Your Business Credit

How to make sure your PPP loan is forgivable

New rules from the government clarify which payroll costs you can cover and stay eligible for loan forgiveness


Many small business owners have applied for Paycheck Protection Program loans to make it through the pandemic-related lockdown. These loans are forgivable if you meet certain criteria when using the funds. Here’s what you should know.

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Many small business owners have applied for Paycheck Protection Program loans to make it through the pandemic-related lockdown.

These are part of the Coronavirus Aid, Relief and Economic Security (CARES) Act aimed at providing economic relief to small businesses adversely impacted by COVID-19.

These loans offer eight weeks of payroll costs, plus 25% to cover other expenses specified by the federal government.

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When are PPP loans forgivable?

The loans are forgivable if 75% of the loan is used on payroll costs and the rest of the money is used as specified.

Lenders are responsible for verifying that borrowers have met the requirements for forgiveness, once borrowers fill out an application for forgiveness. If all or part of the loan forgiveness is denied, the borrower has two years to repay the loan.

In a report that covers the period through May 23, the SBA said that 4,426,118 loans worth a total of $511,231,948,095 were distributed through 5,511 lenders. The average loan size was $116,000.

See related: How to apply for an SBA disaster loan

New rules provide more clarity on loan forgiveness

The SBA and Treasury Department released new interim final rules on May 22 that provided more clarity on which payroll costs may be covered with the funds to make the loan eligible for forgiveness. There are still open questions, but some of the new information may be helpful.

As the federal government states in a recently released application for loan forgiveness, the funds are intended to be used for the following:

  • Payroll costs for an eight-week period following disbursement of the loan or the first day of the payroll period in the covered cycle
  • Business rent
  • Business mortgages
  • Business mortgage interest
  • Business utilities (electricity, gas, water, transportation, telephone or internet access)

The utilities must be paid in the eight-week cycle or, if they were incurred in the eight-week cycle but not billed yet, paid by the next regular billing date, the guidance says. The maximum payroll costs are limited to $100,000 per worker, or $15,384 for the eight-week period covered in the PPP.

See related: 9 small business costs, and the best credit cards to pay them

Key questions about PPP loans

The new guidance offers greater clarity on a few key areas. (It important to consult with your CPA on how the program’s rules apply to you, as the rules are complicated and require a thorough reading.)

1. How much can owners of corporations may pay themselves and still get forgiveness?

Compensation to owners who are corporate shareholders cannot exceed either $15,384 or about 15.38% of their 2019 compensation, whichever is less. This applies to owners of both S-corps and C-corps.

2. How much can general partners pay themselves and still get forgiveness?

Compensation for general partners is limited to $15,384 or 8/52nds of their 2019 “net earnings from self-employment” (up to a maximum of $100,000, prorated for the eight-week period).

3. Can sole proprietors or independent contractors use their PPP loan to cover health insurance or retirement fund contributions and still get that portion forgiven?

The answer is no. The federal government says this is because “such expenses are paid out of their net self-employment income.”

4. Can you pay employees bonuses or hazard pay and still get forgiveness for what you spend on this?

The guidance says these are considered legitimate payroll costs, as long as they don’t exceed the $15,384 for the eight-week period.

5. Can employers get forgiveness for the payment of an employee who does not want to come back to work because he or she is getting more income on unemployment?

This has been a big challenge for employers of lower-wage workers who are bringing home more on unemployment than they did in their jobs.

According to the new guidance, employers don’t have to reduce employee head count if they made a good-faith effort to rehire the employee and the offer was for the same salary, wages or hours as the employee earned in the pay period before they stopped working or before hours were reduced – and the employee rejected the offer to come back. Employers must document the rejection of the offer and inform the state unemployment office the employee has done so.

See related: What to do if you’re unemployed and have credit card debt

Final thoughts

There are a couple of issues worth keeping an eye on.

Congress is considering extending the eight-week period to 12-16 weeks. This would help many small businesses that were not able to open their doors at the start of the eight-week period.

Additionally, it remains unclear how home-based businesses may use the funds for non-payroll costs and still get forgiveness.

For instance, the guidance says the loans will be forgivable if used for business rent or mortgages. What isn’t stated is what happens if an owner takes the home office deduction. Can the PPP be used for the mortgage or rent on the portion of the home that is used for business?

It is very likely there will be more guidance to come, but in the meantime, this latest one will make it a little easier for small businesses to get their loans forgiven.

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The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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