Paycheck Protection Program – Loan Forgiveness

From the initial real estate purchase to completing construction, the entire real estate industry has been hit hard by the economic downturn caused by COVID-19. Some of the new relief bills have helped, especially the Paycheck Protection Program (PPP) of the CARES Act. For those small businesses who have received SBA loans under the PPP, the next challenge will be figuring out how much of that loan will be forgiven.

To have the entire loan forgiven (both principal and accrued interest), a borrower must show that it:

  • Used all of the loan proceeds for Eligible Costs;

  • Did not reduce the size of its staff; and

  • Did not reduce its employee compensation beyond the permitted limit.

If the borrower succeeds in having all (or part) of its PPP loan forgiven, the amount of the forgiveness will not be included in the borrower’s gross income as is usually the case. The great news is that in addition to providing potentially free money Congress is footing the tax bill too.

Eligible Costs

Eligible Costs. The amount of the loan forgiveness is equal to all the Eligible Costs paid during the 8-week period immediately after receiving the loan, which include:

  • Payroll Costs.
  • Owner compensation replacement of sole proprietors.
  • Any payment of interest (but not principal) on certain indebtedness incurred in the ordinary course of business before February 15, 2020.
  • Any payment of rent which the lessee is obligated to pay under a leasing agreement that was in force before February 15, 2020.
  • Any payment for a service for electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

Payroll Costs. Payroll Costs must make up at least 75% of the Eligible Costs. Payroll Costs for employees (but not independent employees) means any compensation that is:

  • Salary, wage, commission, or similar compensation;
  • Payment of cash tip or equivalent;
  • Self-employment income of general active partners of a partnership;
  • Payment for vacation, parental, family, medical, or sick leave;
  • Allowance for dismissal or separation;
  • Payment required for the provisions of group health care benefits, including health insurance premiums;
  • Payment of any retirement benefit; or

Payment of state or local tax assessed on employee compensation. Payroll Costs, however, do not include certain types of compensation such as the compensation of an individual employee with an annual salary of more than $100,000, among others.

Not All Permitted Uses of Loan Proceeds Are Eligible Costs. The expenses which may be paid with the PPP loan proceeds overlaps substantially with, but is not the same as, Eligible Costs for loan forgiveness purposes. PPP loan proceeds may be used to pay the following expenses from February 15, 2020 through June 30, 2020:

  • Payroll Costs;
  • Costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;
  • Payments of interest (but not principal) on any mortgage obligation;
  • Rent (including rent under a lease agreement);
  • Utilities; and
  • Interest on any other debt obligations that were incurred before February 15, 2020);
  • Refinancing an SBA EIDL loan that was made between January 31, 2020 and April 3, 2020.

For example, although PPP loan proceeds may be used to pay Payroll Costs before receiving the PPP loan, these costs would not be considered Eligible Costs for loan forgiveness purposes.

Similarly, PPP loan proceeds could be used to pay rent under a lease that was entered into after February 15, 2020, however, this rent payment would not be an Eligible Cost for loan forgiveness purposes.

Staff Reduction

Staff Reduction Percentage. The amount of loan forgiveness may be reduced by the percentage of reduction in full-time equivalent (FTE) employees during the 8-week period immediately after receiving the PPP loan. The reduction percentage is determined by comparing the average number of FTE employee during that 8-week period to the average number FTE employee (a) between February 15, 2019 and June 30, 2019, or (b) between January 1, 2020 and February 29, 2020.

Re-Hires. The amount of loan forgiveness will not be reduced because of staff reduction if the borrower eliminates such reduction in staff by June 30, 2020.

Compensation Reductions

Compensation Reduction Amount. The amount of loan forgiveness will be reduced dollar-for-dollar by the amount of the reduction in total compensation of any employee during the 8-week period immediately after receiving the PPP loan, if the reduction in compensation is by more than 25%.

Re-Hires. Similar to the staff reduction rule, the amount of loan forgiveness will not be reduced because of compensation reduction if the borrower eliminates the reduction by June 30, 2020.

Understanding how the loan forgiveness amount is determined is by no means easy. But this understanding will protect borrowers from unexpected surprises when they later apply for loan forgiveness. It will also help borrowers to make informed decisions during the next 2 months regarding staff or compensation reduction.

For additional information regarding the Paycheck Protection Program of the CARES Act and related loan forgiveness, please contact the any of the authors of this blog or our COVID-19 legal response team.

The information contained in this publication should not be construed as legal or medical advice, is not a substitute for legal counsel or medical consultation, and should not be relied on as such.

About the Authors

David A. Nasatir


Dave is the Chair of the Firm as well as the Chair of both the Business and Finance Department and the Workout and Lender Liability group. Dave’s goal is to create solutions...

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Peter Oberkircher

Peter J. Oberkircher


Peter concentrates his practice on real estate, general corporate, business transactions, contracts, and financing. He has extensive experience in a broad range of corporate and real estate transactions, acquisition, development, financing, and...

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Warren W. Ayres


Warren focuses his practice on advising individuals, businesses, and other organizations regarding federal, state, and local taxation, and he leads Obermayer’s Tax Practice Group. Warren is also a partner and member of...

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W. Patrick Scott


Pat is a partner in Obermayer’s Business & Finance Department, where he represents borrowers, lenders and issuers in both conventional and tax exempt loan transactions. He often works with nonprofit corporations on...

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Michael P. Malloy, Jr.

Of Counsel

Mike spent years as an attorney in private practice helping individuals and corporations navigate their real estate and business problems, and most recently, 11 years as general counsel of one of Pennsylvania’s...

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Tassos Efstratiades

Anastasius (Tassos) Efstratiades


Anastasius, who prefers to go as “Tassos,” is the Co-Chair of the firm’s Business and Finance Department. He also chairs the firm’s Public Finance Practice Group. Tassos’ practice focuses on transactional work,...

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