations, incurred before February 15, 2020;


• Rent, under lease agreements in force before February 15, 2020;


• Utilities, for which service began before February 15, 2020.

Understand the coverage period, 75% Rule

When the lender eventually evaluates whether you used the loan money for covered expenses during the covered period, the lender is going to scrutinize the eight-week period following the loan origination date. During those eight weeks, you must use at least 75% of the loan amount for payroll costs, with the remaining funds going toward covered mortgage interest/lease/utility payments.

Maintain staff headcounts

To qualify for loan forgiveness, you must maintain the same headcount on your payroll during the coverage period that you had during the pre-loan eight-week period.


“Your loan forgiveness will be reduced if you decrease your full-time employee headcount,” the government says. Your loan forgiveness will also be cut if you reduce salaries and wages by more than 25 percent for anyone who made less than $100,000 per year in 2019.


“You have until June 30, 2020 to restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020,” the government notes.

What must your certification include?

When applying for PPP loans, you must certify that you meet the following conditions:


• Current economic uncertainty makes the loan necessary to support your ongoing operations.


• The funds will be used to retain workers and maintain payroll or to make mortgage, lease and utility payments.


• You have not and will not receive another loan under this program.


• You will provide documentation that verifies the number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments and covered utilities for the eight weeks after getting this loan.


• Loan forgiveness will be provided for the sum of documented payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities. Due to likely high subscription, it is anticipated that not more than 25 percent of the forgiven amount may be for non-payroll costs.


• All the information you provided in your application and in all supporting documents and forms is true and accurate. Knowingly making a false statement to get a loan under this program is punishable by law.


• You acknowledge that the lender will calculate the eligible loan amount using the tax documents you submitted. You affirm that the tax documents are identical to those you submitted to the IRS. And you also understand, acknowledge, and agree that the lender can share the tax information with the SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of compliance with SBA Loan Program Requirements and all SBA reviews.


Keep in mind that the PPP is subject to changing government guidelines, so this information will be updated as the factors involved in the program shift.