The Small Business Administration (SBA) has officially released a copy of the Loan Forgiveness Application for recipients of loans from the Paycheck Protection Program. Why is this important? This document determines how much of your PPP loan funds will be forgiven and what, if any, amount you will need to pay back. 

As a quick review, here is how the PPP loans work:

  • Step One: You get a PPP loan and funds are disbursed to your bank account
  • Step Two: You have eight weeks from the time funds are disbursed to spend them on specific items. At least 75% of these items must be payroll and related payroll expenses.
  • Step Three: After the eight weeks, you apply for forgiveness with your lender (via the Loan Forgiveness Application) and provide required documentation.
  • Step Four: The lender has up to 60 days to respond to your request for forgiveness, and ideally agrees and the balance is forgiven. Any balance NOT forgiven will become a loan at 1% for up to 2 years.

In other words, if you received your PPP loans several weeks ago, it may be time to start thinking about the Loan Forgiveness Application. In this first installment of a two-part series, we will address what you can do during your eight-week period to maximize loan forgiveness. The application, along with updated rule clarifications, are providing business owners with a clearer understanding of how to spend PPP loans, and potential financial and legal pitfalls.  In part two of our series, coming in late May, we will address the required documentation and process for applying for loan forgiveness.

Note this information is meant to provide a high-level overview of PPP loan regulations as they stand at the time of this writing. We strongly encourage all recipients of PPP loans to consult their tax and legal advisors to find specific answers to their questions and verify the most up-to-date information.

How to Spend PPP Loans

Generally speaking, money from your PPP loan should be allocated to the following:

  • Payroll costs, including most benefits
  • Interest on a business-related mortgage obligation*
  • Rent and other leasing costs*
  • Utility Payments*
  • Interest on other debt obligations*

*Expenses must be for obligations or services established prior to February 15, 2020

Non-payroll expenses (everything in the list below payroll) cannot account for more than 25% of the loan amount for forgiveness purposes.

It was clear from the start that mortgage interest and rent for real property such as office space and storefronts were going to be included. The new Loan Forgiveness Application now specifies rents and mortgage interest on personal property items also qualifies. This means you can use funds to pay for leased equipment such as copiers, servers and company cars. Similarly, interest payments for business-related mortgage interest obligations apply to interest on auto loans, equipment loans, etc.. Other debt obligations may include interest paid on a business loan for working capital.

The Loan Forgiveness Application clarifies other qualified non-payroll expenses, but some questions remain. Utility expenses are defined as costs related to electricity, gas, water, telephone, internet access, and transportation. The SBA appears to define transportation costs as gas and other auto expenses normally deducted on a business-tax return. However, as of the time of this writing (May 2020), there is no definitive guidance about exactly what qualifies as a transportation cost.


Potential Pitfalls

Some borrowers will find their amount eligible for forgiveness may be reduced when they fill out their Loan Forgiveness Application, regardless of whether they stuck to the above requirements. This scenario applies to businesses who made cuts to their number of employees and/or decreased salaries during their designated eight-week period. There appears to be an exception for furloughed employees who return by June 30, 2020, but further clarification is needed to finalize this detail.

If your expenses fall outside the above definitions, or you need to use the money for other expenses, then your PPP money becomes a loan. The interest rate on the loan is fixed at 1.0% and has to be paid back in two years. You can defer payment for 6 months; however, interest will accrue over this period.

It is implied, but nonetheless important, to remind anyone receiving a PPP loan to use these funds responsibly and document their financial activity. The Loan Forgiveness Application requires bank statements, receipts, and other related documentation to account for exactly what you are spending. Federal investigators are already pursuing borrowers for fraudulently obtaining PPP loans. It remains unclear what additional consequences may befall those who legally obtain loans, but spend the proceeds on luxury items and other personal expenses. We strongly advise you to consult with a professional bookkeeper if you are having trouble keeping up with your financial records. Your PPP loan should be listed separately in your chart of accounts and accurately reflected on your balance sheet. Your tax and legal advisors should also be consulted to help clarify the evolving rules and regulations related to these loans.




Firm Numbers provides small business owners bookkeeping and financial reporting designed to help you make better management decisions. Firm Numbers offers flat-fee monthly service packages to address the pain points of law firms and professional service providers nationwide.

  • Weekly bookkeeping to ensure timely delivery of your numbers
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Our goal is to help you be the boss, not the bookkeeper. We pull you out of reactive decision-making based on emotion and provide the necessary tools to objectively run your business.

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