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The Complete Guide to Paycheck Protection Program (PPP) Loan Forgiveness

The Complete Guide to Paycheck Protection Program (PPP) Loan Forgiveness

The Treasury and SBA launched a PPP forgiveness loan that many borrowers will use to apply for the Paycheck Protection Program (PPP) loan. There is also an alternate EZ Form. In this article, we will guide PPP borrowers through this application and share the additional information provided in the guide below, if applicable.

The best part of the PPP is that 100% of the loan can be canceled if certain criteria are met.

Here is a complete guide on how to prepare for full loan repayment.


Let's take a look at the terms of the PPP first.

The loan amount is based on the average monthly salary cost as of 2019. You can receive 2.5 times this amount to help cover eight weeks of salary.

The features of the Paycheck Protection Program (PPP) can be used for the following purposes:

  • Payroll: salary, parental, wages, leave, family, sickness or illness, health benefits

  • Mortgage Interest: provided that the loan is signed before February 15th, 2020

  • Rent: as long as the contract was in effect before February 15th, 2020

  • Utilities: as long as the service started prior to February 15th, 2020 

All expenses that fall into these categories are eligible for forgiveness. The following conditions also apply:

24-Weeks of Coverage

Eligible expenses are those incurred for 24 weeks from the day the creditor made the first payment. It is not necessarily the date you signed the loan agreement.

It is not necessary to change the payroll schedule. All payment slips incurred by employees during 24 weeks are eligible, even if the effective payment date exceeds eight weeks. December 31st, 2020, is the deadline for eligible expenses. For loans paid on or after July 16th, you won't be able to take full advantage of the 24 weeks.

If you received the PPP loan before June 5th, you could still use it for eight weeks. Not sure whether to opt for the eight weeks or 24 week coverage period? The main factors to consider are whether you are an independent employee receiving compensation from the owner and whether you have enough eligible expenses to repay the loan. 

60/40 Rule

At least 60% of the loan must be used for personnel costs. Payments to independent contractors cannot be included in personnel costs. The forgivable amount will increase in proportion to the amount spent in the payment statement, up to the total loan amount.

Staff Requirements

You should keep a comprehensive number of employees on your payroll.

You can use this calculation to determine if you have met this requirement:

The first thing to do is to determine the average number of full-time equivalent employees you had for:

  • The eight weeks after the initial loan payment, (X)

  • Between February 15th, 2019 and June 30th, 2019, (Y)

  • And from January 1st, 2020 to February 29th, 2020. (Z)

Take X and divide it by Y. Do the same with Z. Take the largest number you obtain. If you are a periodic employer, you must separate with Y. 

  • If you come up with a number equal to or greater than 1, you have successfully met your headcount and met this requirement.

  • If you come up with a number less than 1, then the reverse is the case, and your refund will be reduced accordingly.


Employees hired on February 15th, 2020, and have been released or fired may not wish to be rehired onto the payroll. If the employee rejects the offer of re-employment, you can exempt this employee when calculating forgiveness.

To benefit from this exemption:

  • You are expected to have made a written offer to rehire in good faith.

  • You must offer to rehire it for the same salary/wages and hours before resignation.

  • Documentation relating to the employee's rejection of the offer must be available.

If one of these conditions applies to an employee, you may also benefit from an exemption:

  • They were fired for a just cause

  • They voluntarily resigned

  • They volunteered and received a reduction in their working hours

You may also need to demonstrate that you have not been able to hire employees of similar qualifications for the vacancies or have not been able to return to normal operating levels due to security requirements. Please note that employees who decline re-employment offers may no longer be entitled to unemployment benefits.

Payment Terms

You must have at least 75% of the total salary. This requirement will be assessed individually for each employee who did not receive more than $100,000 in annualized payment in 2019.

Suppose the employee's salary during the 24 weeks is less than 75% of the payment received in the last quarter in which he worked. In that case, the amount eligible for forgiveness will be reduced by the difference between his current salary and 75% of the original.


Grace period for rehire

Any terminated or employee put on furlough may be rehired and reinstated at any rate reduced by more than 25% to meet termination requirements. Such changes were made due to COVID-19 between February 15th and April 26th, and you have until December 31st to do so.


Spending Paycheck Protection Program (PPP) funds on the right things are pretty straightforward. But things get complicated when the same salary and the same level of staff are not maintained.

Staff Reduction

Suppose you have three full-time employees, each earning $ 3,000 per month, which means that the PPP loan value was $ 22,500 (3,000 x 3 x 2.5). You had to fire them in February because of COVID-19.

If you employ only two of the three employees, the headcount will be 67% (two-thirds) of the initial headcount.

During the 24-week PPP period, you spend $ 36,000 on employees, more than the value of your PPP loan. You can request a total of $ 22,500 for your loan. If we assume that you are not entitled to a re-employment exemption for calculating the refundable amount because the workforce is lower, the refundable amount will be multiplied by 0.67. You can be forgiven up to $15,075.

Payment Reduction

Let's say you have three employees, each earning $ 3,000 per month, which means the PPP loan value was $ 22,500 (3,000 x 3 x 2.5) and had to fire them in February because of COVID-19. Then you rehire all three employees but are only able to pay them only $ 2,000 a month.

During the 24-week PPP period, you spend $ 36,000 on employees, more than the value of your PPP loan. You can request a total of $ 22,500 for your loan.

When it comes to calculating the forgivable amount, we look at each employee's payment. The 75% minimum wage is $ 2,250, so pay each person $250 less than each month. The difference is increased over 24 weeks ($ 250 x 6), then $ 1,500 will be deducted from the forgivable amount. To repeat this for each employee would result in forgiveness of $ 18,000.

Forgiveness For Freelancers

You have the right to use the PPP loan to replace the compensation lost due to the impact of COVID-19. You have the right to claim 2.5 months of your 2019 net profit to replace the payment. If you do not have other Paycheck charges factored into the PPP loan amount, it means that the entire PPP loan could be forgiven within 24 weeks.

If you use an eight week exit period, you can claim the eight-week net income from 2019 instead of the owner's compensation. Remaining PPP funds must be spent on utilities, rents, and mortgage interest to be forgiven.

If you have a mortgage, rent, or utility charges, you must have claimed or be entitled to a deduction for these charges from Form 1040, Schedule C 2019, to claim the rebate.

For instance, if you worked in an office in 2019 and didn't have a home office, you couldn't claim interest deduction on home loans. Even if you are working from home, currently, you cannot claim interest on your mortgage.

Suppose you are self-employed but have received a PPP loan through multiple businesses. In that case, your maximum limit is $ 20,833 in owner compensation for all businesses through which you received a PPP loan. For instance, if you received a PPP loan through two companies and received a replacement indemnity of $15,000 in owner compensation, you would be entitled to $ 5,833 on owners' payroll on other business.


Forgiveness for Partnerships 

As a general partner of a partnership, your eligible compensation is based on your partnership's net gain in 2019.

Partner's maximum compensation is limited to the 2019 Schedule K-1 net earnings from self-employment, all multiplied by 0.9235.

After 24 Weeks: Applying for Loan Forgiveness

Your lender will process applications for loan forgiveness. You will also be obligated to complete a PPP forgiveness request form and submit it to your lender. If you had a PPP loan before the PPP Flexibility Act was signed, you could use the initial eight week period instead of the 24 weeks. 

Once you have submitted the forgiveness request, the law provides that your lender will respond within 60 days.

Documents Required For Forgiveness

These are the necessary documents that you will need to collect to apply for a PPP application. Your lender may have additional requirements.

Records verifying the number of full-time equivalent employees on salaries and their rates of pay, for the periods used to verify compliance with staffing and payment requirements:

  • Documents certifying contributions to health and pension insurance

  • Documents verifying that your interest, rent, and utility payments were active in February 2020

  • Documents verifying your interest, rent and eligible utility payments (checks, receipts, bank statements)

  • Good record keeping and good accounting will be essential to forgive the loan; you will need to keep track of eligible expenses and accompanying documents for 24 weeks. Your lender will likely request these documents in digital format, so take the time to scan all paper documents and keep backup copies of your digital records.

  • Paycheck reports from your Paycheck provider

  • Tax Return (Form 941)

  • Your business will also need to have a full balance sheet at the end of the year. Your lender and SBA have the right to request and verify business and financial records.

  • Your income status, salary and unemployment insurance register

What If My Application for Paycheck Protection Program is not approved?

The lender may allow you to provide additional documents to reassess the claim. Otherwise, the outstanding balance will continue to accumulate 1% interest for the remainder of the five years. There is no penalty for prepayment. You can cancel the remaining balance at any time at no additional cost.

Dennis Jao
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