Loan forgiveness under the Paycheck Protection Program and next steps

Tax Law and News tax matters for self-employed people

The Coronavirus Aid, Relief, and Economic Security (CARES) Act established the Paycheck Protection Program (PPP) as an incentive for small businesses to retain employees during the COVID-19 pandemic. The program provides a low-interest loan to eligible small business owners, self-employed individuals, and other eligible businesses, including non-profits, and is meant to cover eligible payroll costs, mortgage interest, rent, utilities, and interest on certain other debt obligations and refinancing an Economic Injury Disaster Loan (EIDL) made between Jan. 31, 2020, and April 3, 2020 (though at least 75% of the loan proceeds must be used for eligible payroll costs to be forgiven) over an eight-week period.

Borrowers can apply for approximately 2.5 times their average qualified monthly payroll expenses, up to $10 million and subject to certain restrictions. The application period began on April 3, 2020, and runs through the earlier of June 30, 2020, or when all the funds have been committed. The PPP loan carries a maturity of two years and a 1% interest rate.

Loan forgiveness

A PPP loan may be forgiven, in whole or in part, if certain requirements are met. Borrowers can apply for loan forgiveness with their lender eight weeks after loan disbursement, and the lender is responsible for determining eligibility. Borrowers don’t have to use all the loan proceeds in the eight-week period, but funds used after the eight week period are not eligible for loan forgiveness. Loan forgiveness is limited to the loan principal plus accrued interest. For tax purposes, forgiven loan amounts are excluded from gross income, and associated expenses are not deductible.

The following expenses are included in loan forgiveness, and the non-payroll items are capped at 25% of the loan proceeds:

  • Eligible payroll costs
  • Mortgage interest payments on mortgages incurred in the ordinary course of business before Feb. 15, 2020
  • Rent payments under leases dated before Feb. 15, 2020
  • Utility payments for electricity, gas, water, transportation, phone, or internet access under service agreements dated before Feb. 15, 2020
  • For certain employers identified in the statute, additional wages paid to tipped employees

The uses listed above are ones that may be covered by loan forgiveness, but they are not the only allowable uses of a PPP loan. Only loan proceeds spent on covered uses during the eight-week period following disbursement of your client’s PPP loan are forgivable

Eligible payroll costs may include, but are not limited to, compensation paid to employees whose principal place of residence is the U.S. in the form of salaries, wages, commissions, or other similar compensation, cash tips, and payment for vacation, employee benefits, health insurance premiums, retirement benefits, and state and local taxes assessed on compensation. However, you need to exclude Federal employment taxes imposed or withheld between Feb. 15, 2020, and June 30, 2020, including the employee’s and employer’s share of FICA and Railroad Retirement Act taxes, and income taxes required to be withheld from employees.

If your client has employees, their loan forgiveness amount may be reduced as a result of reductions to employee headcount or wages.

Reducing the number of employees

The loan forgiveness amount may be reduced if the average number of full-time equivalent employees* employed during the eight-week period after the lender sent the PPP loan funds to the borrower is less than the average number of full-time equivalent employees per pay period between:

  • Feb. 15, 2019, and June 30, 2019, or
  • Jan. 1, 2020, and Feb. 29, 2020

Most borrowers can choose which time period to use for comparison, but seasonal employers must use Feb. 15, 2019, to June 30, 2019.

If any full-time employee reductions made between Feb. 15, 2020, and April 26, 2020, are reversed by June 30, 2020, the loan forgiveness amount will not be reduced.

Reducing employee salary or wages

The loan forgiveness amount may be reduced if total salary or wages is reduced more than 25% for any employee during the eight-week period after the lender sent the PPP loan funds to the borrower as compared to the most recent full quarter before the eight-week period.

If reductions made between Feb. 15, 2020, and April 26, 2020, are reversed by June 30, 2020, the loan forgiveness amount will not be reduced.

This forgiveness reduction does not apply to reductions associated with employees who had salaries or wages higher than $100,000 in 2019.

Other reasons why the forgivable amount may be reduced  

  • Only 25% of the loan forgiveness amount may be attributed to non-payroll costs
  • If the borrower received an advance through the EIDL program, it will be deducted from the forgivable amount on a PPP loan.


Borrowers can apply for loan forgiveness through their lender. They will need to verify the number of employees on the payroll and their pay rates for the eight-week period after the lender sent the borrower their PPP loan funds. Determining how your client used the loan proceeds is important because all or a portion of the loan is forgivable, and the remaining balance needs to be repaid over a two-year period at a 1% interest rate. We’re still awaiting final guidelines on forgiveness from the U.S. Treasury and Small Business Administration.

Documents needed for PPP loan forgiveness include, but may not be limited to:

  • Payroll tax filings
  • State income, payroll and unemployment insurance filings
  • Canceled checks, payment receipts, transcripts of accounts, or other documents verifying payments on mortgage obligations, payments on covered lease obligations, and utility payments
  • Documentation of any advance received under the CARES Act EIDL Emergency Grant program

Tracking expenses

The forgivable amount will depend, in part, on how the PPP loan funds are spent during the eight-week period after the lender disbursed the loan proceeds. At the end of those eight weeks, clients that borrowed can apply for PPP loan forgiveness with their lender. It will be helpful to track this information on spreadsheets or through QuickBooks®.

Here are some tips if your clients use QuickBooks and its tracking features:

  • Create the PPP loan as a long-term liability account.
  • Create a bank deposit or use a bank feed.
  • Categorize any PPP-related expenses (and consider using PPP tags, notes, projects, and classes for optimal tracking).
  • Break out your eligible payroll costs to account for the following, and possibly export to a spreadsheet if you don’t want to make permanent changes to your chart of accounts:
    • 75% threshold
    • Exclusion of federal taxes paid
    • Exclusion of annual compensation above the $100,000 annual cap ($8,333.33 per month)
  • Run reports because you’ll apply for loan forgiveness at the end of the eight-week period:
    • Create a profit and loss statement for the eight-week period by using tags or classes, or by filtering on any relevant expense categories.
    • If you use QuickBooks Payroll, you can run a payroll tax and wage summary, exclude federal tax payments, and export it to a spreadsheet.

Practitioner insights

  • Keeping accurate records is important if your clients receive a PPP loan and subsequently apply for forgiveness. Encourage your clients to keep all PPP funds in a separate account.
  • Be aware of the timing requirements associated with PPP loan forgiveness and help ensure our clients’ actions, recordkeeping and tracking comply with them.
  • Communicating with your clients is key:  Be proactive and make sure they understand the requirements!

You already play a key role in advising your clients on their taxes, so spend the extra time to advise on how to keep track of their PPP loans. Spending time on the front end by setting up the recordkeeping and processes will save a lot of time in the long term.

More resources from the U.S. Treasury

Editor’s note: This article was originally published in the CPA Practice Advisor.


Note: PPP borrowers may engage the services of an accountant to track the use of their PPP funds. However, only the borrower or an authorized representative who is legally authorized to make certifications on the borrower’s behalf may submit an application for loan forgiveness. Accountants should be aware of this limitation and ensure that an authorized representative of the borrower understands his or her obligation to complete, review, and certify to the contents of any loan forgiveness application.
Regulations and guidance from the SBA and the U.S. Department of the Treasury on the PPP are evolving rapidly and the above information may be outdated.  Please refer to the latest guidance from SBA and Treasury to confirm current program rules and how they apply to your particular situation.
The funding described is made available to businesses located in the United States of America and are not available in other locations. 
This content is for information purposes only and should not be considered legal, accounting or tax advice, or a substitute for obtaining such advice specific to your business. Additional information and exceptions may apply. Applicable laws may vary by state or locality. No assurance is given that the information is comprehensive in its coverage or that it is suitable in dealing with a customer’s particular situation. Intuit Inc. does not have any responsibility for updating or revising any information presented herein. Accordingly, the information provided should not be relied upon as a substitute for independent research. Intuit Inc. does not warrant that the material contained herein will continue to be accurate, nor that it is completely free of errors when published. Readers should verify statements before relying on them.
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Comments (14) Leave your comment

  1. Please clarify: “However, you need to exclude Social Security and Medicare taxes.” Does this mean reducing gross payroll by the employee half of SS & Med? I was operating under the belief that full gross payroll (including the employee half of SS & Med) would be an allowable payroll cost, but that the EMPLOYER half of SS & Med would not be included.

  2. This is interesting. It is my understanding that the amount forgiven is not to be counted as revenue and is not to be taxed.

    I saw the IRS notice 2020-32, however. indicating that any expenses paid with forgiven funds will not be deductible. Isn’t this the same as taxing the debt relief as income?

    This seems inconsistent with congress’ intent and the design of the program.

    I’m curious if you were aware of this and if you know if this is being challenged?

  3. Have a question. Saw several articles and on the IRS website the computation for maximum loan forgiveness for an Schedule C taxpayer that showed this example
    Sch C line 31– $100,000. Therefore max loan 100,000 /12 x 8 =8333 x 2.5 = $20,833
    Article stated maximum forgiveness is $ 20,513
    How do you compute the $ 20,513 maximum forgiveness

  4. Are we allowed to hire new employees or must keep and PAY the current existing employees in order to qualify for the PPP forgiveness?

  5. Thank you very much. This will be very useful to all of my clients that received the PPP Loan.
    I appreciate your article and your sharing it with all of us.

  6. PPP Loan Forgiveness for a Self Employed person with a seasonal employee outside of FTE time period
    To whom it may concern:

    I need guidance on calculating PPP loan forgiveness in what is turning out to be a fairly common situation.

    The scenario involves a sole proprietor who receives a PPP loan, and that sole proprietor also has employees.

    1 example is a sole proprietor whom has 1 employee that works December only.

    In this case their denominator in the forgiveness calculation would be 0, does that mean no forgiveness?

    Sch C 2019 Net Income = $100,000. Employee wages from sch C were $1,000.

    loan = Sch C 100,000 plus employee wages 1,000 = 101,000 divided by 12 times 2.5 = Total PPP Loan = 21,042 rounded to 21,000.

    The PPP is used as follows: Owner replacement = 100,000 x 8/52 = 15,385, employee wages = 1000, Total payroll = 16,385, the rest is spent on rent.

    21000 x .75 = 15,750 so the 75% rule has been met.

    But the employee normally only works in December to help with that busy time of year.

    The forgiveness ratio calculation is 1 employee in the eight week period divided by 0 employees in the specified time period 2/15-6/30/19 or 1/1-2/29/20. This employee worked in December of 2019, and a paycheck was given to them to meet the 75% rule.

    How does the ratio 1/0 work?

    Does that mean none of it will be forgiven?

    Does that mean all of it will be forgiven?

    It is very confusing, because the point of the PPP was a forgiven loan to a self-employed person.

    Please let me know.

    Thank you.



  7. I think this statement may be incorrect or I could be misreading it: However, you need to exclude Social Security and Medicare taxes. This statement is under the subtitle, Loan Forgiveness. And one question: why would we need to track the EIDL advance if we received it after the PPP loan? Not sure where that fits in. Thank you.

  8. Two Questions

    How does this work for a self-employed person with no payroll, they were eligible for the loan but it isn’t clear what they can spend the loan proceeds on since they have no payroll. If the give themselves the 75% of the loan and use the 25% of the loan to pay rent, will that work?

    If the client does have payroll, do they have to keep the same employees on for the eight week period or can they hire new people if the old ones do not want to come back. What if the new employees are spouse/adult children.

  9. Mike: Must the applicant exclude the withheld FICA & Medicare & FIT withheld? I understand the employer portion is not eligible for forgiveness, but the amounts withheld also?

  10. Can anyone explain why garbage services are not explicitly listed as a utility expense?
    Not all cities have garbage costs included in the water bill.

Comments are closed.