How Much of the Paycheck Protection Program (PPP) Loan Will Be Eligible for Forgiveness?

The amount of the Paycheck Protection Program (PPP) loan forgiveness can be up to the full principle amount of the loan, plus any accrued interest.  The actual amount of loan forgiveness will depend, in part, on the total amount spent over the covered period on the following:

• Payroll Costs.  This includes salary, wages, and tips, up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual), as well as covered benefits for employees (but not owners), including health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment premiums).

• Owner Compensation Replacement.  This should be calculated based off your 2019 net profit.  The forgiveness of this amount will be limited to eight weeks’ worth of the 2019 profit, and excludes any qualified sick leave equivalent amount for which a credit is claimed under section 7002 of the Families First Coronavirus Response Act (FFCRA) (Public Law 116-127) or qualified family leave equivalent amount for which a credit is claimed under section 7004 of FFCRA.

• Payments of Interest on Mortgage Obligations.  This must be on real or personal property that was incurred before February 15, 2020.

• Rent Payments.  The rent payments on lease agreements must have been in force before February 15, 2020.

• Utility Payments.  The utility payments must have been under service agreements dated before February 15, 2020.

What is the Guidance on Loan Forgiveness?

It has been determined that the forgiveness of owner compensation replacement for individuals with self-employment income will be limited to eight weeks’ work of their 2019 net profit. This is due to that fact that it is the most consistent with the structure of the Act and its overarching focus on keeping workers paid. This will also prevent windfalls that Congress did not intend.

It was also determined that the maximum loan amount will be based on 2.5 months of the borrower’s payroll during the one-year period preceding the loan.  Additionally, it was determined that the maximum amount of loan forgiveness is based on the borrower’s eligible payments over the eight-week period following the date of the loan disbursement.  An example of an eligible payment would be the sum of payroll costs and certain overhead expenses.

If you have self-employment income and file a Schedule C, it has been determined that it is appropriate to limit loan forgiveness to a proportionate eight-week share of your 2019 net profit, as reflected on your 2019 Form 1040 Schedule C.

This is due to the fact that many self-employed individuals have few of the overhead expenses that qualify for forgiveness under the Act.  For example, many individuals operate out of their homes, vehicles, or sheds, and therefore do not incur qualifying mortgage, interest, rent, or utility payments. This will result in most of their receipts constituting net income.  Allowing such a self-employed individual to treat the full amount of the PPP loan as net income would result in a windfall. The entire amount of the PPP loan (a maximum of 2.5 times monthly payroll costs) would be forgiven even though Congress designed this program to limit forgiveness to certain eligible expenses incurred over an eight-week period.

Limiting forgiveness to eight weeks of net profit from the owner’s 2019 form 1040 Schedule C is consistent with the structure of the Act, which provides for a loan forgiveness based on eight weeks of expenditures.  This limitation will also help to ensure that the finite appropriations are directed toward payroll protection, consistent with the Act’s central objective.

Finally, 75% of the amount forgiven must be attributable to payroll costs for the reasons specified in the First PPP Interim Final Rule.

For additional questions, you can read other articles about the COVID-19 impact on our Resource Center here.