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Frequently Asked Questions About PPP Forgiveness

Frequently Asked Questions About PPP Forgiveness


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General Loan Forgiveness FAQs



For your convenience, we have compiled a list of required documents based on type of entity. Please click here to view the list.

The Covered Period is either (1) the 24-week (168-day) period beginning on the PPP loan disbursement date, or (2) if the borrower received its PPP loan before June 5, 2020, the borrower may elect to use an eight-week (56-day) Covered Period. For example, if the borrower is using a 24-week Covered Period and received its PPP loan proceeds on Monday, April 20, the first day of the Covered Period is April 20 and the last day of the Covered Period is Sunday, October 4. In no event may the Covered Period extend beyond December 31, 2020.


Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the 24-week (168-day) period (or for loans received before June 5, 2020 at the election of the borrower, the eight week (56-day) period) that begins on the first day of their first pay period following their PPP loan disbursement date (i.e., the “Alternative Covered Period”). For example, if the borrower is using a 24-week Alternative Payroll Covered Period and received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, October 10. In no event may the Alternative Payroll Covered Period extend beyond December 31, 2020.


You may need to provide a copy of the Schedule A Worksheet of the Loan Forgiveness Application if the SBA asks to review your loan. All documentation submitted for forgiveness must be retained for 6 years after the date the loan is forgiven or repaid.

To make it easier to apply for forgiveness when our online portal opens, we recommend preparing all the information required in the Forgiveness Application in a worksheet.  Some organizations such as the AICPA are providing loan forgiveness tools, which are publicly available and free of charge.  If you use such a tool you should confirm it is current with the latest PPP forgiveness rules, and be advised that you remain fully responsible for the accuracy, correctness and completeness of your forgiveness information, calculations and submission to your lender and SBA. Here is a link to the AICPA’s dynamic tool https://www.pppforgivenesstool.com/


You have 10 months after the end of the Covered Period to submit your loan forgiveness application. 


As long as you submit your application before the deadline, you do not need to make any payments on your loan while CPB awaits payment of the loan forgiveness amount from the Small Business Administration.  CPB will notify you when it receives from SBA either (a) payment for the portion of your loan that has been forgiven or (b) notice that your loan is not eligible for forgiveness.

  • You will not owe anything on the loan if your loan is fully forgiven.
  • If only part of your loan is forgiven or if your forgiveness application is denied, you must repay the balance of your loan that is not forgiven by your loan’s maturity date. CPB will notify you of the date on which your first loan payment is due.

Interest accrues on your loan starting from disbursement of your PPP loan until SBA pays CPB the amount of your loan that has been forgiven.  You are responsible for paying accrued interest on any amount of your loan that is not forgiven.


This is a good question to check with your tax professional, as the response can be complicated. The IRS recently issued Notice 2020-32, which can be viewed here.

Loan Forgiveness Payroll Costs


Yes, if those payroll costs are paid on or before the next regular payroll date after the Covered Period or Alternative Payroll Covered Period.


Yes.

Yes, if your business pays payroll twice a month or less frequently, you will need to calculate payroll costs for partial pay periods in order to determine payroll costs eligible for loan forgiveness. However, if you use a biweekly or more frequent payroll cycle (such as weekly), you can choose to calculate eligible payroll costs starting with the first day of the first payroll cycle that follows the PPP Loan Disbursement Date (called the Alternative Payroll Covered Period). The Alternative Payroll Covered Period only can be used for payroll costs.


You should use the gross amount of cash compensation paid to employees.


Forgivable payroll costs include all forms of cash compensation you paid to employees, including tips, commissions, bonuses and hazard pay, up to a limit of $100,000 per employee on an annualized basis.    


Your business’s expenses for employee group health care benefits paid or incurred by you during the Covered Period or Alternative Payroll Covered period are eligible for loan forgiveness.  If you have an insured group health plan, the insurance premiums you paid or incurred during the Covered Period or Alternative Payroll Covered Period for coverage during that period are eligible for forgiveness.  Those premiums must be paid during the applicable period or by the next premium due date after the end of the applicable period in order to be eligible for forgiveness.

These health care-related payroll costs are not eligible for forgiveness:  expenses for group health care benefits paid by employees or other beneficiaries of the plan; and your business’s expenses for group health care benefits for periods outside of the Covered Period or Alternative Payroll Covered Period.



Generally, your business’s contributions for employee retirement benefits, paid or incurred during the Covered Period or Alternative Payroll Covered Period, are eligible for loan forgiveness.

These retirement-related payments are not eligible for forgiveness:  retirement contributions deducted from employees’ pay or otherwise paid by employees; or employer contributions for retirement benefits for periods outside of the Covered Period or Alternative Payroll Covered Period.  Note that the treatment of eligible retirement benefits for business owners is different from this general rule.  These differences are discussed in more detail in the section on Business Owner FAQ’s.  


If you are a business owner who works for your business, the amount of forgiveness-eligible compensation paid to you depends on your business type (e.g., C Corporation, S Corporation, self-employed, general partner, LLC owner), and whether you are using an eight-week or 24-week Covered Period.  For more specific discussion, see the section below on FAQ’s applicable to Sole Proprietors, Independent Contractors, Self-Employed Individuals with No Employees and Other Business Owners. 


Loan Forgiveness Nonpayroll Costs


Yes, they are eligible for loan forgiveness.  This answer applies to eligible business mortgage interest costs on real or personal property, business rent or lease costs and business utility costs.

Yes, if they are paid on or before the next regular billing date, even if the billing date is after the Covered Period.


No. The Alternative Payroll Covered Period only applies to payroll costs, in order to allow a borrower to align its biweekly or more frequent payroll schedule with the covered period.  For nonpayroll costs, the Covered Period starts on the date the lender makes the PPP loan disbursement and continues for either 24 weeks or for eight weeks (if you received your PPP loan before June 5, 2020, and opted to use the eight-week Covered Period).  To be eligible for forgiveness, nonpayroll costs must be paid or incurred during the Covered Period. 


No.  Only interest payments on business mortgages on real or personal property are eligible for loan forgiveness.  Unlike mortgages, unsecured loans are not backed by collateral.  While PPP loan proceeds can be used to pay interest on unsecured loans incurred before February 15, 2020; that expense will not be eligible for loan forgiveness.


Yes.  Rent under a lease that was renewed on or after February 15, 2020, is eligible for forgiveness if paid during the Covered Period and if the original lease existed before February 15, 2020.  Likewise, interest payments on a mortgage refinanced on or after February 15, 2020, are eligible for forgiveness if paid during the Covered Period and if the original mortgage loan existed before February 15, 2020.


The term refers to transportation utility fees assessed by a state or local government. 


Yes, even if charges are separate, the entire electricity bill is eligible for loan forgiveness to the extent paid or incurred during the Covered Period

Loan Forgiveness Reductions


In calculating its loan forgiveness amount, a borrower may exclude any reduction in FTE employees if the borrower is able to document in good faith the following: (1) an inability to rehire individuals who were employees of the borrower on February 15, 2020 and (2) an inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020. Borrowers are required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer. The documents that borrowers should maintain to show compliance with this exemption include the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of efforts to hire a similarly qualified individual.


A seasonal employer that elects to use a 12-week period between May 1, 2019 and September 15, 2019 to calculate its maximum PPP loan amount must use the same 12-week period as the reference period for calculation of any reduction in the amount of loan forgiveness.

Yes. The FTE Reduction Exceptions apply to all employees, not just those who would be listed in Table 1 of the Loan Forgiveness Application (SBA Form 3508 or lender equivalent). Borrowers should therefore include employees who made more than $100,000 in the FTE Reduction Exception line in Table 1 of the PPP Schedule A Worksheet.


Certain pay reductions during the Covered Period or the Alternative Payroll Covered Period may reduce the amount of loan forgiveness a borrower will receive. If the salary or hourly wage of a covered employee6 is reduced by more than 25% during the Covered Period or the Alternative Payroll Covered Period, the portion in excess of 25% reduces the eligible forgiveness amount unless the borrower satisfies the Salary/Hourly Wage Reduction Safe Harbor (as described in the Loan Forgiveness Application (SBA Form 3508 or lender equivalent)). The examples below assume that each employee is a “covered employee.”

Example 1: A borrower received its PPP loan before June 5, 2020 and elected to use an eight-week covered period. Its full-time salaried employee’s pay was reduced during the Covered Period from $52,000 per year to $36,400 per year on April 23, 2020 and not restored by December 31, 2020. The employee continued to work on a full-time basis with a full-time equivalency (FTE) of 1.0. The borrower should refer to the “Salary/Hourly Wage Reduction” section under the “Instructions for PPP Schedule A Worksheet” in the PPP Loan Forgiveness Application Instructions. In Step 1, the borrower enters the figures in 1.a, 1.b, and 1.c, and because annual salary was reduced by more than 25%, the borrower proceeds to Step 2. Under Step 2, because the salary reduction was not remedied by December 31, 2020, the Salary/Hourly Wage Reduction Safe Harbor is not met, and the borrower is required to proceed to Step 3. Under Step 3.a., $39,000 (75% of $52,000) is the minimum salary that must be maintained to avoid a penalty. Salary was reduced to $36,400, and the excess reduction of $2,600 is entered in Step 3.b. Because this employee is salaried, in Step 3.e., the borrower would multiply the excess reduction of $2,600 by 8 (if it had instead selected a 24-week Covered Period, it would multiply by 24) and divide by 52 to arrive at a loan forgiveness reduction amount of $400. The borrower would enter on the PPP Schedule A Worksheet, Table 1, $400 as the salary/hourly wage reduction in the column above box 3 for that employee.

Example 2: A borrower received its PPP loan before June 5, 2020 and elected to use a 24-week Covered Period. An hourly employee’s hourly wage was reduced from $20 per hour to $15 per hour during the Covered Period. The employee worked 10 hours per week between January 1, 2020 and March 31, 2020. The borrower should refer to the “Salary/Hourly Wage Reduction” section under the “Instructions for PPP Schedule A Worksheet” in the PPP Loan Forgiveness Application Instructions. Because the employee’s hourly wage was reduced by exactly 25% (from $20 per hour to $15 per hour), the wage reduction does not reduce the eligible forgiveness amount. The amount on line 1.c would be 0.75 or more, so the borrower would enter $0 in the Salary/Hourly Wage Reduction column for that employee on the PPP Schedule A Worksheet, Table 1. If the same employee’s hourly wage had been reduced to $14 per hour, the reduction would be more than 25%, and the borrower would proceed to Step 2. If that reduction 6 A “covered employee” is an individual who: (1) was employed by the borrower at any point during the Covered Period or Alternative Payroll Covered Period and whose principal place of residence is in the United States; and (2) received compensation from the borrower at an annualized rate less than or equal to $100,000 for all pay periods in 2019 or was not employed by the borrower at any point in 2019. As of August 11, 2020 10 were not remedied as of December 31, 2020, the borrower would proceed to Step 3. This reduction in hourly wage in excess of 25% is $1 per hour. In Step 3, the borrower would multiply $1 per hour by 10 hours per week to determine the weekly salary reduction. The borrower would then multiply the weekly salary reduction by 24 (because the borrower is using a 24-week Covered Period). The borrower would enter $240 in the Salary/Hourly Wage Reduction column for that employee on the PPP Schedule A Worksheet, Table 1. If the borrower applies for forgiveness before the end of the 24-week Covered Period, it must account for the salary reduction (the excess reduction over 25%, or $240) for the full 24-week Covered Period.

Example 3: An employee earned a wage of $20 per hour between January 1, 2020 and March 31, 2020 and worked 40 hours per week. During the Covered Period, the employee’s wage was not changed, but his or her hours were reduced to 25 hours per week. In this case, the salary/hourly wage reduction for that employee is zero, because the hourly wage was unchanged. As a result, the borrower would enter $0 in the Salary/Hourly Wage Reduction column for that employee on the PPP Schedule A Worksheet, Table 1. The employee’s reduction in hours would be taken into account in the borrower’s calculation of its FTE during the Covered Period, which is calculated separately and may result in a reduction of the borrower’s loan forgiveness amount.


For purposes of calculating reductions in the loan forgiveness amount, the borrower should only take into account decreases in salaries or wages.

Economic Injury Disaster Loan (EIDL)


If a borrower received an EIDL advance, SBA is required to reduce the borrower’s loan forgiveness amount by the amount of the EIDL advance. SBA will deduct the amount of the EIDL advance from the forgiveness amount remitted by SBA to the lender. The lender will be able to confirm the amount of the EIDL advance that will be automatically deducted by SBA from the forgiveness payment by reviewing the borrower’s EIDL advance information in the PPP Forgiveness Platform.

If a PPP loan is not forgiven in full (including if there has been a reduction in the forgiveness amount for an EIDL advance), any remaining balance due on the PPP As of August 11, 2020 must be repaid by the borrower. The lender is responsible for notifying the borrower of the loan forgiveness amount remitted by SBA and the date on which the borrower’s first loan payment is due. The lender must continue to service the loan. The borrower must repay the remaining loan balance by the maturity date of the PPP loan (either two or five years). If a borrower is determined to have been ineligible for a PPP loan for any reason, SBA may seek repayment of the outstanding PPP loan balance or pursue other available remedies.


A borrower that received an EIDL advance in excess of the amount of its PPP loan will not receive any forgiveness on the PPP loan, because the amount of an EIDL advance is deducted from the PPP loan forgiveness amount. The lender is responsible for notifying the borrower of the date on which the borrower’s first loan payment is due. The lender must continue to service the loan. The borrower must repay the remaining loan balance by the maturity date of the PPP loan (either two or five years). If a borrower is determined to have been ineligible for a PPP loan for any reason, SBA may seek repayment of the outstanding PPP loan balance or pursue other available remedies.


Sole Proprietors, Independent Contractors, Self-Employed Individuals with No Employees and Other Business Owners


You should use the Loan Forgiveness Application Form 3508EZ if you are a (a) sole proprietor,(b)  independent contractor or (c) self-employed individual who had no employees at the time of your PPP loan application and you did not include any employee salaries in calculating monthly payroll in your PPP loan application.

For owner-employees and self-employed individuals using a 24-week Covered Period, the amount of payroll compensation eligible for loan forgiveness is capped at $20,833 per individual, total, for all businesses in which you have an ownership stake.  If you received a PPP loan before June 5, 2020, and opted to use an eight-week Covered Period, the cap is $15,385.  If your total compensation across the businesses you own that received PPP loans exceeds the cap, you can choose how to allocate the capped amount across your different businesses.  This cap is in addition to specific compensation caps that apply to different types of businesses:

For C-Corporation and S-Corporation owner-employees with a 5% or larger interest in the corporation, an owner who is also an employee may obtain loan forgiveness of (a) up to 2.5/12 of the owner-employee’s 2019 employee cash compensation; (b) payments for employer state and local taxes assessed on compensation; (c) employer contributions to the employer retirement plans capped at 2.5/12 of the 2019 employer retirement contribution; (d) for C-Corporation owner-employees and S-corporation owner employees with less than a 5% stake in the business, employer contributions for employee health insurance.  Non-cash compensation payments eligible for forgiveness are entered in another part of the PPP loan forgiveness application and do not count toward the $20,833 cap per individual. 

For self-employed individuals filing Schedule C or Schedule F, including sole proprietors, self-employed individuals and independent contractors, cash compensation eligible for loan forgiveness is capped at 2.5/12 of 2019 net profit as reported on Schedule C of your federal tax return, or of 2019 net farm profit as reported on Schedule F.  Payments for health insurance, retirement, or state or local taxes are not eligible for loan forgiveness because health insurance and retirement expenses are paid out of net self-employment income.

For general partners, cash compensation eligible for loan forgiveness is limited to 2.5/12 of your 2019 net earnings from self-employment that is subject to self-employment tax, as computed from 2019 IRS Form 1065 Schedule K-1 box 14a (reduced by certain expense deductions and unreimbursed partnership expenses) and multiplied by 0.9235.  The compensation to partners must have been made during the Covered Period or Alternative Payroll Covered Period to be eligible for forgiveness.  Payments for health insurance, retirement and state or local taxes are not eligible for forgiveness.

LLC owners must follow instructions applicable to how your business was organized for tax filing purposes for the tax year 2019; or if your business is new, the expected tax filing situation for 2020. 

For more specific discussion about limits on the amount of owner compensation eligible for forgiveness, based on type of business, see the Small Business Administration’s FAQs, dated August 11, 2020 https://home.treasury.gov/system/files/136/PPP--Loan-Forgiveness-FAQs.pdf and Interim Final Rule issued August 24, 2020 https://home.treasury.gov/system/files/136/PPP--IFR--Treatment-Owners-Forgiveness-Certain-Nonpayroll-Costs.pdf


Disclosures

This communication is as of August 28, 2020 and is intended to assist PPP applicants/borrowers in understanding and complying with the Paycheck Protection Program (“PPP”) laws, regulations, requirements and rules (collectively “PPP Rules”).  This is only a general description/summary of the matters covered herein. PPP applicants/borrower should consult the PPP Rules for the complete coverage. Central Pacific Bank (“CPB”) is not rendering any legal, tax, accounting, business or other advice to PPP applicants/borrowers in connection with the PPP which is a federal government program and subject at all times to the PPP Rules as they may be changed, amended or supplemented at any time by the federal government.  PPP applicants/borrowers are strongly encouraged to seek the advice of legal, tax, accounting, and other professional advisors respecting the PPP.  PPP applicants/borrowers are solely responsible for determining their eligibility for the PPP and compliance with all PPP Rules, and shall not rely on CPB or any employee or representative of CPB respecting the PPP Rules or any interpretation or application thereof. CPB has no obligation or responsibility to update this communication as additional PPP Rules are issued or if any PPP Rules are changed, amended or clarified. PPP applicants/borrowers must monitor the government’s PPP websites at https://home.treasury.gov/policy-issues/cares/assistance-for-small-businesses and https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program for any updates to the PPP Rules.

CPB