About

The Paycheck Protection Program (PPP) involves strict compliance rules regarding how funds are utilized. Business owners must demonstrate that at least 60% of the loan proceeds were used for payroll costs to maximize forgiveness. Failure to meet this threshold limits the forgivable amount significantly. This tool models the SBA Form 3508 forgiveness logic. It accounts for the distinction between the 8-week and 24-week covered periods. It also factors in the Full-Time Equivalency (FTE) reduction quotient which penalizes headcount reductions. The calculation strictly separates payroll from non-payroll expenses like rent and utilities. Use this to estimate remaining debt liability.

Formulas

The maximum forgivable amount is determined by the smallest of three values: the original loan amount, the amount justified by the 60% payroll rule, or the total eligible expenses adjusted by FTE reductions.

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Rule 1: Forgiveness ≤ Loan_PrincipalRule 2: Forgiveness ≤ Payroll_Costs0.60Rule 3: Forgiveness ≤ (Payroll + Non_Payroll) × FTE_Quotient − Wage_Reductions

The FTE_Quotient is calculated by comparing average full-time equivalency during the Covered Period to a Reference Period chosen by the borrower.

FTE_Quotient = Avg_FTE_Covered_Periodmin(Avg_FTE_Ref_1, Avg_FTE_Ref_2)

Reference Data

Expense Category	Description	Forgiveness Limit (SBA Rules)	Documentation Needed
Cash Compensation	Gross salary, wages, commissions, or tips paid to employees.	Capped at $100,000 annualized per employee.	Bank account statements, tax forms, payroll provider reports.
Owner Compensation	Net profit or salary paid to owners/partners.	8-week: $15,385 cap 24-week: $20,833 cap.	Schedule C, K-1, or W-2 from prior year.
Health Benefits	Employer contributions to employee health insurance.	No specific cap (included in Payroll Costs).	Payment receipts, cancelled checks, account statements.
Retirement Benefits	Employer contributions to employee retirement plans.	No specific cap (included in Payroll Costs).	Payment receipts, cancelled checks, account statements.
Business Rent/Lease	Rent payments for real or personal property.	Lease must be in force before Feb 15, 2020.	Copy of current lease agreement, proof of payment.
Business Utilities	Electricity, gas, water, transportation, telephone, internet.	Service began before Feb 15, 2020.	Invoices, receipts, cancelled checks.
Mortgage Interest	Interest payments on business mortgage obligations.	Prepayments of principal are not eligible.	Lender amortization schedule, account statements.
FTE Reduction	Reduction based on employee headcount decrease.	Reduces total forgiveness amount proportionally.	Payroll reports showing average hours per week.
Salary/Wage Reduction	Reduction if salaries cut by >25%.	Dollar-for-dollar reduction in forgiveness.	Payroll records for Covered Period vs Q1 2020.
State/Local Taxes	State and local taxes assessed on employee compensation.	Included in Payroll Costs.	State quarterly wage reporting forms.

Frequently Asked Questions

The SBA provides two methods for calculating FTEs. The standard method assigns a value of 1.0 for employees working 40 hours or more per week, and a proportional value for those working fewer hours (e.g., 30 hours = 0.75). The simplified method assigns 1.0 for employees working 40+ hours and 0.5 for all other employees. Consistency in the chosen method is required throughout the application.

Yes. Borrowers with loans issued before June 5, 2020, can elect to use the original 8-week covered period or extend it to 24 weeks. The 24-week period generally makes it easier to reach full forgiveness because it provides more time to accrue eligible payroll costs to meet the 60% threshold.

Owner compensation replacement is capped based on 2019 net profit. For an 8-week period, the cap is 8/52 of 2019 net profit (max $15,385). For a 24-week period, the cap is 2.5 months worth of 2019 net profit (max $20,833). This prevents owners from paying themselves the entire loan amount as a windfall.

If you reduce the salary or hourly wage of any employee making less than $100,000 by more than 25% during the covered period compared to Q1 2020, your forgiveness amount is reduced. The reduction is calculated dollar-for-dollar for the amount exceeding the 25% buffer.

Generally, no. Eligible non-payroll costs must be for business obligations in force before February 15, 2020. Home office expenses are typically only deductible to the extent they are deductible on your tax return (e.g., Schedule C) and only if you claimed them in 2019.