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How to Apply for and Calculate PPP Loan Forgiveness - And More

How to Apply for and Calculate PPP Loan Forgiveness - And More

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The Paycheck Protection Program (PPP) is moving into the forgiveness stage for most business owners. While there still aren’t any hard and fast rules on applying for PPP forgiveness, there are a few areas where we can offer some insight.

Here’s an overview of some of the guidance and advice I’ve been giving my clients on how to navigate the PPP loan forgiveness process.

Summer 2020 PPP Loan Forgiveness Update

Which PPP Loan Forgiveness Form to Use

To apply for PPP forgiveness, the SBA has issued two forms:

1. Form 3508

This is what I call the “long form.” Compared to the other form mentioned below, it requires a greater amount of detail to be entered in order to qualify for loan forgiveness.

2. Form 3508EZ

This form is what I call the “simple form.” It requires less detail than Form 3508, but its use is limited to businesses that meet one of the following criteria:

  • A sole proprietor who is self-employed or individual contractors with no employees
  • An employer that didn’t reduce salaries of employees by more than 25% and didn’t reduce employees’ hours
  • An employer that didn’t reduce salary by more than 25%, but was unable to operate due to COVID requirements

If you don’t easily fit in one of those three categories, you need to use the more complex Form 3508.

What’s Included in Salary Costs for Forgiveness?

Fortunately, in the last few months there has been some guidance on what qualifies for forgiveness, and what doesn’t.

Let’s start with salary, which is relatively straightforward.


Salary is the gross amount of your employee’s salary, and includes any state and local taxes assessed on it. It’s not the employee’s state and local withholding. Instead, for example, it would be unemployment taxes.

Retirement Plans

The cost associated with retirement plans comes from any contributions you make to the retirement plan during the loan forgiveness period. Note that you can't accelerate contributions in order to maximize the retirement plan deduction related to salary.

Health Insurance

Any health insurance premiums that you pay qualify for loan forgiveness. However, do not include in your cost calculation any withholdings you make for your employees. It’s only the net amount that you pay that qualifies. For example, if you write a check for $10,000 a month to cover your employees’ health insurance for the entire company, but withhold $2,000 a month from your employees’ salary to cover the employees’ portion, then only $8,000 qualifies for loan forgiveness.

Calculating Salary Based on Your Ownership Type

The ownership type for your business also plays a role in your salary calculation.

C Corporation

As an owner of a C corp, you should include salary and retirement and health insurance expenses in your calculation.

S Corporation

As an owner of an S corp, you should include salary and retirement plan expenses. Health insurance premiums aren’t included due to those costs being included in your salary.


For partnerships, include only your self-employed income in your calculation.


If you own an LLC, your salary calculation is based on whether your LLC is taxed as a C corp, S corp or partnership.

Other Expenses Included in Loan Forgiveness

There are other types of expenses, in addition to salaries, that qualify for PPP loan forgiveness.


Your business’s rent as well as automotive or equipment leases that were in effect prior to February 15, 2020 are eligible for forgiveness. Rents to related parties are subject to more stringent rules to qualify for forgiveness.


Another allowable expense is interest on mortgages and other secured loans. Those loans, however, must have been in place prior to February 15, 2020.


Utility expenses include telephone (both cell phone and landlines), internet, gas, electric and water. Auto expenses also fall into the utility category. It's not clear from the guidance as to what qualifies for auto expenses, but the general thought is that items you would normally deduct as an auto expense on your tax return would be included in the utility expenses.

Calculating the Forgivable Loan Amount

It’s important to understand that even if you spent the loan money in exact accordance with the rules (payroll and related expenses, rent, utilities, etc.) it’s not a given that 100% of the loan will be forgiven. You must determine what percentage of the loan is forgivable.

There are two calculation methods used for determining whether your loan is forgivable, and it’s based on the monthly average number of full-time employees (FTEs).

The Complex Method

  1. Add up all of your employees
  2. Prorate their hours for up to 40 hours a week
  3. Average the hours over the eight-week period to determine the number of full-time employees
  4. Do the same calculation for two comparable time periods prior to the pandemic
  5. Divide the number of full-time employees in the loan period by the lower of the two full-time employee counts in the comparable time periods for a percentage of the loan that is forgivable

The Simplified Method

  1. Determine how many employees work 40 hours in a week and count them as full-time employees
  2. Determine how many employees work less than 40 hours a week and count them as “half” employees
  3. Add these numbers together for your total full-time employees
  4. Do the same calculation for two comparable time periods prior to the pandemic
  5. Divide the number of full-time employees in the loan period by the lower of the two full-time employee counts in the comparable time periods for a percentage of the loan that is forgivable

I recommend to my clients that they make the calculation both ways. By doing so, you can figure out which method provides the highest percentage of forgiveness on allowable costs for your PPP loan.

You should ask your payroll preparer or payroll provider for this information. If you use a payroll provider such as Paychex or ADP, they should be able to produce these reports for you. If you handle payroll internally, then you’re going to have to make this calculation on your own. The accuracy of these calculations is important as the documentation of these calculations is necessary for loan forgiveness.

Submitting Your PPP Loan Forgiveness Application

As of this writing, banks are just starting to open their portals to submit loan forgiveness applications, and that means you should be getting your information together. 

Important Legislative Changes

Initially, businesses were required to use 75% of their PPP loan on payroll costs and the remaining 25% on operating costs. However, businesses with a small salary base were struggling to meet this requirement.

The Paycheck Protection Program Flexibility Act of 2020 changed the payroll expenditure requirement. Businesses now must spend 60% of their PPP loan on payroll costs. The remaining amount of the loan can be used for non-payroll expenses.

Calculation Period

Initially, businesses were limited to an eight-week calculation period for their PPP loan. However, the Paycheck Protection Program Flexibility Act of 2020 extended the loan forgiveness period from eight weeks to 24 weeks (or up until December 31, 2020). While borrowers can still opt to keep the original eight-week period, this additional flexibility is intended to make it easier for more borrowers to reach full forgiveness. With the 24-week period, some businesses will probably qualify for 100% forgiveness of their loan with just payroll related costs, even with a partial reduction in FTE count.

For my clients, I’m recommending waiting until the 24 weeks are up and then doing both calculations. By waiting 24 weeks, you can see which loan forgiveness period garners the highest percent of forgiveness. Assuming you are still in business at a relatively significant level, you should be able to qualify for 100% loan forgiveness after 24 weeks.

What to Do When Your Eight Weeks Are Up

Remember, no loan repayments are required under this plan for 10 months. That takes you to the beginning of 2021, so you do not need to rush. It is expected that companies that received their PPP loan in the spring will be able to submit their forgiveness application towards the end of 2020 and will receive forgiveness early next year.

Tax Implications of Loan Forgiveness

As of this writing, forgiveness is taxable, or put another way, deductions related to forgiveness are not deductible, which is the same thing as saying it’s all taxable. Something to consider is whether you want to report the taxability in 2020 or 2021. This will be an important tax planning consideration at year end.

By requesting forgiveness later in the year or early next year, and it not getting approved until the beginning of the next year, you are able to claim the forgiveness as income in either 2020 or 2021. 2020 is more than likely going to be the worst year for most companies, so 2020 could be a good year to report the forgiveness. This is something to watch as the end of 2020 approaches.

Key Takeaways

  1. There are two loan forgiveness applications: Forms 3508 and 3508EZ
  2. Different entity types calculate salary differently
  3. 60% of the loan amount needs to be spent on salary related expenses, versus the original 75%
  4. You can use a 24-week period to calculate your loan forgiveness
  5. No loan repayments are covered for 10 months
  6. Think about when you want to report to taxability of your forgiveness

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COVID-19 updates

Published on September 22, 2020