August 18, 2020

This article reflects the law prior to the passage of the Consolidated Appropriations Act (CAA) in December 2020. As such, certain sections may now be outdated. To learn more about the CAA updates, read our article here.

Many Paycheck Protection Program (PPP) borrowers have now started their loan forgiveness calculations and are questioning which expenses are eligible for forgiveness. This article will walk through the four types of eligible expenses and address some of the common questions. As mentioned in our previous article on PPP loans, achieving maximum loan forgiveness requires the following:

  1. Utilize at least 60% of the proceeds for payroll costs during the covered period (previously the threshold was 75%, but the Paycheck Protection Program Flexibility Act (PPPFA) reduced it to 60%);
  2. Entire loan proceeds are spent on eligible expenses – payroll costs, interest on loans, rental payments, and utility costs;
  3. Restore the number of full-time equivalent employees by the end of the covered period; and
  4. Restore wages to employees by the end of the covered period.

Eligible Expenses

The CARES Act specifies four categories of expenses for which the PPP loan proceeds may be used: payroll costs, mortgage interest, rent, and utilities. To be eligible for maximum loan forgiveness, at least 60% of the loan proceeds must be spent on payroll costs. If less than 60% of the proceeds are spent on this amount, the amount of forgiveness is reduced prorata.

Payroll Costs

When calculating compensation costs, remember to include an employee’s gross wages, bonuses and hazard pay, commissions, and tips. Payments under vacation plans, parental leave, and medical or sick leave are also included. Additionally, payments for separation or dismissal are also eligible payroll costs. Payroll taxes paid by the employer are not considered eligible payroll costs for the loan forgiveness process.

For independent contractors or sole proprietors, payroll costs only include wages, commissions, income, or net earnings from self-employment, or similar compensation.

Note that cash compensation payments are capped at $100,000 per employee on an annual basis. Therefore, if an employee earns more than $1,923 per week ($100,000 / 52 weeks), the weekly compensation over that amount cannot count towards payroll costs for loan forgiveness purposes. In other words, a borrower using an eight-week covered period is limited to $15,385 per employee. A borrower with a 24-week covered period is limited to $46,154 per employee. Special rules exist for owner-employees, self-employed individuals, and general partners. Compensation for those individuals during a 24-week covered period is capped at $20,833 (2.5/12 x $100,000).

Non-cash compensation payments are not subject to the employee wage cap. This includes payments for group healthcare coverage premiums, employer contributions to a defined-benefit or defined-contribution retirement plan, and payments of state and local taxes assessed on compensation of employees, including unemployment taxes. Note that healthcare benefits paid by employees, such as the employee share of healthcare premiums, are not an eligible expense. It makes no difference if the amounts are paid using pre- or post-tax dollars based on the recent guidance issued by the SBA on August 4. Payments paid for fringe benefits (except for health insurance) and other ancillary benefits, such as disability insurance, gym memberships, and employer-paid group life insurance, are also not included in payroll costs.

Currently, there is no requirement that a borrower must only include the payroll costs originally identified on the borrower’s loan application when applying for forgiveness. The SBA has issued additional guidance over the past few months that expands the definition of payroll costs, including items such as bonuses, hazard pay, and minister housing allowances. Absent further guidance from the SBA, borrowers may use the most recent guidance in determining eligible payroll costs for the loan forgiveness application.

It is unclear at this time how payments to non-group healthcare plans are treated. This includes employer payments to Health Savings Accounts and reimbursement arrangements for an individual with healthcare coverage that is not part of a group plan.

Last, remember there is no double dipping on payroll costs. If the borrower is claiming a credit under the Families First Coronavirus Response Act (FFCRA) for sick and family leave wages, these wage costs cannot be used towards the PPP loan forgiveness costs.

Mortgage Interest

Interest on mortgage obligations during the covered period is considered an eligible expense for loan forgiveness. The loan itself must have been in place before February 15, 2020. If the borrower obtained other financing during its covered period, the interest paid on those loans are not eligible expenses.

The mortgage may be for real or personal property. Therefore, interest paid or incurred on office equipment, company vehicles, and machinery are all eligible costs.

Advance payments of interest are not eligible for loan forgiveness. Additionally, principal payments on mortgage obligations are not eligible expenses.

The additional guidance provided by the SBA in August clarified an important question for many borrowers. Previously, it was unclear whether interest on a refinanced mortgage counted as an eligible expense. Per the additional guidance, if the loan existed prior to February 15, 2020 and is refinanced on or after February 15, 2020, the interest payments on the refinanced mortgage are considered eligible expenses if paid or incurred during the covered period.

To date, no guidance has been provided on construction loans and whether the interest payments are an eligible expense.


Rent or lease payments for leases in place prior to February 15, 2020 are eligible expenses. The rent may be for real or personal property. Additionally, if a lease existed prior to February 15, 2020, but it expires on or after that date, then payments for rent under the renewed lease are eligible expenses.

The SBA has not specifically indicated whether prepaid rent or rent paid in arrears are eligible expenses. However, guidance has been issued on advance mortgage payments that indicate these are not eligible expenses. It seems reasonable that advance rental payments may have the same treatment. Back payments of rent, however, are eligible for loan forgiveness if they are paid within the borrower’s covered period.

It is unclear at this time whether “rent” is defined as just the property itself or if it also includes other costs associated with rent, such as property insurance or management fees that may be billed by a landlord. Utility payments billed by a landlord are likely includible, since utilities costs themselves are expenses eligible for forgiveness.

For borrowers that sublease their space to others, only the rent payment attributable to the space directly used by the borrower is eligible for loan forgiveness. For example, if a borrower pays $10,000 per month for office space, but they sublease a portion to a third party for $2,000 per month, only $8,000 of the rent payment is an eligible expense for loan forgiveness purposes.

The SBA has provided no guidance on what a borrower should do when a lease modification occurs on February 15 or later. The guidance provided in August only addresses a lease that expires and is renewed during the covered period. As borrowers struggle with cash flow, many are negotiating new leases with their landlords. It is not clear whether these lease modifications are considered an extension of the original contract or if they give rise to a new agreement.


Utility services in place before February 15, 2020 are qualified expenses. This includes electricity, gas, water, telephone, and internet access. The SBA also includes “transportation” as a utility cost, but no definition currently exists for this term. It is unclear if this would include gas for vehicles or mileage reimbursements.

The SBA has not addressed whether costs for garbage collection are included in the definition of utilities. Additionally, it is unclear whether cell phone stipends for employee-owned devices or allowances for supporting remote work environments are an eligible cost.

Paid Versus Incurred

When the CARES Act passed, there were many questions on whether expenses must be incurred or paid to qualify for maximum forgiveness. Through additional guidance from the SBA, it is now clear that both payroll and non-payroll costs, either incurred or paid during the covered period, are eligible expenses. The allowance for expenses incurred (accrual basis) as well as paid (cash basis) essentially expands the period which a borrower can determine its eligible expenses.

  • Example – paid during covered period but incurred cost before covered period starts: Borrower X receives its loan proceeds on Thursday, April 30, marking the beginning of its covered period. The borrower pays its employees on the 1st and 15th of each month. It cuts payroll on May 1 for wages earned April 16 to April 30. Even though the wage costs were incurred before its covered period began, Borrower X may still treat the entire wage payment on May 1 as a qualifying expense since it was paid within the covered period. 

When a cost is incurred during the covered period but paid after the covered period ends, it is only eligible for forgiveness if paid on or before the next regular billing date or payroll cycle.

  • Example – incurred cost during covered period but paid after covered period ends: Borrower X’s covered period ends on Wednesday, June 24. Its next regularly scheduled payroll is July 1 for wages earned from June 16 to June 30. Since the costs are for wages incurred during the covered period, and payment is made on the next regular payroll cycle, Borrower X may treat the portion of wages through June 24 as an eligible expense. 

In these examples, Borrower X can use 10 weeks of payroll costs in its loan forgiveness calculation, even though its covered period is only eight weeks (April 16 – June 24). This is because both paid or incurred costs are considered eligible expenses.

Alternative Payroll Period for Compensation

To simplify things, the SBA allows for an alternative payroll period when determining wages eligible for forgiveness. The SBA recognizes that payroll cycles don’t always line up nicely with the covered period. Thus, for wages only, a different period may be used that lines up with the borrower’s payroll cycle. This alternative payroll period is only available for borrowers with payroll cycles on a bi-weekly or more frequent basis.

  • Example: Borrower Y’s eight-week covered period begins on Thursday, April 30 and ends on Wednesday, June 24. It issues payroll each Friday. Rather than track which payroll periods are within its covered period, Borrower Y can use an alternative eight-week payroll period for its wages – Friday, May 1 to Thursday, June 25. For payroll costs incurred during this alternative covered period but paid after the end of the alternative covered period, these payroll costs will qualify, assuming they are paid on Friday, June 26 (the next regularly scheduled payroll cycle after the end of the covered period). 

Under this scenario, Borrower Y essentially utilizes nine weeks of payroll costs. While the alternative payroll period makes things easier, borrowers may not want to use it as it may result in less allocable payroll costs. However, pay close attention to the staffing levels during the covered period. If staff has been laid off, and the borrower reinstates them shortly after the PPP loan proceeds are received, the alternative payroll covered period may yield a higher staff utilization percentage. As a reminder, the staff utilization percentage is key when determining maximum loan forgiveness. Our next article in this series will discuss this calculation in more detail. Borrowers should run the calculation both ways when working through their loan forgiveness application to determine which covered period is optimal for their situation.

If you have questions as you navigate the loan forgiveness process, please reach out to your advisor at Clark Nuber for up to date information on the latest rules surrounding the program.

This is the second post in a series of articles on Paycheck Protection Program loan forgiveness. Click the following links to read Part I: The Covered Period, Part III: Maintaining Wages and EmployeesPart IV: Accounting for PPP Loans, and Part V: The Application.

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This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.