A Refresher on Eligible Expenses for PPP Loan Forgiveness.

May 26, 2020

On Friday, May 15, the Small Business Administration (SBA) issued the Loan Forgiveness Application for Paycheck Protection Program (PPP) loans along with a list of instructions for completing the application. Included in these instructions was guidance on costs that are eligible for loan forgiveness. Depending on when you initially applied for your PPP loan, your memory of the eligibility guidelines may be beginning to fade. Plus, some of the initial requirements have been revised by the SBA recently. As a result, we thought revisiting cost eligibility with our PPP loan customers would be helpful as they begin to work on the application.

In a broad sense, the guidelines are simple; the PPP loan amount will be forgiven if at least 75% goes toward eligible payroll costs, and up to 25% of the loan amount will be forgiven if it goes toward eligible non-payroll costs. The key to analyzing whether specific expenses are eligible for forgiveness depends on the definition of eligibility for each cost category.

Eligible Payroll Costs

Eligible payroll costs are defined by the SBA as payroll costs incurred and payroll costs paid during the eight-week (56-day) Covered Period or Alternative Payroll Covered Period. (For purposes of simplicity, references to Covered Period will also include Alternative Payroll Covered Period.)  In short, any cost related to payroll is eligible including insurance premiums, employee benefits like vacation, parental, family, medical and sick leave and taxes on compensation. Where things start to get tricky is in the difference between incurred and paid payroll costs, so let’s explore both in more detail. Payroll costs are considered incurred when the employee’s pay is earned. Basically, any time an employee shows up for work you are incurring payroll costs. Payroll costs are considered paid on the day that paychecks are distributed or when you, as a business owner, originates an ACH transaction to deposit the employee’s pay into their bank account. In short, payroll costs are paid on payday. If payroll costs are paid during the Covered Period, they are eligible. You may be wondering what happens if you have incurred payroll costs that were not paid during the last pay period of the Covered Period? Those incurred costs are eligible for forgiveness as long as they are paid on or before the next regular payroll date. For example, you incur payroll costs for employees working May 18 to May 29. Employees are paid for the work they did during that time on June 12, but your Covered Period ends on June 5. As long as your employees are paid by June 12, those payroll costs are eligible.

It’s also important to keep in mind that for each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the Covered Period. Count payroll costs that were both paid and incurred only once.

Eligible Non-Payroll Costs

Non-payroll costs eligible for forgiveness include mortgage payments, rent or utilities. The following are definitions and eligibility requirements for each:

Mortgage payments:  Payments of interest on any business mortgage obligation on real or personal property. To be eligible, the mortgage had to have been taken out before February 15, 2020. Any payment or prepayment of principal on any business mortgage obligation is not eligible.

Business rent or lease payments:  These payments must be outlined in a business rent or lease agreement for real or personal property. To be eligible, the lease must have been executed before February 15, 2020.

Utility Payments:  Business payments for electricity, gas, water, transportation, telephone, or internet access. Service of all these utilities must have begun, you guessed it, before February, 15, 2020

For all three categories of non-payroll costs, timing of the payment also determines eligibility. Each must be paid during the Covered Period. A cost incurred during the Covered Period can also be eligible as long as it is paid on or before the next regular billing date, even if the billing date is after the Covered Period. For example, if your May electric bill is due June 20 and your Covered Period ends June 5. The cost is eligible because it was incurred during the Covered Period as long as the bill is paid by June 20. As with Payroll Costs, each non-payroll paid and incurred cost should only be counted once.

We hope you find this information helpful. If you have questions or would like more details, please call your ENB Relationship Manager or our Customer Service Center at (717) 733-4181. Also, keep an eye out for our next article where we’ll discuss documentation requirements for eligible expenses.

This information is guidance from the Small Business Administration (SBA) in consultation with the Department of the Treasury as of May 15, 2020. As always, you are encouraged to seek independent accounting and legal advice on decisions that require such professional reviews and to assist you in determining your priorities.

Back to Blog >