PPP Forgiveness Calculation: Process & Example

Want to know how much of your PPP loan is eligible for forgiveness? Thanks to the SBA’s release of the Loan Forgiveness Application, you can now do the PPP forgiveness calculation for your loan amount.

Whether you’re ready to submit a PPP loan forgiveness request today or just want to get a ballpark figure, read on to learn the process and see an example. 

Background on the PPP

By now, you’re probably well-versed in the PPP (Paycheck Protection Program). But if you aren’t, here’s a quick refresher. 

The PPP was established by the CARES Act and replenished through the PPP and Health Care Enhancement Act. It provides forgivable loans to small business owners to help them keep employees on payroll. 

The loans are fully forgivable if borrowers:

• Use the loan for qualifying payroll and non-payroll expenses during the covered period, which is the eight weeks from the date of the first disbursement. You can also use an alternative covered period, which is eight weeks starting from the first day of the first pay period after receiving the disbursement.
  • 75% of the loan for payroll costs (salaries, wages, commissions, or tips; benefits; state and local taxes)
  • 25% for eligible non-payroll costs (interest on mortgages, rent, and utilities)
• Maintain full-time equivalent (FTE) employee levels or rehire employees furloughed or laid off between February 15, 2020 – April 26, 2020 by June 30, 2020 without penalty.
• Do not reduce salaries or hourly wages by more than 25% of the employee’s earnings between January 1, 2020 – March 31, 2020 or bring wages back up by June 30, 2020.

Failing to follow these rules reduces the forgivable portion of your PPP loan. But by how much? Use the PPP forgiveness calculation to find out. 

SBA application form for loan forgiveness

On May 15, the Small Business Administration published the Paycheck Protection Program Loan Forgiveness Application form. 

The form is broken down into the following sections:

• Instructions for PPP Loan Forgiveness Calculation Form
• PPP Loan Forgiveness Calculation Form
• Instructions for PPP Schedule A
• PPP Schedule A
• Instructions for PPP Schedule A Worksheet
• PPP Schedule A Worksheet
• Documents that Each Borrower Must Submit with its PPP Loan
• Forgiveness Application
• Documents that Each Borrower Must Maintain but is Not Required to Submit
• PPP Borrower Demographic Information Form (Optional)

When it comes to PPP forgiveness calculation, you need the PPP Schedule A Worksheet, PPP Schedule A, and PPP Loan Forgiveness Calculation Form (in that order). All of these are in the Loan Forgiveness Application form packet. Borrowers must use all three forms to calculate their loan forgiveness amount.

In short, it’s a lot to take in. That’s why we’re going to go through the calculation process bit by bit. 

PPP forgiveness calculation 

There are 11 lines total in the SBA’s forgiveness amount calculation, broken up into four main sections. Again, you’ll pull some of the information from PPP Schedule A:  

1. Calculate payroll and non-payroll costs
   1. Line 1: Payroll costs
   2. Line 2: Mortgage interest payments
   3. Line 3: Rent or lease payments
   4. Line 4: Utility payments
2. Make adjustments for full-time equivalency* (FTE) and salary/hourly wage reductions
   1. Line 5: Total salary/hourly wage reduction of more than 25%
   2. Line 6: Add the amounts on lines 1, 2, 3, and 4, then subtract the amount entered on line 5
   3. Line 7: FTE reduction quotient (Average number of FTEs during the covered period / Average FTEs during the reference period)
3. Calculate potential forgiveness amounts
   1. Line 8: Modified total (line 6 X line 7)
   2. Line 9: PPP loan amount
   3. Line 10: Payroll cost 75% requirement (divide line 1 by 0.75)
4. Arrive at the forgiveness amount
   1. Line 11: Forgiveness amount (The smallest of lines 8, 9, and 10)

*To calculate your FTE, you can use one of the following methods:

1. Enter the average number of hours each employee worked per week, divide by 40, and round to the nearest tenth (maximum, 1.0).
2. Assign a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours

Let’s talk more about how you’ll arrive at the forgiveness amount by taking a closer look at Lines 1 – 11. 

1. Payroll and non-payroll costs

First, calculate your total payroll and eligible non-payroll business costs. Don’t do anything with the 75% payroll / 25% non-payroll requirement yet—that comes later.

Line 1: To calculate your payroll costs, add together the following expenses you had during the covered period:

• The total cash compensation you paid your employees during the covered period (gross wages, but do not include federal income, Social Security, or Medicare taxes) 
• Employee health insurance contributions (employer) 
• Employee retirement plan contributions (employer)
• State and local taxes assessed on employee compensation
• Total amount paid to owner-employees/self-employed individuals/general partners

Line 2: Enter the amount of mortgage interest payments you made during the covered period. Only include payments on mortgage interest incurred before February 15, 2020.

Line 3: Enter the amount of rent or lease payments you made during the covered period if you entered into the lease agreement before February 15, 2020.

Line 4: Enter the amount of utility payments you made during the covered period if the service began before February 15, 2020. 

Keep in mind that you don’t have to report any non-eligible payroll or non-payroll costs you used the loan for. But, you won’t receive loan forgiveness on this portion. 

2. Adjustments for full-time equivalency and salary/hourly wage reductions

Next, you must adjust your PPP forgivable amount by any salary/hourly wage and FTE reductions you had during the covered period. To see if you have reductions, compare wage and FTE levels to the reference period you used when applying for the loan. 

Line 5: If you have any salary or hourly wage reductions over 25%, enter the amounts here (e.g., $5,000). If you didn’t cut wages, enter $0.00 here. 

Line 6: Add your payroll and non-payroll costs from lines 1 – 4, then subtract the wage reduction amount from line 5 (if applicable). 

Line 7: If you reduced your FTE employees, divide your total average FTEs during the covered period by your average FTEs during the reference period. Enter the quotient (e.g., 0.8) here. If you haven’t reduced your FTEs, enter 1.0 on this line.   

3. Potential forgiveness amounts (75% payroll requirement)

Almost there. The three lines of the potential forgiveness amounts section tell you what your loan forgiveness amount should be. 

Line 8: To calculate this line, multiply line 6 by line 7. This shows you the total of your payroll and non-payroll costs, minus your wage reduction amounts, then multiplied by your FTE reduction quotient.  

Line 9: Simply enter the PPP loan amount you received from your lender.

Line 10: Take your total payroll costs (line 1) and divide it by 0.75. This will determine if you used 75% of your loan for payroll costs like the Treasury and SBA require. 

4. Forgiveness amount

Ta-da! You’ve arrived at the final step of the PPP forgiveness calculation. The only thing you need to do is reference the potential forgiveness amounts section.

Line 11: Enter the smallest amount from lines 8, 9, or 10. This is your forgiveness amount. 

Examples

To give you a better idea of the process, here are some examples of the PPP forgiveness calculation in action. Take a look at examples of partially and fully forgivable loans. 

Partially forgivable loan

Let’s say you received a PPP loan worth $200,000. Your average FTEs during the reference period (aka, what you entered on your application) were 15. Your average FTEs during the covered period were 12. You didn’t cut any of your remaining employees’ wages.  

Here’s a rough breakdown of what you used the PPP loan for:

• $150,000 compensation
• $20,000 health insurance contributions
• $10,000 state and local taxes assessed on wages
• $10,000 rent
• $2,000 utilities

Quick calculation

First, add together your payroll and non-payroll costs:

• $180,000 (gross compensation + health insurance contributions + state and local taxes assessed) + $0.00 (mortgage interest) + $10,000 (rent) + $2,000 (utilities) = $192,000

Next, subtract your wage reduction amounts. Because you didn’t reduce wages, your wage reduction amount is $0.00:

• $192,000 – $0.00 = $192,000 

Multiply that number ($192,000) by your FTE reduction quotient. But before you can do that, you need to find your FTE reduction quotient. 

So, let’s find the FTE reduction quotient. Divide your FTEs during the covered period (12) by your FTEs during the reference period (15):

• 12 (FTEs during covered period) / 15 (FTEs during reference period) = 0.8

Now you can multiply the total of your payroll and non-payroll costs minus wage reduction amounts by the FTE reduction quotient:

• $192,000 X 0.8 = $153,600

Finally, you must select the smallest amount between the following three options:

1.  [(Payroll + Non-payroll Costs) – Wage Reduction Amounts] X FTE Reduction Quotient = $153,600
2. PPP Loan Amount = $200,000
3. Payroll Cost 75% Requirement = $240,000 ($180,000 / 0.75)

The smallest amount is $153,600. Out of your $200,000 PPP loan, $153,600 is forgivable. 

Line-by-line calculation

Line 1: Payroll costs | $180,000

Line 2: Mortgage interest payments | $0.00

Line 3: Rent or lease payments | $10,000

Line 4: Utility payments | $2,000

Line 5: Salary/Hourly Wage Reduction | $0.00

Line 6: Total of lines 1-4, minus line 5 | $192,000 

($192,000 – $0.00)

Line 7: FTE reduction quotient | 0.8

12 / 15

Line 8: Modified total, multiplying line 6 by 7 | $153,600

$192,000 X 0.8

Line 9: PPP loan amount | $200,000

Line 10: Payroll cost 75% requirement, dividing line 1 by 0.75 | $240,000

$180,000 / 0.75

Line 11: Pick the smallest number from lines 8, 9, and 10 | $153,600

Again, $153,600 out of your $200,000 PPP loan is forgivable.

Fully forgivable loan

Now, let’s say you received a $200,000 PPP loan. Your average FTEs during the reference period were 15. Your average FTEs during the covered period were 15. You didn’t cut any of your remaining employees’ wages.  

Here’s a rough breakdown of what you used the PPP loan for:

• $155,000 compensation
• $22,000 health insurance contributions
• $11,000 state and local taxes assessed on wages
• $10,000 rent
• $2,000 utilities

We’ll just stick with a quick calculation for this example. 

Quick calculation

Add together your payroll and non-payroll costs:

• $188,000 (payroll) + $0.00 (mortgage interest) + $10,000 (rent) + $2,000 (utilities) = $200,000

Next, subtract your wage reduction amounts. Because you didn’t reduce wages, your wage reduction amount is $0.00:

• $200,000 – $0.00 = $200,000 

Now, multiply that number ($200,000) by your FTE reduction quotient. Because you didn’t reduce your FTEs, your quotient is 1.0:

• $200,000 X 1.0 = $200,000

Finally, select the smallest amount between the following three options:

1. [(Payroll + Non-payroll Costs) – Wage Reduction Amounts] X FTE Reduction Quotient = $200,000
2. PPP Loan Amount = $200,000
3. Payroll Cost 75% Requirement = ~$250,667 ($188,000 / 0.75)

The smallest amount is $200,000. The full amount of your PPP loan is forgivable. 

This is not intended as legal advice; for more information, please click here.