Editor's Note: Though this article remains substantially correct, some changes to the PPP rules have occurred since its original publication. You can read about the latest updates here and here.

Getting a Small Business Administration (SBA) Paycheck Protection Program (PPP) loan is only part of the battle. After all, the main goal for most SMBs is to have the loan forgiven, effectively turning the loan into a grant. According to the National Federation of Independent Business (NFIB), 80% of its members have applied for a PPP loan and of those, 90% received one. Most of the loans were deposited between mid-April and mid-May. SMBs have until Aug. 8, 2020 to apply for a PPP loan under current SBA rules.

The earliest dispersed loans will be eligible for forgiveness in early June and, based on the NFIB survey, 54% of recipients expect their loans to be totally forgiven with another 27% anticipating at least 75% forgiveness. Forgiveness of your loan isn't automatic: You must apply with your lender, and the applications just came out. Since most business owners who receive a PPP loan expect most of it to be forgiven, it's worth paying close attention to the forgiveness process and how it works--at least under the current rules (see "Revisions to PPP May Be Coming Soon" below).

Current Basic Forgiveness Rules

The basic forgiveness rules as they stand now from the SBA are outlined here:

  • PPP loans up to $10 million can be completely forgiven.
  • You must spend the money within 8 weeks of the date you receive the first loan payment from your lender.
  • At least 60% of the forgiven portion of your loan must be spent on permitted payroll costs.
  • Up to 40% of the amount forgiven can be spent on other permitted expenses.
  • Any permitted amount not forgiven becomes a two-year loan at 1% interest.
  • Any non-permitted use may be subject to immediate payback.
  • You must maintain the same number of employees you had for the staffing calculation base period.
  • You must maintain at least 75% of total base period salary.
  • You have until June 30, 2020 to rehire any staff that were laid off and reinstate pay that was decreased 25% or more.

Permitted Expenses

To qualify for forgiveness, you must spend loan proceeds according to a 75/25 rule as follows:

Payroll (75% or more of amount forgiven)

Expenses that are considered payroll include compensation in the form of salaries, wages, tips, commissions, employee benefits, health insurance premiums, retirement benefits, and state/local taxes assessed on compensation.

The eight weeks spending/forgiveness period begins when you receive the first loan payment, not when you signed the agreement. Payroll costs up to $100K per employee that you incur during the eight week spending period are eligible regardless of payroll date. For example, if your spending period begins May 13 but payroll is dispersed May 8, only costs incurred beginning May 13 are eligible for forgiveness.

Non-payroll expenses (up to 25% of amount forgiven)

Eligible non-payroll expenses include mortgage interest on a mortgage signed before Feb. 15, 2020, rent if the contract was entered into before Feb. 15, 2020 and utility bills in effect before Feb. 15, 2020.

As with payroll costs, permitted non-payroll expenses must be those incurred during the eight week spending period, regardless of when you pay the bill. (See example above.)

Non-Permitted Expenses

If you spend the loan on any of the following, it will not be eligible for forgiveness and may be subject to immediate payback (not retained as a loan):

  • Salaries over $100K per employee
  • Payroll outside the United States
  • Employer federal, FICA, FFCRA credits
  • 1099s
  • Mortgage principal

Calculating the Forgiven Amount

While the 75/25 rule for forgiveness seems simple enough, it can be complicated. It's important to pay attention to the way it's worded. The rule says 75% or more of the amount forgiven must be permitted payroll expenses and up to 25% of the amount forgiven must be permitted non-payroll expenses.

Suppose you have a $100,000 PPP loan and $100,000 in total permitted payroll and non-payroll expenses during the 8-week spending period. If you want the entire loan forgiven, at least $75,000 must be permitted payroll expenses and $25,000 must be permitted non-payroll expenses. If payroll is $80,000, then only $20,000 in non-payroll expenses is needed. Conversely, if your payroll expenses only amount to $60,000, the total possible forgiven amount will only be $80,000 with $60,000 allocated to payroll and $20,000 to non-payroll.

In addition, remember that all expenses must be permitted expenses. Non-permitted expenses don't count and can't even be part of a loan under PPP guidelines. In other words, non-permitted expenses are on you.

Counting the Staff

One standard you must meet in order to receive full forgiveness of your loan is to retain (or rehire by June 30, 2020) all full-time equivalent employees (FTEEs), according to a baseline. This baseline is established by counting the average number of FTEEs working for you between February 15, 2019 and June 30, 2019 or between January 1, 2020 and February 29, 2020. One notable exception has to do with an employee you offer to rehire (that's covered in detail below).

To determine whether you have met the standard, calculate the average number of FTEEs you had for each of the three periods below:

A - The 8-week period following your initial loan disbursement

B - February 15, 2019 to June 30, 2019

C - January 1, 2020 to February 29, 2020

For PPP purposes an employee who averaged 40 or more hours per week during a given measuring period counts as 1.0 full time equivalent employee (FTEE). You have two options when accounting for part-time employees (less than 40 hours/week) but you must be consistent in using the same system for all calculations in your forgiveness application

Option 1: Count every part-time employee as 0.5 FTEE.

Option 2: Add up total average hours worked for all part-time employees and divide by 40. That number, to the nearest tenth, is the number of FTEEs you have who work part-time.

Total of FTEEs is the number you have for each period (A,B, or C).

Divide the number of FTEEs you get for B by the number of FTEEs you get for A (B/A). Then divide the number you get for C by the number you get for A (C/A). If you are a seasonal employer you must use the number you get when you divide by B. Otherwise, use the highest number you get.

If the number you get is equal to or larger than 1 you have successfully complied with the staffing requirement. If the number is less than 1, your forgiveness will be reduced proportionally.

Special Re-Hiring Exemption

If you offer to rehire a laid-off employee and they refuse to come back, you may be allowed to exclude that employee from your staffing count. To qualify for the exemption you must have:

  • Made a written offer to rehire the employee in good faith
  • Offered to rehire the employee for the same salary/wage and hours as before they were laid off
  • Documentation showing the employee rejected your offer

If any of the following apply to an employee, you can also qualify for an exemption:

  • The employee was fired for cause
  • The employee voluntarily resigned
  • The employee voluntarily requested and received a reduction of their hours

Making Payroll Calculations

A second standard you must meet for full forgiveness is to maintain salary or wages for each employee at 75% or more of their average wages during the base period used above. Otherwise the amount forgiven will be reduced in proportion to any reduction in an employee's salary or wages during the 8-week forgiveness (spending) period greater than 25% of the average made by that employee during the base period.

The Art of Applying

As noted earlier, you must apply for forgiveness with your lender, using the official Paycheck Protection Program Forgiveness Application. Brace yourself: The application is 11 pages long, and the SBA estimates it will take 180 minutes to complete, including the gathering of needed data.

As part of your application you will need to supply the following information:

  • The total amount of your loan for which you are requesting forgiveness
  • Verification of the number of FTEEs you have and their pay rates, including IRS payroll tax filings and state income, payroll and unemployment insurance filings
  • Verification of your payments on mortgage interest, rent/lease payments, and utilities
  • Certification from an authorized representative of your company that the provided documentation is true and that the amount requested to be forgiven complies with SBA guidelines

Note: Your lender must make a decision on forgiveness within 60 days of the date of your application.

Permitted Vs. Non-Permitted Funds

How you use PPP loan funds may fall into up to three categories: Permitted/Forgiven; Permitted/Not Forgiven; and Non-Permitted. Any amount forgiven is wiped off the slates and does not have to be paid back. Permitted but not forgiven amounts, i.e., utility costs over and above 25% of the amount forgiven, automatically become a two-year loan at 1% with a six-month deferment.

If you choose to spend loan funds on a non-permitted expense, i.e., mortgage principal, that money will be subject to immediate payback. The best way to avoid that consequence, of course, is to make sure loan funds are only spent on non-permitted expenses.

Revisions to PPP May Be Coming Soon

The Wall Street Journal reported recently that legislators and other government officials have been discussing major changes to the PPP loan program to take place in coming weeks. These discussions include:

  • Giving SMBs more discretion in how they spend the money, including changing the 75/25 rule
  • Extending the time to spend funds from the current 8-week period

The changes under discussion are being driven in part by less demand for PPP funds. Restaurants, hair salons, and others have said they can't use the money under the current 75/25 rule since their businesses have not sufficiently recovered to hire back all staff.

If you haven't yet applied for a loan, you still might be able to. According to latest SBA figures, about 37% of the second wave of PPP funding remains available.