PPP Paycheck Protection Program Loans & Forgiveness – OLD VERSION – (by: Mattisyahu Teichman, CPA)



update 5/14/2020 – Updated loan amount calculation for Sch C and Partners and added note about modifying partnership loan requests. Updated loan forgiveness for Partners. Added analysis of partners vs sole proprietors (in various other point section).

update 5/13/2020 – Modified Loan Certification Section]

We have been getting numerous questions about the Paycheck Protection Program (PPP) under Section 1102 of the CARES Act, created in response to the COVID-19 epidemic. The following provides some limited information regarding the program. Please understand that the rules are constantly being updated and our understanding of them is constantly changing. Accordingly, anything discussed here is subject to change and may reflect an outdated or incorrect understanding of the rules. If you have any questions or corrections please contact me. Also just want to say thanks to all of my colleagues who were kind enough to read this and especially those who have made some valuable corrections.

The PPP is a program designed to provide loans to small businesses via the Small Business Administration (SBA) in order to help cover payroll costs and some overhead expenses. If various requirements are met the loans can be forgiven in full or part. These loans are applied for via a bank or other lender. They carry a low interest rate (1%) and the maturity (on any portion not forgiven) is two years.

There are three calculations here relevant to the loan. (1) How the loan amount is computed, (2) how you can use the loan, and (3) how the loan forgiveness is computed. There are various differences between each of these, which can make this confusing, but they are important to understand. The most critical discussion here is likely the loan forgiveness section as that will be what most of you will be making decisions based on.


The loan amount is based on the 2.5 months of average salary plus 2.5 months of various employee benefits (e.g. employer provided retirement and group health). In addition, employer paid state and local taxes (generally unemployment contributions) are included.

Average salary is generally computed by taking either the 2019 or last 12 months (April 1, 2019 – March 31, 2020) salary, dividing by 12 and multiplying by 2.5.

For Sch C (Sole Proprietors), they can apply for the loan based on their 2019 Sch C income. The calculation for them is divide the Sch C income by 12 and multiply by 2.5. This is in addition to any loan amount they would be eligible for based on their employees as discussed above. Health insurance and retirement paid for the owner is not included (for employees as mentioned above it is included).

For partners, they can apply for the loan based on their self-employment income as reported on line 14 of Sch K-1 for 2019 (less any Sec 179 deducted, unremibursed partnership expenses, and depletion on oil and gas properties). First multiply by 0.9235 then divide by 12 and multiply by 2.5. If there are employees this would be in addition to the amount for them. [The $100,000 cap (discussed below) is determined after you multiply by 0.9235. The 0.9235 calculation is intended to be equivalent to removing the employer share of payroll taxes]. We think group health and retirement for partners can be included here. The annual cost should be divided by 12 and multiplied by 2.5 to calculate the amount of loan eligible for that component.

Note: for sole proprietors and partners the application is done in the business name and is a single one together with any employees. The SBA will only approve one application per business so it is important that you include all costs in your initial application in order to get the maximum amount you are eligible for.

For the portion of the loans computed based on salary, Sch C income, and Partnership self-employment income, the amounts are capped at $100,000 annualized (for salaries this is per employee). This means that for this component the maximum loan amount can be $100,000 / 12 x 2.5 = $20,833. As discussed already the non-salary component is added to this amount and there is no dollar limitation.

For partnerships that did not include partner K-1 self-employment income in their original application it is our understanding that you can apply with you bank to adjust the loan request.


In order to get the loan you have to certify in “good faith” that there is a need for the loan and that it will be used to retain employees and maintain salaries.

Initially there was concern what this certification entailed. The SBA and Treasury had indicated that in making the certification one has to look at liquidity and access to funds, but precisely what that meant was not clear.

On May 13 the SBA clarified that for a loan under $2,000,000 this certification will automatically be considered to be made in good faith. For loans above $2,000,000 they will be subject to review by the SBA and if found to lack adequate basis for the certification they will seek repayment of the loan. If the loan is repaid the SBA will not pursue any additional action against the borrower.


The SBA and Treasury decided that the loan has to be used minimally 75% for payroll costs. The remaining amount can be used for eligible overhead costs. Both of these are described below.

Payroll costs are the following:

  • Salaries and other compensation (tips, vacation and other paid leave, dismissal, etc) paid to employees
  • Partner self-employment replacement
  • Sole Proprietor, Sch C income replacement
  • Group health insurance paid by the employer
  • Retirement costs paid by the employer
  • State and local taxes on salary paid by the employer

The salary & other compensation, partner self-employment, and owner compensation replacement portion is capped at $100,000 annualized.

Eligible overhead costs are the following:

These have to be business related (i.e. deducted and eligible to be deducted on your business tax return [Sch C, 1120, 1120S, or 1065] and they have to be arrangements entered into by 2/15/2020).

  • Interest on mortgage obligations on real or personal property
  • FOR LOAN USE ONLY, BUT NOT LOAN FORGIVENESS – Interest on other debt obligations
  • Rent on real or personal property
  • Utility bills.

The use of the funds can extend over the period you have the loan (there is no specific time-limit to use the funds). Please note, this is a very important distinction from the loan forgiveness provisions discussed later.

Note: There are two “75%” provisions as to payroll costs. One, for the use of funds, and the other for the loan forgiveness. They apply separately for each calculation.

The loan use and the loan forgiveness provisions use many similar terms and can really mix you up, so it is important to think about them each separately and understand the distinctions between them.


Ok, finally down to the part you are likely here for. This is also the most difficult part and the guidance is lacking so there is some guess-work here.

Loan forgiveness, is based on use of the funds in the 8 weeks from when you receive the loan (our understanding is this is the date the funds are received by you). At least 75% of the amount forgiven has to be used for payroll costs (this is separate from the 75% loan use requirement). The rest of the amount forgiven can be for eligible overhead costs. Both payroll costs and the eligible overhead costs are described above by the discussion of “loan use.”

There are several important limitations applicable to payroll costs that must be understood.

For Sole Proprietor Sch C Income Replacement

  • The amount eligible for forgiveness is 2019 Sch C income, divided by 52, times 8
  • 2019 Sch C income is the lesser of the amount reported or $100,000 (i.e. the max forgiveness for this is $100,000 / 52 x 8 = $15,385)
  • Assuming no other eligible costs this means that the difference here will have to be repaid
  • The SBA and Treasury have taken the position that the other payroll costs (health insurance, retirement, etc) on behalf of the sole proprietor are not eligible to be included in forgiveness.

For Partner Self-employment Income Replacement

  • The amount eligible for forgiveness is expected to be based on 2019 self-employment income as reported on line 14 of your K-1 (less, any Sec 179 deducted, unremibursed partnership expenses, and depletion on oil and gas properties), multiplied by 0.9235, divided by 52, multiplied by 8.
  • The self-employment income is capped at an annualized amount of $100,000. This cap applies after multiplying by 0.9235.
  • There is no advice from the SBA or Treasury regarding partner’s share of the other payroll costs (e.g. health and retirement). We think for partner’s they will allow these costs to be included.

For Salary and Compensation of Employees

  • Salary and Compensation is capped at $100,000 annualized per employee (maximum forgiveness for this portion is $100,000 / 52 x 8 = $15,385).
  • The other payroll costs (health, retirement, state and local employer taxes) are added to this amount.
  • If you have a reduction in the number of full-time equivalent employees (FTEE) as compared to either 1/1/2020-2/29/2020 or 2/15/2019-6/30/2019 (you can choose which period to compare to) you will have a proportional reduction in the amount of the loan forgiven. There are some unknowns about how FTEE are calculated. Our recommendation is that you should ensure you have employees on payroll for the same number of hours (excluding overtime) as the comparison period to ensure maximum forgiveness. For this provision, we don’t believe it matters if you have the same or different employees.
  • If you have a reduction of more than 25% of salary (based off a maximum salary of $100,000) per employee for the 8 week period as compared to the last full quarter they worked it will cause a reduction in the loan forgiveness for the amount in excess of the 25% reduction. This is on a per employee basis and you cannot replace one employee with the other.
  • [The CARES Act says that the reduction for salary only applies to employees who were not paid in any period during 2019 a salary at a rate greater than $100,000, accordingly many assume that reductions in salaries related to those employees will not count against you. We are awaiting final guidance from the SBA on this topic. Our recommendation is to assume that the reduction will apply to all employees based on salary capped at $100,000 annualized.]
  • If you had laid off employees and then offered to rehire (at the same wages and hours) and they refused it will not count against you for the reduction provisions. You have to document this and it may impact the employees ability to continue collecting unemployment insurance.
  • There is a provision that if you rehire an employee by 6/30/2020 it will not count as a reduction in FTEE or salary. HOWEVER, it is important to understand that this only applies to the period up to 4/26/2020. If on any date after that, during the 8 week period after you receive your loan, you have an employee laid off it will count against you for the reduction in FTEE or salary as applicable.
  • Our recommendation is that all employees that were on payroll prior to 2/15/2020 should be on payroll in the 8 week period at their regular rate of pay, in order to ensure the maximum loan forgiveness.

There are numerous questions related to the eligible overhead costs or other payroll costs. Primarily they revolve around can you pay more than 2 months of costs in the 8 week period. The answer to this is unknown. Our advice is to pay an extra month of these costs if you will anyways be paying them in the hope they are included in the loan forgiveness calculation, however try not to rely on this. Many have noted the odd language in the law regarding “incurred” and “paid.” The SBA and Treasury seem to focus on what you paid in the 8 weeks, but it is too soon for anyone to suggest anything here one way or the other.

For Sch C eligible overhead costs, it is unclear if they will be allowed for loan forgiveness or not. The language in the rules is confusing. We think it will be allowed, but we can’t know this.

Various other points related to all this (sorry if this is a mess, but there is a lot of info to process and trying to keep it simple and understandable):

Parsonage – Parsonage is included in wages and compensation.

1099’s – Originally the law suggested that you can include 1099’s in your payroll loan, but the rules since clarified that you cannot. People receiving 1099’s should apply themselves if eligible.

Partial unemployment / Work share – Employees should be eligible for partial unemployment or work share if you don’t rehire them fully. In terms of partial unemployment, unless you are paying them a small fraction of their prior salary, they will likely not be eligible for unemployment. In terms of work share they will be eligible as long as the reduction in employment meets the terms of the program. Once they receive work share they should also be eligible for the $600 pandemic unemployment assistance payments the Federal Government is providing. I would caution that any reduction in employment that causes an employee to be eligible for unemployment or work share, may be considered a reduction in FTEE by the SBA and Treasury. As there is currently limited guidance on how FTEE are calculated, any planning here is difficult to do. My recommendation as stated previously, is to rehire all employees for the same hours and wages as prior to 2/15/2020 to ensure maximum loan forgiveness. Also, one should consider how paying employees for partial time or salary aligns with the certification made when taking the loan that you will retain employees and maintain salary. We cannot provide any specific advice as to what the certification means.

Increasing salary or head count – The provisions penalize you for reducing salary or head count. There is no mention about increasing salaries or head count. We think that you can increase salaries (up to $100,000 annualized) or head count for the loan forgiveness calculation.

Tax implications – The law says that the loan forgiveness is tax-exempt. The treasury issued a notice stating that accordingly the expenses paid with the loan are not deductible. Congress may be passing a law reinstating a deduction for expenses here, which would be a very significant benefit for business receiving these loans. It should be noted, for Sch C and partner income replacement (possibly excluding any portion paid as a guaranteed payment) the law as it stands allows for tax free income for that portion.

EIDL Grant – If you received an EIDL Grant ($1,000 per employee, up to $10,000) the amount of loan forgiveness for the PPP loan is reduced by that amount.

Employee Retention Credit (ERC) – The CARES Act also offers an ERC which covers 50% of payroll up to $10,000 in payroll ($5,000 credit) per employee. You cannot receive both an ERC and a PPP loan.

Paid Leave – The “Families First Coronavirus Response Act”, introduced various paid leave benefits for people affected by COVID-19. These paid leave benefits provide a credit to the employer for up to certain amounts. During the 8 week period in which you are to use the funds for the loan forgiveness, the loan forgiveness will be reduced for any paid leave credit claimed.

Partners vs Sole Proprietors (Sch C) – Analysis of the difference in treatment – The CARES Act specifies for Sole Proprietors that their loan amount and forgiveness is based on income and does not include health and retirement benefits in the respective calculations. For employees, the act specifies, that in addition to their wages and salary, amounts paid for group health and retirement are included in the respective calculations. As to partners (who are considered self-employed) the law is not clear as to whether they are treated like sole proprietors or employees (notable difference being whether you can include group health and retirement costs). In the various rules the SBA issued, it appears they determined to consider partner’s similar to employees, hence the partner’s self-employment income is multiplied by 0.9235 in order to approximate having a received a salary (whereas for a sole proprietor you don’t have to multiply the Sch C income by 0.9235). Accordingly, if partner’s are like employees it seems likely this treatment extends to health and retirement benefits and accordingly they are included in the loan and forgiveness calculations.

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