How Paycheck Protection Program Loan Forgiveness Works

April 16, 2020

The second round of stimulus provides the Small Business Administration to authorize another $310 billion in forgivable loans to small businesses through the Paycheck Protection Program (PPP) to pay their employees during the COVID-19 crisis. All loan terms are the same for everyone.

We’ve written about various parts of the program:

In this article, we will address a key component of the program that provides 100 percent forgiveness up to the full principal amount of the loan and any accrued interest.

The loan will be forgiven for expenses spend during the eight-week period after disbursement on

  • Payroll costs
  • Rent on leases incurred before Feb 15
  • Mortgage interest or other debt interest on loans before Feb 15
  • Utility expenses

A borrower must document the proceeds used for payroll costs in order to determine the amount of forgiveness. To request loan forgiveness, a borrower must submit a request to the lender that is servicing the loan and certify accuracy of documents. The lender has 60 days to respond.

It’s important to note that not more than 25 percent of the loan forgiveness amount may be attributable to nonpayroll costs. The canceled loan amount will not count toward gross income for tax purposes. The term “covered utility payment” means payment for a service for the distribution of electricity, gas, water, transportation, telephone or internet access for which service began before February 15, 2020.

The loan forgiveness will be proportionally reduced if a company decreases its full-time employee headcount from your headcount on Feb 15 or decreases salaries and wages by more than 25 percent for any employee that made less than $100,000 annualized in 2019. A company has until June 30, 2020 to restore full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020.

Here are several questions ALTA has received about loan forgiveness under the PPP:

  • Do I need to hold my PPP loan proceeds in a separate segregated account? No. However, using a separate account may make it easier to document the use of the proceeds for forgivable purposes.
  • How can I use the money such that the loan will be forgiven? The amount of principal that may be forgiven is equal to the sum of expenses for payroll, and existing interest payments on mortgages, rent payments, leases, and utility service agreements. Payroll costs include employee salaries (up to an annual rate of pay of $100,000), hourly wages and cash tips, paid sick or medical leave, and group health insurance premiums. If you would like to use the Paycheck Protection Program for other business-related expenses, like inventory, you can, but that portion of the loan will not be forgiven.
  • When is the loan forgiven? At the end of the eight-week period after you take out the loan, you can apply to your loan servicer for forgiveness. Borrowers will work with lenders to verify covered expenses and the proper amount of forgiveness. Servicers will have up to 60 days to respond to a forgiveness request.
  • What is the covered period of the loan? The covered period during which expenses can be forgiven extends from February 15, 2020 to June 30, 2020. Borrowers can choose which eight weeks they want to count toward the covered period, which can start as early as February 15, 2020.
  • How can I request loan forgiveness? You can submit a request to the lender that is servicing the loan. The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations. You must certify that the documents are true and that you used the forgiveness amount to keep employees and make eligible mortgage interest, rent, and utility payments. The lender must decide on the forgiveness within 60 days.
  • How much of my loan will be forgiven? Up to 100% of the loan proceeds you spend over the eight-week period form the date the loan is disbursed that is spent on payroll costs, mortgage interest, rent, and utilities. The purpose of the Paycheck Protection Program is to help you retain your employees, at their current base pay. If you keep all of your employees, the entirety of the loan will be forgiven. If you still lay off employees, the forgiveness will be reduced by the percent decrease in the number of employees. If your total payroll expenses on workers making less than $100,000 annually decreases by more than 25 percent, loan forgiveness will be reduced by the same amount. If you have already laid off some employees, you can still be forgiven for the full amount of your payroll cost if you rehire your employees by June 30, 2020.
  • Do you lose forgiveness eligibility of the PPP loan if an employee is fired for cause\poor work within the time frame discussed re: required employee retention? Maybe. Currently, the SBA guidance suggests two test for determine the amount of eligible forgiveness borrower. First, the servicer will measure your headcount at the date of forgiveness request compared to Feb 15. Second, the servicer will measure whether the rate of pay for employees has been decreased from the Feb 15 level. You may not lose forgiveness eligibility if you only reduce employee hours, but not salary or pay rate.
  • Is there a sure way to know ahead of time that you qualify for full forgiveness? No.
  • Am I responsible for interest on the forgiven loan amount? No, if the full principal of the PPP loan is forgiven, the borrower is not responsible for the interest accrued in the eight-week covered period. The remainder of the loan that is not forgiven will operate according to the loan terms agreed upon by you and the lender.
  • If an agency uses funds for payroll and ends up making a profit for those eight weeks can they still get the forgiveness? Yes. There is no restriction on forgiveness except that the funds be used for an allowable purpose and that staff levels are maintained.
  • What are the interest rate and terms for the loan amount that is not forgiven? PPP loans have a two-year maturity with a one percent interest rate. Loan payments will be deferred for at least six months and up to one year starting at the origination of the loan.
  • What if you only asked for a PPP loan to cover your payroll but you spend part of it on your utilities or mortgage? Would they be forgiven too? Yes, but your eligible amount of forgiveness may be reduced if you don’t spend at least 75% of your loan on payroll costs.
  • If a company has no employees just independent contractors that are paid via 1099, can the company still qualify for a PPP and obtain forgiveness for interest and utilities? Maybe. You can still qualify for a PPP as a sole proprietor however the amount you are eligible to borrow will be based solely on payroll costs (aka your income as paid via salary or reported on Schedule C of your tax return). If you elect to use those proceeds to only pay interest and utilities, you will only be eligible for a maximum forgiveness equal to 25%.
  • Is salary to a part-time employee covered under PPP and forgivable? Yes.

Contact ALTA at 202-296-3671 or