Howard, LLP

Paycheck Protection Program Loan Forgiveness

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Clients and Friends!

Today we bring you some additional considerations surrounding the Paycheck Protection Program (PPP). In one of our previous communications, we discussed this program, where payroll, benefits, interest, and other costs, and may be forgiven.  When applying for the loan, the business were required to certify that the loan was necessary to support their ongoing operations.  The Small Business Administration (SBA) just released an updated FAQ, surrounding this certification.  Borrowers that received PPP loans of less than $2 million would be deemed to have made the required certification concerning the necessity of the loan request in good faith.  Loans over $2 million will be reviewed by the SBA.  If SBA determines that the borrower lacked adequate basis for the required certification concerning the necessity of the loan, and the borrower repays the loan after receiving this notification, SBA will not pursue administrative enforcement or referrals to other agencies.

Click here to review the Paycheck Protection Program Loans Frequently Asked Questions (FAQs). Please refer to the last question, #46.

Here is a brief discussion of the PPP loan forgiveness, and its tax effects per IRS Notice 2020-32.

Eligible Costs

Starting with the date the loan proceeds were received and for an 8-week period thereafter (“Covered Period”), the sum of the following costs incurred and payments made will be eligible for forgiveness:

  • Payroll Costs
  • Mortgage Interest
  • Rent
  • Utilities

Payroll Costs.These costs include:

  • Salary, wages, commissions (subject to a cap of $100,000)
  • Cash tips or equivalent
  • Vacation, parental, family, medical, sick leave
  • Allowance for separation or dismissal
  • Group health care coverage
  • Retirement benefits
  • State and local tax assess on compensation of employees

It does not include:

  • Compensation of an employee whose principal residence is outside of the U.S.
  • Salary, wages, commissions in excess of $100,000, as prorated for the covered period
  • Qualified sick leave and family leave wages for which a credit is allowed under Sec. 7001 and 7003, respectively, of the Families First Coronavirus Response Act
  • Independent contractors

Mortgage Interest. These costs include payments of interest on a mortgage obligation the was incurred before February 15, 2020.

Rent. These costs include payments of rent under a leasing agreement in effect before February 15, 2020.

Utilities. These costs include payments for electricity, gas, water transportation, telephone or internet access for which service was established before February 15, 2020.

Of the total eligible costs, 75% must be used for payroll costs.  If payroll costs are less than 75%, the forgiveness is reduced by the amount under 75%.

Staff and Pay Requirements

The business must maintain the number of employees on its payroll and at least 75% of total salary. The forgiveness is reduced if a business either cuts employees or slashes salary during certain time periods.

Here are the steps for determining if the number of employees have been maintained or reduced.

Step One: Determine the average number of full-time equivalent employees you had for:

  • The 8-week period following receipt of loan proceeds (A)
  • February 15, 2019 to June 30, 2019 (B)
  • January 1, 2020 to February 29, 2020 (C)

Step Two: Take the larger of:

  • A divided by B
  • A divided by C

Step Three: If the larger number is equal to or larger than 1, you have maintained your headcount. If it is less than 1, the loan forgiveness will be reduced proportionately.

As for the maintaining the 75% of total salary, this requirement is determined for each employee that did not receive more than $100,000 in annualized pay in 2019.  If the employee’s salary during the covered period (current pay) is 75% or more of the salary they received during the most recent quarter in which they were employed before the covered period (75% amount), there is no reduction in the loan forgiveness.  If the salary is less than 75%, the eligible amount for forgiveness will be reduced by the difference between their current pay and the 75% amount.

There is a grace period until June 30, 2020 to rehire employees or reinstate pay to meet the tests above.

Any portion of a PPP loan that is not forgiven must be repaid over two years at an interest rate of 1%.


Documents verifying the eligible costs as well as the number of full-time equivalent employees will need to be provided on the PPP forgiveness application.  Good recordkeeping and bookkeeping will be critical for getting your loan forgiven.

IRS Notice 2020-32

Under Sec. 1106(i) of the CARES Act, any amounts forgiven of PPP loans are excluded from gross income.  In IRS Notice 2020-32, IRS has determined that loan amounts forgiven are tax-exempt income under Code Sec. 265 and the accompanying treasury regulations.  Under Code Sec. 265 (a)(1), a taxpayer is not allowed to deduct amounts allocable to income that is exempt from taxes.  The purpose of this rule is to prevent a double benefit by preventing a deduction for excluded income.  As a result, to the extent the expenses were reimbursed by a PPP loan that was forgiven, a taxpayer is not permitted to deduct those expenses.

On May 6, 2020, members of the Senate Finance Committee introduced the Small Business Expenses Protection Act of 2020 (Senate Bill 3612), which would allow small businesses to deduct the expenses paid with their forgiven PPP loan.  If passed, this act would reverse Notice 2020-32.  We will follow Senate Bill 3612 and will keep you informed of new developments.