Paycheck Protection Program (PPP) Loan Forgiveness: Learn More About How it Works

Small business owners have lots of questions about Paycheck Protection Program (PPP) loans. One of the most-asked is about full and partial loan forgiveness terms. This article provides an overview. Further details can be found on the SBA website referenced below.

Receive Updates About The CARES Act Paycheck Protection Program

The government’s efforts to aid businesses during the economic downturn has resulted in terms for PPP loans designed to reduce burdens on small businesses. Eligible borrowers can receive two and a half times their monthly payroll costs incurred during the year before the date the loan is made. As an example, if your monthly average payroll in the last 12 months is $10,000, you may borrow up to $25,000. The maximum any business can borrow is $10 million.

Loan forgiveness details

To be eligible for this aspect of the program, you must meet the following requirements:

  • Business owners must spend at least 75% of their loans on payroll costs.
  • Employers can apply for full or partial forgiveness if they spend their loans on qualifying expenses over the eight weeks after receiving a loan. Qualifying expenses include:
    • Payroll costs
    • Utilities
    • Mortgage interest (not including principal payments)
    • Rent
  • If full-time employee headcount is reduced, loan forgiveness will be proportionally reduced.
  • If salaries or wages are reduced, loan forgiveness will be proportionally reduced.

What if I cut employee headcount?

Forgiveness for part of a PPP loan is available if you reduce employee numbers during this time. However, the CARES Act reduces forgiveness of a loan proportionally if an employer cuts employee headcount.

To determine its baseline headcounts, an employer can use either:

(a) The average number of full-time equivalents (FTEs) it employed from January 1, 2020 to February 29, 2020.


(b) The average number of FTEs it employed from February 15, 2019 to June 30, 2019.

Whichever average the employer chooses, it must maintain that number for at least the eight weeks after receiving a loan. If headcount falls below that number, the loan forgiveness is reduced by a proportional amount.

What if I cut employee salaries?

The Act also reduces loan forgiveness if an employer cuts employee compensation.

To get its baseline compensation figure, an employer should include all salaries and wages for employees up to $100,000 (the maximum amount of an employee’s compensation that an employer may count for monthly payroll purposes).

If the employer reduces compensation below that number during the eight weeks after getting a loan, forgiveness may be reduced. This reduction is more flexible than the reduction for headcount, as the reduction begins only after the employer reduces compensation by more than 25%.

For a close look at payroll calculation, read Payroll Cost Calculation for Paycheck Protection Program Loans. Information includes what is included in payroll costs and what is excluded along with 5 steps to help you calculate.

How is employee compensation reduction calculated?

Assume an employer calculates its average monthly compensation to be $100,000.

Because of coronavirus-related shutdowns, the employer cuts compensation to $50,000 per month—a 50% reduction. But only reductions after the first 25% count against loan forgiveness. So the employer’s forgiveness will fall by only 25%.

How does PPP loan forgiveness affect a tax credit?

You cannot get both a small business loan under the PPP and also claim a tax credit.

If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200 to request an advance payment of employer credits due to COVID-19.

See Claiming CARES Act Tax Credits To Keep Employees for more information.

Additional resources

Further detail concerning how these loans work, and other programs to support small business, please refer directly to the SBA website.

The SmartBiz team is regularly updating our resource center to help address questions top-of-mind for small business owners. Visit our Learning Center:

SBA Funding During COVID-19 Coronavirus: SBA 7(a) Paycheck Protection Program Loans