Will PPP borrowers be able to receive partial loan forgiveness?

Before the ink dried on the latest COVID-relief legislation, tax pros and small business owners alike had questions about the Paycheck Protection Program Flexibility Act. Despite being designed to expand access to the PPP loan, the bill included a change that seemed to eliminate partial loan forgiveness. Luckily, the latest regulations published by the Department of the Treasury put those concerns to rest.

The trouble arose from the Section 3 language titled “LIMITATION ON FORGIVENESS,” which reads:

“To receive loan forgiveness under this section, an eligible recipient shall use at least 60 percent of the covered loan amount for payroll costs, and may use up to 40 percent of such amount for any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), any payment on any covered rent obligation, or any covered utility payment.”

Since there was no mention of partial forgiveness in the actual language of the legislation, it appeared that borrowers who failed to use 60 percent of the loan on payroll costs would not have any of the loan forgiven. That led the Department of the Treasury and Small Business Association to issue a joint statement, which previewed the regulations published this week: “Business Loan Program Temporary Changes; Paycheck Protection Program – Revisions to First Interim Final Rule.”   

The regulations clearly outlined how partial loan forgiveness would be implemented. Borrowers still have to use 60 percent of the loan on payroll costs to receive full forgiveness, and partial forgiveness will now require 60 percent of the forgiven amount go toward payroll. Here’s an example from page 10:

“If a borrower receives a $100,000 PPP loan, and during the covered period the borrower spends $54,000 (or 54 percent) of its loan on payroll costs, then because the borrower used less than 60 percent of its loan on payroll costs, the maximum amount of loan forgiveness the borrower may receive is $90,000 (with $54,000 in payroll costs constituting 60 percent of the forgiveness amount and $36,000 in nonpayroll costs constituting 40 percent of the forgiveness amount).”

Sources: “Business Loan Program Temporary Changes; Paycheck Protection Program – Revisions to First Interim Final Rule”; “Joint Statement by Treasury Secretary Steven T. Mnuchin and SBA Administrator Jovita Carranza Regarding Enactment of the Paycheck Protection Program Flexibility Act”; H.R. 7010