How to use the money for maximum loan forgiveness

Updated September 2020

PPP (Payroll Protection Program) loan confusion has hit hard.

Small business owners and self-employed people are scared to use the money the wrong way – but the rules have not been communicated clearly. That’s partly because new “interpretations” keep coming out, and partly because the rules were unclear when the loans first hit the streets (and still kind of are).

Here’s the deal:

You can ONLY use PPP loan proceeds to pay:

  • Employees through payroll
  • Rent
  • Mortgage interest
  • Utilities

That’s it. You can’t pay contractors. You can’t pay back other loans or credit card debt. You can’t use it for marketing or office supplies or inventory.

How to Bump Up Your Chance of PPP Loan Forgiveness

The best thing about the PPP loans: forgiveness.

If you use the loan in the right way (according to their rules), you may not have to pay all of it – or any of it – back.

The right way means using at least 75% of those proceeds on payroll, and the remaining 25% (or less) on the other three eligible expenses: rent, mortgage interest, utilities.

You can use more than 75% of the proceeds for payroll. But if you use less than 75% on payroll, you won’t get full loan forgiveness.

The forgiveness is not automatic. You have to apply for it. And you’ll need to supply documentation to the bank to show exactly how you spent that money.

What Counts Toward Payroll?

One question that’s been bouncing around: What exactly qualifies as a payroll expense for PPP loan forgiveness.

According to the latest guidelines, payroll includes:

  • Gross salary, wages, commissions, or tips (up to $100,000/year for each employee, so no more than $15,385 over that 8-week period)
  • PTO (paid time off) such as vacation or parental, family, medical, or sick leave
  • health insurance premiums for group coverage
  • contributions to employee retirement accounts (like an employer match, for example)

For these purposes, payroll does not include the employer portion of FICA taxes (Social Security and Medicare) or any payments to independent contractors.

The other issue with PPP loan forgiveness: Maintaining your pre-COVID payroll.  This gets a little complicated, but basically you need to pay as many employees as you had before all the COVID-related closings, and you need to pay them at least 75% as much as you did before. (It doesn’t have to be the same people.) You can find a great explanation of how all that works here:

Use this free online PPP Forgiveness tool to see how much of your loan qualifies for forgiveness and be ready when your lender starts accepting applications. You can find the free PPP Forgiveness tool here:

You can find the U.S. Treasury department’s PPP Loan Fact Sheet here:–Fact-Sheet.pdf

Have more questions? Try this official FAQ:

It’s Different for Self-Employed People

PPP loans for self-employed people and independent contractors are based on 2019 Schedule C income. The maximum loan amount came to 10/52 of the 2019 profit, 10 weeks worth of self-employment “payroll.”

PPP loan forgiveness for payroll for self-employed people maxes out at 8/52 of the 2019 profit. So if your schedule C income for 2019 was $52,000, you could have gotten a PPP loan of $10,000 (10/52 * $52,000). Your maximum forgiveness for the payroll portion of the loan would be $8,000 (8/52 * $52,000). You don’t need to document anything special here – just pay yourself like you normally would. That’s what the rules say as of now.

If you also normally report rent, mortgage interest, or utilities expenses on your Schedule C, and use your loan proceeds to pay those, that amount may be forgiven also.

It’s unclear whether home office deduction will count here – my guess is no (but I could be wrong). The intent seems to be if you rent or own separate office space for your business. We’ll have to wait and see on that until the first of these loans become eligible for forgiveness.

Track Your PPP Funds

Crystal clear expense tracking is the key the maximum PPP loan forgiveness.

That means a straight line from receiving your funding to spending them.

If you can open a separate checking account for your loan proceeds, do. That will make the money going in and out much easier to trace.

If you can’t (or if it’s too expensive to do that), don’t worry. Just be very thorough in your documentation and your bookkeeping. You want to be able to track every dollar spent, and prove to the bank and the SBA that you used the money for approved expenses.

Every time you make a related payment, add a note to it if you can. In your bookkeeping software, whichever one you use, add a note to the entry. These notes can be as simple as “PPP loan expense payment.”

It’s ok if you spend more than 75% on payroll.

It’s ok if you spend less than 75% on payroll as long as you only use the money for approved expenses – you just won’t receive full loan forgiveness, meaning you’ll have a debt to pay back.

Remember: You’ll be paying 1% interest on any portion of the PPP loan that you have to pay back. And you’ll have two years to pay it back, starting six months after your business receives the funding.

You Can Give the Money Back

Now that the rules have been clarified, not everyone who got a PPP loan actually wants to keep it.

For example, a business that has high rent and utilities costs compared to payroll probably wouldn’t qualify for loan forgiveness… and may not want to take out the loan after all.

A company that didn’t realize they could only use their PPP proceeds for the four listed expenses may want to nix their loan.

A company that hasn’t lost any business and is still bringing in cash and revenue – meaning it doesn’t actually need the loan – should return their money to avoid possible legal issues. At least some of these loans (who knows how many?) will be audited, and there could be legal consequences for companies that took the loans without actually needing them. (There’s an interesting article on this here:

If you applied for and got a PPP loan early on, before the rules were made clear (or at least as clear as they are now), you have until May 14, 2020 to return the money.

Bottom line: The rules for PPP loan spending and forgiveness can be confusing. If you need help figuring out how to manage the proceeds or the bookkeeping for your PPP transactions, contact your business accountant (NOT a personal accountant).

You can also contact me for a FREE consultation, and together we’ll figure out your best plan for maximum loan forgiveness.