There’s an old saying about not trying to pack your parachute after you’ve already stepped off the plane. In other words, it’s generally not a good idea to delay some action or decision until you’re already in the middle of it. Take the Paycheck Protection Program (PPP). The forgiveness provision is perhaps its most compelling feature for small and mid-size businesses, not-for-profit organizations and the self-employed. However, the rules for getting a loan forgiven are complex and continue to evolve, even though the extended deadline for applying for a PPP loan has passed. In fact, the Small Business Administration issued a new Interim Final Rule on July 28, 2021 that streamlines the forgiveness process for loans of $150 ,000 or less. And the application form for first-draw loans was updated nine times.


The PPP loan program was created in the CARES Act to help businesses and not-for-profits with certain eligible operating expenses during the economic downturn brought on by COVID-19. In large part, that meant helping them with payroll costs to retain their employees. The repayment rules were designed with that in mind. As a result, forgiveness of PPP loans is based on how the loan proceeds are actually used. But the rules continue to evolve, leaving borrowers to deal with unexpected changes and ongoing uncertainties. In addition to the traditional loan forgiveness process, in August of 2021, the SBA opened an optional direct loan forgiveness portal with a streamlined process for borrowers with loans of $150,000 or less. These borrowers represent more than 90 percent of all PPP borrowers. The application form for first-draw loans was updated nine times.

Loan Forgiveness Qualifications

To have a loan forgiven in full — including principal and accrued interest — the PPP borrower must satisfy the following requirements:

  • during the covered period, used loan proceeds for forgivable expenditures
  • maintained the number of employees and compensation levels, or qualified for a safe harbor
  • used at least 60 percent of loan proceeds for payroll costs, leaving 40 percent for other eligible expenses

Borrowers are not required to subtract the amount of any EIDL advance from their loan forgiveness. For those borrowers who received loan forgiveness reduced by their EIDL amounts, the SBA must issue rules to make these borrowers whole.

PPP Loan Forgiveness Process

A PPP borrower can apply for loan forgiveness any time on or before the maturity date of the loan, assuming the borrower used all of the loan funds for the specified purposes. A borrower that does not apply for forgiveness within 10 months after the end of the maximum covered period (24 weeks) — or some or all of the loan amount is not forgiven —must begin paying principal and interest. Borrowers that apply for forgiveness within the 10-month period, will not be required to make payments and will not accrue interest while a decision is pending, assuming the loan is fully forgiven. Interest continues to accrue on any portion of the loan that is not forgiven. Any amount not forgiven is due by the loan’s maturity date.

Forgiveness Process for PPP Loans of $150,000 or Less

The SBA offers an optional, streamlined PPP loan forgiveness process for smaller loans, representing more than 90 percent of all PPP borrowers. This process is available via a PPP direct forgiveness portal that simplifies PPP loan forgiveness for borrowers with loans of $150,000 or less. Using the portal, qualifying businesses and not-for-profits can register and apply for loan forgiveness directly through the SBA. Importantly, the borrower’s lender must also opt in. Ultimately, even under this direct forgiveness process, the lender has responsibility for making the PPP loan forgiveness decision.

Traditional Forgiveness Process for PPP Loans

To begin the loan forgiveness process, the borrower must complete and submit the appropriate loan forgiveness application form. Second-draw borrowers with loans in excess of $150,000 must submit a loan forgiveness application for the first-draw loan either with or before the forgiveness for the second-draw loan. After receiving the complete loan forgiveness application, the lender must provide the SBA with a decision regarding loan forgiveness within 60 days. The lender must then inform the borrower of the forgiveness amount. From that date, and subject to an SBA audit/review, the lender has 90 days to remit the amount forgiven plus accrued interest. Under current rules, the amount of any EIDL advance does not reduce this amount. (The SBA will automatically repay EIDL advance amounts, plus interest, to borrowers that already had EIDL advance amounts deducted from their loan forgiveness amounts.) If the lender denies forgiveness, in part or in total, the borrower has 30 days to notify the lender that it is requesting an SBA review of the decision. The lender has 5 days to notify the SBA. The SBA has 90 days to review. If the SBA denies forgiveness in any amount, the amount of the loan not forgiven, plus interest, becomes due. As previously noted, borrowers generally must retain PPP forgiveness documentation for six years after the date the loan is forgiven or repaid in full, although the rules vary for loans of $150,000 or less.

Forgiveness Process for PPP Loans of $2 million or More

The SBA reserves the right to review any loan of at least $2 million. Lenders may rely on the certifications and documentation submitted by the borrower. The SBA has the authority to review/audit these loans and to access the borrower’s records. If this reveals ineligibility, noncompliance or fraud, the SBA can modify the amount of the loan or the forgiveness amount — or determine the borrower was not eligible for the loan.

Loan Forgiveness Documentation

Generally, to support loan forgiveness, you should retain all relevant supporting documents, including payroll reports and tax forms, invoices and payment receipts, copies of checks, banking records, unemployment filings, retirement and health insurance payment records, plus other documents you used to determine the amount of your loan. The SBA’s loan forgiveness application form includes a very detailed list of the documents you need to submit with your application, the documents you should retain but don’t need to submit, and the documents (as previously noted) you’re required to keep for six years after the loan is forgiven or repaid. You will need additional documentation if you have employees who refuse an offer to return to work. You can exclude them from your forgiveness calculation if your offer is for the same number of hours and at the same salary/wages as before, so it’s essential to save all documents supporting this treatment. For each employee, you should make the offer to return to work in writing and save a copy. Also, ask each employee who declines your offer to put the refusal in writing and save those, too. Finally, you must notify your state unemployment insurance office within 30 days of the employee’s rejection of your offer. If you are applying for direct forgiveness through the SBA portal, you won’t need to submit documentation unless requested during the application process — including requests from the SBA for information to support calculations.

Loan Forgiveness Forms

Under most circumstances, to have your loan forgiven you must submit an application for forgiveness and provide your lender with documentation to support your application. That includes information on the eligible payroll costs and other eligible expenses incurred or paid during your covered period. The following loan forgiveness forms apply to both first-draw and second-draw loans. If the amount of your loan was no more than $150,000 (originally $50,000), use SBA Form 3508S. If you are a borrower with a loan of more than $150,000, use SBA Form 3508EZ if they meet at least one of the three following requirements: You are an independent contractor, sole proprietor or are self-employed and you have no employees. You haven’t reduced employee wages for those making $100,000 or less by more than 25 percent and did not reduce average employee hours. You haven’t reduced employee wages for those making $100,000 and federal COVID-19 regulations have meant you weren’t able to continue at the same level as before February 15, 2020. In general, all other borrowers that received loans of more than $150,000 use the more complicated SBA Form 3508 or your lender’s alternative. You can apply for forgiveness at any time during the term of the loan. But under certain circumstances it can be advantageous to delay filing. Once filed, if there are issues with your FTE or salary/wage numbers or other calculations — or the rules change — you lose the ability to make corrections after you file your application. You also may lose the ability to use one of the safe harbors.

Expenses Eligible for Loan Forgiveness

Eligible expenses consist of payroll costs and seven categories of nonpayroll costs. Payroll costs must make up at least 60 percent of the loan forgiveness amount. Nonpayroll costs cannot exceed 40 percent. In addition, the underlying obligations for certain of these nonpayroll eligible expenses must have existed before February 15, 2020. The eligible-expense rules for PP2 first-draw and second-draw loans are generally the same as those for original PPP loans, plus a few additions.

Amounts Paid or Incurred for Nonpayroll Expenses

Loan forgiveness can be based on eligible expenses paid or incurred in the covered period. By including expenses that were paid or incurred during the covered period, the SBA appears to have opened the door to include more expenses on the front and back ends than originally presumed to be the case, at least according to current guidance. Consider amounts paid. Any otherwise-eligible amounts you actually paid during the covered period qualify. Assume you were behind in paying various utilities and had several months of unpaid invoices due before the start of the covered period. It appears that you can pay all of them during the covered period and increase the total amount of your eligible expenses. Expenses incurred but not yet paid by the end of the covered period, but are paid by the next regular billing date, are also considered eligible — even if the billing date is after the covered period.

Payroll Costs

In determining payroll costs for PPP loan forgiveness, it is important to note that a PPP borrower cannot use the same wages with regard to both loan forgiveness and the employee retention credit. This is a retroactive change as, under the original PPP rules, PPP borrowers were not eligible for the credit. Additional guidance on how borrowers can implement this retroactive change was provided in IRS Notice 2021-20, including how to treat wages identified on a loan forgiveness application that did not affect the amount of loan forgiveness. Not-for-profits must exclude payroll amounts covered by certain government grants. Payroll Costs for Employees Residing in the U.S. Eligible payroll costs consist primarily of cash compensation: gross salary and gross wages, gross commissions, gross tips, gross commissions, paid leave (vacation, family, medical, health, but excluding Families First leave) and any separation pay. Importantly, it includes hazard pay. In other words, cash compensation refers to the gross amount before deductions. This maximum forgivable compensation is limited to $100,000 in annualized salary/wages for any one employee, then prorated for the covered period. For example, a maximum of $15,385 per employee for an eight-week covered period ($46,154 for a 24-week covered period). In addition to cash compensation, eligible payroll costs for each employee include the cost of certain noncash payroll costs: retirement contributions, group health care/group life benefits and insurance, and state/local payroll taxes paid by the employer. There are two limitations to the general paid-or-incurred rule for noncash payroll expenses. Group health care/group life costs must be paid by the employer during the covered period for this coverage to be eligible. Retirement benefits cannot be accelerated from outside of the covered periods. Further, any payroll costs incurred (earned) but not yet paid during the final pay period in the covered period must be paid on or before the next regular payroll date to be eligible for forgiveness. Payroll Costs for Independent Contractors and Employees Outside of the U.S. Amounts paid to independent contractors and to employees residing outside of the U.S. are specifically excluded from the loan forgiveness calculations. Payroll Costs for Owners The compensation paid to owner-employees, self-employed persons and general partners is eligible for forgiveness. However, across these owner categories, it is generally limited to 2.5 month’s (2.5/12) of 2019 or 2020 compensation (a maximum $20,833 per owner, in total, across all businesses). The owner’s total compensation can’t exceed $100,000 on an annualized basis, prorated for the period in which the payments are made or incurred. The 2019/2020 compensation amounts vary by owner category. For C corporation owner-employees with an ownership interest of at least five percent, loan forgiveness is limited to 2.5 months of 2019/2020 cash compensation (subject to the $20,833 limit) plus employer retirement and health, life, disability, vision and dental insurance contributions made on their behalf, state and local taxes. Owner-employees with less than a five percent ownership interest are exempt from the owner-employee compensation rule. For S corporation owner-employees with an ownership interest of at least five percent, loan forgiveness is generally limited to 2.5 months of 2019/2020 cash compensation plus state and local taxes and employer-paid retirement contributions. Group health contributions are not included as they are already included in their employee compensation. Owner-employees with less than a five percent ownership interest are exempt from the owner-employee compensation rule. For Schedule C or F filers (including the self-employed and independent contractors), the limit on loan forgiveness is based on 2019/2020 net profit. The limit is not increased by retirement benefits, group healthcare contributions or state and local taxes as they are already included in the net self-employment income amount. For general partners, loan forgiveness is based on the prorated amount of their 2019/2020 net earnings from self-employment (reduced by any Section 179 deduction, unreimbursed partnership expenses and depletion from oil/gas properties), multiplied by 0.9235. Again, the forgiveness amount is not increased by retirement benefits, group healthcare contributions or state and local taxes. Guaranteed payments are only includible to the extent they are included in self-employment income.

Business Mortgage Interest

Interest payments (not principal) for any business mortgage obligation on real or personal property are an eligible expense. Interest on unsecured credit is not forgivable. Further, the rules specifically exclude prepayments. The underlying obligation must have existed before February 15, 2020.

Business Rent or Lease Payments

Eligible costs include rent and lease payments for real and personal business property under a lease agreement that existed before February 15, 2020.


Utilities include payments for the distribution of electricity, internet access, telephone, gas, water and transportation utility fees. The service must have begun before February 15, 2020. The following nonpayroll costs are forgivable only if the SBA has not yet provided the lender with a forgiveness payment on the loan as of December 27, 2020.

Covered Operations Costs

Operations costs include payments for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.

Covered Property Damage Costs

Property damage costs are costs related to property damage and vandalism or looting due to public disturbances that occurred during 2020 and that were not covered by insurance or other compensation.

Covered Supplier Costs

Supplier costs are the expenditures made by the borrower to a supplier for goods that are essential to the operations of the borrower when the expenditure is made. They must be incurred pursuant to a contract, order, or purchase order in effect at any time before the loan’s covered period — or, with respect to perishable goods, in effect before or at any time during the loan’s covered period.

Covered Worker Protection Costs

Worker protection costs are expenditures for worker protection and facility modification, including PPE, air filtration units and physical barriers, that were necessary to comply with COVID-19 federal/state health and safety rules. These costs are limited to those during the period beginning March 1, 2020 and ending when the declared COVID-19 national emergency expires.

Calculating Loan Forgiveness

The amount you spend on eligible expenses during the covered period determines the actual amount of your loan that can be forgiven. You must be able to demonstrate that you’ve used your loan proceeds for eligible purposes. Originally, eligible expenses for this purpose were limited to the following.

  • payroll costs
  • business mortgage interest payments
  • business rent or lease payments
  • utilities

The CAA retroactively added the following eligible expenses:

  • covered worker protection and facility modification expenditures, including PPE, air filtration units and physical barriers, that were necessary to comply with COVID-19 federal/state health and safety rules
  • covered property damage costs related to vandalism or looting due to public disturbances in 2020, to the extent not covered by insurance
  • covered supplier costs for expenses under contracts and orders in effect prior to the loan and that were essential to the borrower's operations at that time
  • covered operations expenditures, including payments for software, cloud computing, accounting and HR

Note that costs attributable or incurred by a tenant or sub-tenant of a borrower — such as mortgage interest or rent — are not eligible for forgiveness as nonpayroll costs. Nor are the household expenses of a home-based business. You can refinance the amount required to repay SBA Economic Injury Disaster Loans (EIDLs) made between January 31, 2020 and April 3, 2020.

Requirements, Tests and Safe Harbors

The amount of your PPP loan (plus accrued interest) establishes the absolute maximum amount that can be forgiven. To qualify for maximum forgiveness, you must have used all of the loan proceeds during the covered period for eligible expenditures. That means your business must satisfy both salary and full-time equivalent employee (FTE) tests, calculated in that order. Fail either test (or both) and your loan forgiveness amount is reduced — unless, of course, you qualify under a safe harbor. PPP loans of $50,000 or less are not subject to a reduction in the amount of forgiveness based on either of these tests.

Requirement for Salary/Wages

During the covered period for first-draw and second-draw loans, you must not reduce the annualized salary or average wages of employees (in any pay period in 2019) by more than 25 percent. If you do, the amount to be forgiven may be reduced. This includes new employees in 2020 and 2021, as well as all existing employees earning $100,000 or less in annualized salary/wages during the covered period compared to a selected reference period. For those earning more than $100,000, the forgiveness calculation is limited to $100,000, pro-rated for the covered period. The amount of the reduction in loan forgiveness is calculated separately for each employee. It equals the amount that the employee’s salary/wage reduction exceeds 25 percent. For this purpose, salary/wages do not include additional compensation such as tips, commissions and bonuses. During the covered period you must not have reduced the annualized salary or average wages of certain employees or the amount forgiven is reduced in the same proportion. This includes any employee earning $100,000 or less in salary/wages during 2019 compared to a selected reference period. There is a salary/ wage safe harbor. If you reduced the salary or wages of any employee by more than 25 percent, you have a grace period to restore the salary/wages. You can meet the salary test if you restored the salary/wage amounts by December 31, 2020. For loans made by December 27, 2020 or later, you have until the last day of the loan’s covered period. De minimis exceptions may apply, as determined by the SBA.

Requirement for Full-Time Equivalent Employees (FTEs)

During the covered period, your business must have maintained the number of full-time equivalent employees that it had during either of two reference periods (or a third period for seasonal employers). This requirement includes employees residing both within and outside of the U.S. Notably, they do not have to be the same employees. The reference periods are:

  • February 15, 2019 through June 30, 2019
  • January 1, 2020 through February 29, 2020
  • any consecutive 12-week period between February 15, 2019 and February 15, 2020 (for seasonal employers)

Now the details. An FTE is an employee who works 40 or more hours a week or a combination of employees that work 40 hours. The rules provide for a detailed FTE calculation. As an alternative, you can count each employee who works at least a 40-hour week as one FTE and an employee who works less than 40 hours a week as one-half FTE. You can exclude any employees that have declined your written offer to return to work or declined your written offer to restore their reduced hours. You can also exclude employees that resigned voluntarily, voluntarily reduced their hours, or were fired for cause. Finally, you can exclude any vacant positions that you were unable to fill by December 31, 2020. To ultimately calculate the amount of the loan that can be forgiven, you’ll need to calculate your FTE reduction quotient. Essentially, you divide the average FTEs during your covered period by the average FTEs in either reference period. If the result is greater than 1.0 for either reference period, you’ve met the requirement. If the result is less than 1.0 for both periods, you may qualify for a safe harbor. Otherwise, the amount of loan forgiveness you qualify for will be reduced proportionately. If the average number of FTE employees is less than 1.0 for both reference periods, the forgiveness amount is reduced proportionally based on the percentage reduction in FTE employees. There is an FTE reduction safe harbor. For loans issued in 2021, if you reduced the number of your FTEs during the covered period, you have until the end of your covered period to restore the number of FTEs you had in the pay period that included February 15. For loans issued in 2020, you have until December 31, 2020.

Additional Safe Harbors Enacted in the Payroll Protection Program Flexibility Act (PPPFA)

The PPPFA added two safe harbors. Your loan forgiveness won’t be reduced if you were unable to hire people with similar qualifications by December 31, 2020. Similarly, your forgiveness won’t be reduced if your business wasn’t able to return to its pre-February 15, 2020 level of activity because of federal or other governmental requirements enacted from March 1, 2020 through December 31, 2020 for social distancing, sanitation and employee/customer safety.

Loans of $50,000 or Less

These small PPP loans are not subject to a reduction in the forgiveness amount based on either a reduction in FTE employees or a reduction in salary/wages. There is an exception to this rule if the borrower is part of an affiliated group that, together, received first-draw or second-draw loans of $2 million or more.

Calculating the Loan Forgiveness Amount

Your maximum loan forgiveness is limited by the amount of your loan, plus accrued interest. However, the amount forgiven can be further reduced. Payroll costs must account for at least 60 percent of the amount forgiven. If your payroll costs are not at least 60 percent of your loan amount, the amount to be forgiven is reduced. To calculate the amount potentially eligible for forgiveness, divide your eligible payroll costs by 0.6. Finally, the amount of the loan forgiveness is limited to a modified total amount. You’ll add up your payroll and nonpayroll costs, then subtract any salary/wage reductions. Multiply the result by the FTE reduction quotient. If the result is smaller than the loan amount and the previous payroll percentage calculation, it further limits the forgiveness amount. To summarize, the amount of your loan that is eligible for forgiveness is the lesser of these three amounts.

Loan Audits/Reviews

All PPP loans are potentially subject to review by the SBA, with a likely emphasis on those with amounts in excess of $2 million (including affiliate loans). The SBA has the authority to review/audit PPP loans and to access the borrower’s records. If this reveals ineligibility, noncompliance or fraud, the SBA can modify the amount of the loan or the forgiveness amount — or determine the borrower was not eligible for the loan. During an audit, you may be required to provide additional documentation regarding your use of the loan proceeds. In July of 2021, the requirement that for-profit and not-for-profit borrowers with loans of at least $2 million submit a loan necessity questionnaire (Form 3509 or 3510) was discontinued.