Allowable Expenses for PPP Loan Forgiveness

The Paycheck Protection Program, or PPP, was a government-backed loan program designed to help businesses impacted by the COVID-19 pandemic. Its goal was to provide employers with the financial means to keep their workforce on the payroll when revenue was uncertain. These loans were unique because they offered the possibility of complete forgiveness, effectively turning the loan into a grant.

Understanding the rules for how the funds could be used is necessary for securing forgiveness. The program established guidelines on what constituted a forgivable expense and the procedural requirements businesses had to follow.

Core Forgiveness Rules

PPP loan forgiveness rested on two central requirements that dictated how and when funds must be used. The first is the 60/40 rule, which was designed to ensure funds were primarily used for employee retention. To receive full forgiveness, at least 60% of the forgiven amount had to be for payroll costs, and forgiveness was reduced proportionally if a borrower spent less.

The second requirement was the “covered period,” which defined the timeframe during which expenses had to be incurred or paid. Borrowers could choose either an 8-week or a 24-week period, starting from the date they received the loan funds. All expenditures submitted for forgiveness had to fall within this selected timeframe.

Allowable Payroll Expenses

Allowable payroll expenses formed the largest category of costs eligible for forgiveness. This category included direct wages, other forms of employee compensation, and related expenses paid by the employer.

Cash Compensation

Cash compensation includes the gross pay of employees, such as salaries, wages, commissions, and tips. Cash compensation was capped at the equivalent of an annualized salary of $100,000 per employee. For borrowers using a 24-week covered period, this translated to a maximum of $46,154 per individual, while the cap was $15,385 for an 8-week period.

For business owners, including self-employed individuals, general partners, or owner-employees, separate caps applied. For a 24-week period, owner compensation forgiveness was limited to $20,833, which is the 2.5-month equivalent of a $100,000 annual salary.

Non-Cash Compensation

Beyond direct pay, PPP funds could be used for various non-cash employee benefits. This includes employer contributions to employee health insurance plans, such as medical, dental, and vision coverage. Payments made toward employee retirement plans, like 401(k) contributions, were also eligible for forgiveness. To be eligible, these benefits must have been part of the company’s established compensation structure.

State and Local Taxes

State and local taxes assessed on employee compensation and paid by the employer could be included in the payroll cost calculation. The most common example is state unemployment insurance (SUI) taxes. Federal employer-paid taxes, such as the employer’s share of FICA and Medicare, were explicitly excluded from this calculation.

Allowable Non-Payroll Expenses

While payroll was the primary focus, the PPP allowed up to 40% of the forgiven amount to be for certain non-payroll operating costs. These expenses generally had to be for services or agreements in place before February 15, 2020. Later legislative changes introduced new categories of eligible expenses to provide businesses with more flexibility.

Original Non-Payroll Costs

The initial non-payroll costs eligible for forgiveness covered business overhead. This included interest payments on business mortgage obligations, but not payments on the mortgage principal. Payments for rent or lease agreements for both real and personal property were also eligible. Utility payments were another category, encompassing electricity, gas, water, transportation, telephone, and internet access.

Expanded Non-Payroll Costs

To address evolving business challenges, the program was updated to include four additional types of non-payroll costs:

• Covered operations expenditures, which included payments for business software or cloud computing services used for functions like accounting, inventory, or sales and billing.
• Property damage costs, which covered expenses from vandalism or looting related to public disturbances that were not covered by insurance.
• Supplier costs, which were payments to suppliers for goods essential to the business’s operations, based on contracts or purchase orders in effect before the covered period.
• Worker protection expenditures, which included costs for personal protective equipment (PPE), physical barriers like plexiglass shields, and ventilation system upgrades to comply with public health guidelines.

Required Documentation for Forgiveness

Securing loan forgiveness required borrowers to provide documentation to substantiate all expenses. Lenders and the Small Business Administration (SBA) required proof for both payroll and non-payroll costs to verify that funds were used according to program rules.

For payroll costs, evidence included bank account statements or third-party payroll reports showing cash compensation paid to employees. Borrowers also submitted payroll tax filings, such as IRS Form 941, and state quarterly wage and unemployment insurance tax filings. To prove expenses for employee benefits, documentation like payment receipts or account statements for health insurance and retirement plan contributions was necessary.

For non-payroll expenses, documentation had to prove both the payment and the existence of the obligation prior to February 15, 2020. For mortgage interest, this meant providing the lender’s amortization schedule and receipts verifying payments. For rent, a copy of the lease agreement and receipts were required, while utility payments were verified with invoices or account statements. For the expanded expense categories, invoices, purchase orders, and receipts were needed.

The Loan Forgiveness Application Process

After using the loan proceeds and gathering documentation, the final step was to apply for forgiveness through the lender. The SBA created several application forms for different borrower situations. The standard form was SBA Form 3508, but simpler versions were available for those who met certain criteria.

SBA Form 3508EZ was a streamlined application for borrowers who did not reduce employee salaries by more than 25% and did not reduce employee numbers. A simpler form, SBA Form 3508S, was available for borrowers with loans of $150,000 or less. This form required fewer calculations and less documentation to be submitted, though all records still needed to be retained.

The application was submitted directly to the PPP lender that issued the loan, often through an online portal. After submission, the lender had 60 days to review the application and make a decision. The lender would then notify the borrower of the final forgiven amount.