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PPP Forgiveness Clarification

Updated: Jun 5

Updated for the Paycheck Program Flexibility Act of 2020

A quick recap of PPP(Paycheck Protection Program)


  • Generally, a small business can borrow equal to 2.5 times of your monthly Payroll costs and business owner's "compensation replacement" of 19.23% of your 2019 business net income. There is an annual payroll(owner's net income) cap of $100,000.

  • After you receive the loan proceeds, You can apply loan forgiveness if, during the covered period( 24 weeks), you use the loan proceeds on payroll, mortgage, rent, etc as intended. Otherwise, it will be a 1% interest 5-year loan.

  • If the loan is forgiven, the loan proceeds are completely tax-free.

  • However, to avoid double-dip, the expenses paid by the loan proceeds are not tax-deductible.

  • Safe Harbor-When applying for the loan, all borrowers need to certify the PPP loan is necessary to maintain it's operation and payroll level due to pandemic impact. If the PPP loan is less than 2 million, then SBA deems your certification is made in good faith. Otherwise, your loans will be subject to review by SBA for compliance.

  • Total funding of the PPP loan was 349 Billion for the 1st round and 310 Billion for the 2nd round. As of June 3rd, there is still time and money left to apply if you have not!!

  • The US Treasury has updated FAQ periodically for the latest clarification.


Highlights of PPP Forgiveness


  • The pass of the Paycheck Protection Program Flexibility Act of 2020 gives the business owners significantly more flexibility and time to use loan money and make it much easier for the spending to qualify for forgiveness.

  • SBA published "Loan Forgiveness Application" on its website (pending amendment due to the Flexibility Act) The application is incredibly long and complicated. (I wonder how small business owners can fill it out without help!) It answered a lot of questions borrowers had in mind although not all of them.


"Covered period" to spend the money

  • Originally the "covered period" was 8 weeks, it was extended to 24 weeks by the Flexibility Act. (pending signing)

  • Flexibility in "covered period". Generally "covered period' is 24 weeks following the day you receive the loan proceeds. or, you can choose the 24 weeks starting the 1st pay period following the loan disbursement.

  • If you receive the loan before the passing of the Flexibility Act of 2020(likely will be signed in to law before June 10th, 2020), you can elect to end the covered period 8 weeks after the loan origination.

  • Note: The covered period can not end later than December 31st, 2020.



At least 60% of the loan amount needs to use for payroll costs

  • Business owner-employees' compensation during the 8-weeks period can not be more than 8/52 of owner's compensation in 2019 and capped at $15,384. This means the business owner-employees can not use pay increase as a strategy to achieve the 60% payroll costs threshold. There is no rule regarding the pay increase to other employees.

  • From the form, it also seems that the owner's health insurance premium/retirement costs can not be forgiven.

  • Payroll costs incurred but not paid during the Borrower’s last pay period of the covered period are eligible for forgiveness if paid on or before the next regular payroll date.

Up to 40% of the loan amount non-payroll costs rules:

  • Interest from business loans secured by real or personal properties. The loans need to be preexisting before February 15th, 2020.

  • Rent on real properties or personal properties under leasing agreement incurred before February 15th, 2020.

  • Utility payments: Service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020

  • No prepayment, no principal payment

  • No home office mortgage, rent, utility qualify.

  • The expense can be paid during the 24 weeks covered period or incurred during the 24 weeks covered period but paid by its next due date even it might be outside of the 24 week period.


Reduction in numbers of employees

  • Consequence: Reduction in the number of Full-time Equivalents (FTE) employees will reduce the loan forgiveness amount by the same percentage.

  • FTE definition: You divide the average number of hours paid for each employee per week by 40(not over 40) and numbers together for all employees to get the total FTE number.

  • The reference period of FTE use to compare: February 15, 2019, through June 30, 2019; or January 1, 2020, through February 29, 2020;

  • How to avoid: If you can restore the FTE to the reference period level by December 31, 2020, no reduction of your loan forgiveness amount.

  • How to avoid: Document the reason you can't restore to the previous level of business activity by year-end due to the government COVID-19 shut down or guidance.

  • How to avoid: Document the employee rejects the good-faith written offer, or employee voluntarily resigned or fired for a cause or voluntarily requested a reduction of hours, etc.

Reduction in Pay level of employees

  • Consequence: Reduction in excess of 25% in total annual salary or average hourly wages of any employee during the covered 24-week period will result in a reduction of loan forgiveness amount dollar by dollar.

  • Reference period: Period from January 1, 2020, through March 31, 2020

  • Testing is on each employee basis

  • How to avoid: If you can restore to 75% the pay level to the reference period level by December 31, 2020, no reduction of your loan forgiveness amount.

More information on Convid Relief for business on Virtual CPA For You.


Circular 230:The articles are for general information only. In accordance with IRS Circular 230 they are not considered tax opinions for purposes of relying on such statements in any challenge of the reporting of the above transaction by the IRS. If a full tax opinion is required certain procedures must be met . Also there is a significant cost for a full tax opinion to meet the requirements of Circular 230.

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