Article: Maximizing Your Loan Forgiveness for CARES Act SBA 7(a) Paycheck Protection Program Loan Funds

April 17, 2020

By: Bridget A. Alzheimer, Esq.

You've made it through the gauntlet and secured an SBA-Paycheck Protection Program (PPP) loan for your business. Now what do you do?

The PPP loan program, created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), is so attractive largely because it can function more like a grant if the funds are deployed and tracked properly. Funds used to pay certain expenses within the first eight weeks may qualify for "forgiveness," i.e. the SBA will pay off that portion of your loan. You will still be on the hook for repaying any remaining amount to your lender, but with a 1% interest rate and a six-month delay on the initial payment deadline.

So now that you have your funds, how do you deploy them properly to make the best of this deal?

First, make a plan for how you will use the funds over the next eight weeks and beyond.

Second, get ready to keep accurate records of expenditures. You will need to substantiate the use of any funds when applying for forgiveness.

Third, submit your application for forgiveness as soon as possible after the initial 8-week period ends.

Last, follow up with your lender after the 90-day forgiveness payment period has passed to make sure the balance of your loan is accurate and to set up a repayment plan if necessary.

Making a Plan

Before you start spending your loan funds, you need to make sure you are using that money in the most efficient way. Taking time to consult with your bookkeeper and/or finance manager at this point is a good idea.

You'll need to take into account your overall expected expenses and which of those expenses are 1) allowable expenses and 2) qualify for forgiveness. You will probably want to make a budget to categorize, estimate, and prioritize these expenses.

You'll also need to determine if there will be any limitations on your eligibility for forgiveness, as this may change your budgeting priorities.

Allowable Expenses

In your loan application, you agreed that the loan funds would be used primarily for payroll expenses. If more than 25% of loan funds are used for non-payroll expenses, you may be held legally liable for charges such as fraud. You will also obviously jeopardize your eligibility for loan forgiveness and possibly for future SBA loan programs.

In addition to the Qualified Expenses listed below, allowable expenses include payments to continue group health care benefits during periods of leave, insurance premiums, interest payments on debts incurred prior to February 15, 2020, and refinancing an SBA Economic Injury Disaster Loan (EIDL) made between January 31, 2020 and April 3, 2020. For purposes of meeting the 75% payroll use requirement, the EIDL refinance will be counted toward payroll costs.

Other allowable uses are outlined in the general rules for Section 7(a) loans (15 USC 636(a)).

Qualified Expenses

The following are expenses that qualify for forgiveness:

  • Payroll expenses for employees residing in the United States (Note again that this category must account for at least 75% of loan funds expenditures);
  • Utilities for which service began prior to February 15, 2020; and
  • Mortgage Interest or Rent on real or personal property for which the agreement was in place prior to February 15, 2020.

Payroll expenses include:

  • Regular compensation (Salary, wages, commissions, or similar);
  • Cash tips;
  • Paid Time Off (PTO) wages (Vacation, sick, family, or parental leave);
  • Severance or dismissal pay;
  • The employer's share of employee health coverage, insurance, and retirement benefits;
  • State and local taxes on employee compensation; and
  • For an independent contractor, sole proprietor, or self-employed individual, Owner Compensation Replacement equivalent to 8 weeks-worth of 2019 net profit (averaged), with an annual limit of $100,000.

For PPP purposes Payroll expenses do not include:

  • Compensation of an individual employee in excess of $15,385 during the 8-week period ($100,000 annually);
  • Federal employment taxes imposed or withheld between February 15, 2020 and June 30, 2020 (including both the employer's and employee's shares of FICA and RRA taxes and income taxes withheld from employees);
  • Qualified sick and family leave wages for which a credit has been claimed under the Families First Coronavirus Relief Act (FFCRA) programs; and
  • For an independent contractor or sole proprietor, expenses for owner health coverage, insurance, and retirement benefits.

Limitations on Loan Forgiveness:

Forgiveness is limited to amounts spent on qualified expenditures within the first eight weeks after funds are received.

As a threshold, payroll expenses must make up 75% or more of any amount to be forgiven.

Loan forgiveness is predicated on the business keeping or quickly rehiring full-time employees at the same salary level. Letting staff go or reducing salaries or wages will decrease the amount that can be forgiven. However, employers can correct this and avoid negative results by re-hiring employees and reversing wage or salary reductions by June 30, 2020.

Additionally, it is important to note that the programs set up by the FFCRA and the CARES Act are designed to work in tandem with each other, but not to provide an opportunity to "double dip."

To the extent tax credits have been claimed for payroll expenses under other programs, those expenses may not be counted towards loan forgiveness. However, certain credit claims may be unwound without penalty. You should check in with your tax advisor to determine whether unwinding credit claims is an option and which approach will give you better results.

If you have received an Economic Injury Disaster Loan (EIDL) to cover non-payroll costs, your PPP loan is unaffected. However, if you used EIDL to cover payroll expenses, you will need to use the PPP loan to refinance your EIDL. Additionally, to the extent you have received an advance on the EIDL, the advance amount (up to $10,000) will be deducted from the loan forgiveness amount on your PPP loan.

he SBA has released additional guidance placing further limitations on forgiveness for loans made to Sole Proprietors, Independent Contractors, and Self-Employed individuals who report income on Form 1040, Schedule C.

Essentially, in order to be considered qualified expenses for loan forgiveness purposes, payments for mortgage interest, leases, and utilities must be deductible on Form 1040, Schedule C and the agreements giving rise to those payments must have been in place as of February 15, 2020.

Further, current SBA guidance limits loan forgiveness on amounts spent on Owner Compensation Replacement to an amount equal to eight weeks of net profit (averaged) from the owner's 2019 Form 1040 Schedule C. Presumably, the SBA wishes to prevent a self-employed individual from using PPP Loan proceeds to give him or herself a "raise."

Keeping Accurate Records

You will need to be able to substantiate the amounts and purposes of any expenditures of PPP funds when applying for loan forgiveness. To make it easier to compile this information, you will want to keep records as you go with documentation requirements in mind.

The CARES Act stipulates that to substantiate employee numbers and payroll, documentation should include payroll tax filings reported to the IRS and State income, payroll, and unemployment insurance filings.

The CARES Act notes that to substantiate other expenses, a borrower can submit cancelled checks, payment receipts, account transcripts, or other documents.

Additional documentation requirements are delegated to the SBA Administrator.

The SBA has published interim guidance dealing with the issues discussed in the sections above. However, it has yet to publish guidance on how borrowers should document their use of funds. It is likely the SBA will continue to provide additional guidance as more borrowers move into the next phase of the PPP loan process.

What little guidance on this aspect of the PPP loan program is available is directed at lender liability. The SBA has noted that lenders may rely on attestations of borrowers to determine eligibility for loan forgiveness. Reaching out to your lender to see what information they would like to see is a good start.

In the absence of guidance from the SBA or your lender, a good rule of thumb is to keep records of the same type and in similar detail as you would for tax or loan application purposes. Keep track of expenditure dates, amounts, and purposes and hold onto any external documentation such as an invoice or receipt.

For payroll expenses, speak with your payroll processing provider (or software provider if you manage payroll yourself) about adding further detail to internal records if necessary.

Applying for Forgiveness

The CARES Act states that applications for forgiveness will be made through the lender.

Pursuant to the CARES Act, the application should include documentation to verify (for the 8-week loan forgiveness period):

  • the number of full-time equivalent employees;
  • employee pay rates;
  • payments on mortgage interest and leases;
  • utility payments; and
  • a certification from an authorized representative of the borrower that the documentation provided is true and correct and the amount for which forgiveness is requested was used for qualified purposes.

Absent additional SBA guidance regarding this process, you should consult your lender to determine how you may apply for loan forgiveness.

Neither the CARES Act nor the current SBA guidance provides a deadline for applying for forgiveness. However, a lender has 60 days to make a determination on an application for forgiveness and the SBA has a further 90 days to remit the forgiven amount to the lender. Under the PPP loan terms, the first payment is due six months after receipt of the loan funds. Consequently, the earlier you can submit your application after the initial 8-week period is completed, the better.

Forgiveness Consequences

Loan amounts which are forgiven are to be treated as "canceled indebtedness." For tax purposes, a canceled debt is ordinarily considered income to the debtor. However, the CARES Act explicitly provides that amounts forgiven for PPP Loans will be excluded from the debtor's gross income.


Current news reports indicate that initial funding appropriated for PPP Loans has already been exhausted. So, congratulations! You've made it through what may prove to be the most difficult part of this process. To ensure you get the maximum benefit from the program, make a plan before you start spending, keep track of everything you do spend, and file your application for forgiveness as soon as possible. And don't neglect to leverage the knowledge of your banker, attorney, finance manager, accountant, and other professional advisors as you work through this difficult time.

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