By: Todd Schanel, CFA, CPA, CFP®
on May 4, 2020

SBA-Accountant-Jupiter FL-CPA-Financial AdvisorBusinesses have been receiving Paycheck Protection Program (PPP) loan proceeds over the last few weeks, and the focus has shifted from the application process to the particulars of loan forgiveness. There are still some specifics that we do not know, and the SBA should be issuing more guidance in the weeks to come. In the meantime, the following Q&A provides an overview of what we know so far about PPP loan forgiveness.

What is the “8-week covered period”?

The covered period is the 8-week period starting from the date that the loan proceeds were received by the borrower, during which time certain qualifying expenditures are eligible for loan forgiveness.

Note that the covered period begins the day the funds arrive in the bank account, not the day after.

What expenditures qualify for loan forgiveness?

Funds used during the covered period toward the following are eligible for loan forgiveness:

  • Payroll costs:
    • Gross payroll (up to a $100,000 annualized rate, or $15,384 for the covered period)
    • Benefits such as employer-provided health insurance and retirement plan benefits
    • State and local employment taxes (not Federal payroll taxes paid by the employer)
    • Note that only the gross payroll is restricted to the $100,000 limit.
  • Rent on any lease in force prior to February 15.
  • Qualified mortgage interest, which generally includes interest on debt incurred during the normal course of business prior to February 15.
  • Utilities expenditures assuming the service was in effect prior to February 15.
Can I prepay my rent or utilities and get loan forgiveness?

Not likely. It is best to assume that payments in advance for expenditure not yet incurred will not be eligible for forgiveness.

Will payments of past-due amounts be eligible for forgiveness?

It is unclear at this time how past-due payments will be treated.  However, all non-payroll cost expenditures will be limited by the 75%/25% rule (see below). 

If I pay a retirement plan benefit during the 8-week period, will that be eligible for loan forgiveness?

If employer contributions to company retirement plans are generally made throughout the year during the normal course of payroll, those contributions made during the 8-week covered period will likely be allowed.  However, if the employer makes a single annual contribution during the 8-week period, it is best to assume that only 8/52nds of the amount will be eligible for forgiveness.  We are expecting more guidance from the SBA on this issue.

What if a pay period ends within the covered period, but the payroll date falls outside of the covered period?

Our advice is to assume that only payroll costs actually paid within the covered period will be eligible for forgiveness. Therefore, if the covered period ends on June 18, and the employer is scheduled to fund payroll on June 20th for a pay period ending June 15th, that amount will likely not be eligible for forgiveness.

What is the 75%/25% rule?

The 75%/25% rule states that at least 75% of the loan must be used for payroll costs. To the extent it is not, loan forgiveness for non-payroll items will be reduced to the extent necessary to satisfy the rule.

What are the staffing requirement rules?

In order to qualify for loan forgiveness, the borrower must demonstrate that they are maintaining the same employee headcount as they were prior to the pandemic.  To determine this, employers can compare Full-Time Employee Equivalents (FTEEs) for the 8-week covered period against one of two periods:  1) February 15, 2019, to June 30, 2019, or 2) January 1, 2020-February 29, 2020.

To the extent FTEs are lower in the covered period then they were in the comparison period, the forgiveness amount is to be reduced accordingly.

Example: Business has incurred $90,000 in qualifying expenditures during the covered period and has satisfied the 75%/25% rule.  Their headcount was 8.5 FTEEs during the period February 15, 2019-June 30, 2019, and 9.25 FTEEs during the period January 1, 2020-February 29, 2020.  During the covered period, the business had a headcount of only 7.5 FTEES.  Loan forgiveness will be reduced to 88.24% of the tentative forgiveness amount (7.5 divided by 8.5), or $79,416 (88.24% times $90,000).

How will FTEEs be calculated?

Exactly how FTEEs are to be calculated is unclear.  A traditional measure would involve adding up all hours worked in a period by all employees (up to 40 hours per week) and dividing it by the number of hours in that period assuming a 40-hour workweek.

Others have suggested that any employee working at least 30 hours or more per week should be considered full time, and the FTEEs calculation would only apply to part-time employees, using either 40 or 30 hours in the denominator.

Furthermore, the legislation specifically refers to the “average number of FTEEs per month”, “determined by calculating the average number of full-time equivalent employees for each pay period falling within a month”.  Based on this wording, I believe the calculation would work as follows:  calculate the FTEEs for each pay period that falls within in the relevant period; 2) group the calculated FTEEs for each pay period by month to calculate the average for the month, and 3) calculate an average of the monthly average.

What is the 75% pay requirement?

This rule states that loan forgiveness will be reduced by the amount of any pay reductions in excess of 25% during the covered period relative to the most recent full quarter during which the employee was employed before the covered period.  Note that this is different from the comparison periods used in determining headcount!

This does not apply to any employee who received pay at a rate of $100,000 annualized rate for any single pay period in 2019. This appears to exempt from this rule any employee who earned an annual salary of more than $100,000 at any point in time in 2019.

Will the amount of loan forgiveness be taxable?

No, but yes. The CARES act stated that any amount of loan forgiveness was to be excluded from gross income for tax purposes. However, the IRS recently clarified that any expenditures used to qualify for loan forgiveness are not deductible. This effectively makes the amount of any loan forgiveness taxable.

What is the June 30th “Re-Hire Exemption”?

 This provision states that any reduction in loan forgiveness can be remedied if the employer can demonstrate that any reduction in FTEEs that occurred between February 15 and April 26 are restored to pre-pandemic levels by June 30, 2020. More guidance will be needed before we know exactly how this provision is going to work.

Can you help us manage the PPP loan forgiveness process?

 If you have received or are about to receive a PPP loan, and you need more assistance, we are offering PPP loan consulting services, which include:

  • Initial call to develop a plan for the 8-week covered period
  • Calculation of FTEs for comparison periods based on historical payroll reports
  • Follow-up calls every two weeks, or as needed.
  • Mid-point loan forgiveness calculation
  • Preparation of Loan Forgiveness Application
  • Communicate and incorporate updates from SBA as needed

Pricing will be as follows:

  • Fee will be calculated at standard hourly rates, or 1% of the loan forgiveness plus $500, whichever is lower.
  • Deposit of $500. Remaining payment is due at the time any loan forgiveness is granted.

If you are interested, please email for more information.

Schanel & Associates is a CPA firm specializing in accounting, tax, and business valuation serving Palm Beach, Martin and St. Lucie Counties and beyond since 1993. Our CPAs and accounting professionals work with individuals, businesses, estates and trusts to provide everything you need under one roof. For more information, contact us today at 561-624-2118.

Todd Schanel has been a principal at Schanel & Associates since 2004, where he specializes in financial planning, tax planning, and consulting services. He also serves as Founding Principal and Director of Investment Advisory Services at Core Wealth Management, our sister company, where he leads an accomplished professional team offering independent and objective financial advice to help clients achieve their financial goals. Todd has been a CFA Charterholder since 2005, and in 2007 he earned his Certified Financial Planner® designation and became a licensed CPA. In 2015, he earned the Certified Valuation Analyst (CVA) designation.