UPDATED PPP essentials for small business owners: Qualifying Expenses, Forgiveness, and Recent Changes

It’s been several months now since many small business owners have received and spent their Paycheck Protection Program (PPP) loan awards, and many businesses are now ready to start the forgiveness process.  But SBA rules and legislation have significantly changed the terms of the program since the Cares Act was first passed, and we expect significant changes to come within the next few months.

To recap and update, here’s how the rules surrounding PPP loan forgiveness are being interpreted at this time:

  1. Once the funds are received, the borrower now has 24 weeks to use the funds for eligible expenses in order to qualify for loan forgiveness. Loans dated through June 5, 2020, though, can elect to keep the original 8-week period.
  2. The funds must be used for qualifying expenses within 24 weeks (or if elect, 8 weeks) starting on the date the PPP funds were received (the “covered period”), but in no event later than December 31, 2020.
  3. Qualifying expenses include payroll costs, rent, utilities, and interest on mortgages of real and personal property. Related party rent though is now limited to the amount of mortgage interest paid that is attributable to the space being rented by the PPP borrower.
  4. At least 60% of the PPP funds must be used for payroll costs in order to obtain full forgiveness. Otherwise, there is partial forgiveness.
  5. Payroll costs include: wages (but no more than $100,000 as prorated per employee, which results in a cap of $15,385 for the 8-week period or $46,154 for the 24-week period), employer state and local payroll taxes (mainly state unemployment taxes for Michigan employers), health insurance premiums and other employee benefit programs, and employer retirement contributions.

    However, limitations apply to business owners.  For health insurance, only C-corporation owners are eligible to include this cost, and for retirement contributions, only C and S corporations can include this cost.  These costs though are limited to 2019’s amounts as follows: 8/52 for 8-week Covered Period, and 2.5/12 for 24-week Covered Period.

    For limits on cash compensation to business owners, see chart below:

  6. SBA guidance has provided additional information regarding timing issues for eligible payroll costs:
    • Payroll costs paid or incurred during the “covered period” are eligible for forgiveness.
    • Covered period– 24 weeks (or if elect, 8 weeks) starting on the day the PPP funds are received.
    • Alternative payroll covered period (“APCP”)– 24 weeks (or if elect, 8 weeks) starting on the 1st day of the 1st payroll cycle in the covered period, but only available for bi-weekly or more frequent payroll cycles.
    • Paid– Payroll costs are considered paid on the day the paycheck is distributed or the borrower originates an ACH credit transaction.
    • Incurred – Payroll costs are earned on the day the pay is earned (i.e. the day worked). If not working, costs are incurred on the schedule set by the employer (the day the employee would have worked).
    • Last pay period– Payroll costs incurred during the last pay period of the covered period, or the APCP, are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, can only be forgiven if paid during the covered period or the APCP.

7. Non-related party rent, utilities, and interest on mortgages of real and personal property qualify as long as these were already in place as of 2/5/20. Utilities include electricity, gas, water, telephone, internet access, and transportation.

    • Collectively, these are referred to as non-payroll costs, and the forgiven amount cannot exceed 40% of the total PPP forgiveness.
    • Eligible for forgiveness if:
      • Paid during the covered period, or
      • Incurred during the covered period and paid on or before the next regular billing date, even if that billing date is after the covered period. This may require a proration of the bill.

8.  The forgiven amount of eligible PPP costs is reduced if there is a reduction in the average full-time employee counts during the covered period (or APCP) as compared to the “reference period.”

    • The reference period is the lesser of:
      1. 2/15/19 to 6/30/19, or
      2. 1/1/20 to 2/29/20, or
      3. in the case of seasonal employers, a consecutive 12-week period between 5/1/19 and 9/15/19.
    • Full-time is based on 40 hours or more each week and is considered 1 full-time equivalent (FTE).
    • Part-time employee hours can be calculated as either a percentage of their paid hours to 40 hours, or as .5 FTE. But the choice must be applied across all part-time employees and for all periods involved.
    • Any employees that were let go between 2/15/20 and 4/27/20, and who are rehired (or replaced) by 12/31/20 (at their prior wage amount and hours), will not be considered as a reduction to the FTE count.
    • If an employee is fired for cause, voluntarily resigns, or voluntarily requests a schedule reduction, that employee will be counted at the same FTE as before this event.
    • Any employees that are asked to be rehired and reject the re-employment offer, can be excluded from calculation if: the offer to rehire is for the same salary/wage and number of hours as before they were laid off, the offer is in writing, the offer is made in good faith, the employer’s offer and the employee’s rejection is documented, and the borrower notifies the state unemployment office of an employee’s rejection within 30 days
  • There are also now exceptions for borrowers who cannot find qualified employees by 12/31/20, or are unable to restore business operations to 2/15/20 levels due to COVID-19 related operating restrictions (i.e. capacity limitations, etc.).

9.  Any PPP funds used and not forgiven, as well as any unused PPP funds, will remain as a PPP loan, and subject to the PPP loan repayment terms which are now as follows: no payments until the SBA grants forgiveness or forgiveness is denied, 1% interest rate, and 5 year repayment period for new borrowers, and for current borrowers as well if the lender agrees. If the borrower does not apply for forgiveness within 10 months after the 24-week covered period (or 12/31/20 if earlier), he must begin making payments at that time.


10.  If an EIDL grant was received, it is considered an advance of PPP forgiven funds, and thus the PPP forgiven amount is reduced by the EIDL grant amount.  This means that there will be a PPP loan repayment for the amount of any EIDL grant received, to the extent there is any PPP forgiveness.

11.  The most recent act also expanded the deferral of the employer’s share of social security taxes to 12/31/20 for PPP borrowers.

The SBA has since released three Loan Forgiveness Applications:

  • SBA Form 3508S – Applies if borrower received a PPP loan of $50,000 or less
  • SBA Form 3508EZ – Applies if borrowers meets any one or more of the following:
    • Is self-employed and has no employees;
    • Did not reduce wages of their employees by more than 25%, AND did not reduce their employees’ hours;
    • Experienced reductions in business activity as a result of health directives related to COVID-19, AND did not reduce the wages of their employees by more than 25%.
  • SBA Form 3508All others.

If you would like help managing your PPP loan and preparing for the forgiveness application, please schedule an initial consultation with a ShindelRock tax professional.