During the economic disruption caused by COVID-19, the Paycheck Protection Program (PPP) provided critical relief to small businesses. While the program has ended, PPP loan forgiveness and tax treatment continue to affect prior-year returns, amended filings, audits, and record-retention obligations.
Understanding how PPP funds were required to be reported and which expenses qualified for forgiveness remains essential.
PPP funds received were required to be recorded as a loan liability, not income, until forgiveness was formally granted. Many businesses initially recorded PPP proceeds to a liability account such as “SBA PPP Loan,” later reclassifying the balance to other income once forgiveness was approved.
Originally, PPP expenses were limited to an 8-week covered period. This was later expanded, allowing borrowers to elect a covered period of up to 24 weeks beginning on the date funds were disbursed.
To qualify for full forgiveness, borrowers were required to spend at least 60% of PPP funds on payroll costs. The remaining 40% could be used on qualifying non-payroll expenses.
Payroll costs included:
Salary, wages, commissions, and tips (capped at $100,000 annualized per employee)
Employer-paid health insurance premiums
Employer retirement plan contributions
State and local payroll taxes on employee compensation
Important: Employer federal payroll taxes (employer FICA) were not eligible payroll costs for forgiveness.
Non-payroll expenses eligible for forgiveness included:
Rent under leases in effect before February 15, 2020
Mortgage interest (not principal) on obligations incurred before February 15, 2020
Utilities such as electricity, gas, water, transportation, internet, and phone
Certain covered operations, supplier, and worker-protection costs added under later legislation
PPP funds could be used for certain other business expenses, but those amounts were not forgivable, including:
Principal payments on debt
Interest on debt incurred after February 15, 2020
Owner compensation exceeding statutory limits
Non-business or personal expenses
Under current law:
PPP loan forgiveness is not taxable income
Expenses paid with forgiven PPP funds are fully tax-deductible
This resolved early IRS guidance that initially disallowed deductions and was later overturned by Congress.
Even though PPP is closed, borrowers are required to retain documentation for at least six years after forgiveness. This includes payroll records, invoices, bank statements, and forgiveness calculations. PPP audits and SBA reviews are still ongoing.
PPP provided vital relief, but its accounting, forgiveness, and tax treatment were complex and evolved rapidly. Businesses that received PPP funds should review prior filings to confirm:
Proper income recognition
Correct deduction treatment
Accurate forgiveness reporting
Adequate documentation retention
If you received a PPP loan and have questions about forgiveness, amended returns, or audit exposure, professional review can help avoid costly errors.
