**Eligible expenses (2024-2025 final SBA rules)**: **Payroll costs (60% minimum required)**: Gross wages up to $100,000 annualized per employee, employer health insurance contributions, employer retirement contributions, state/local payroll taxes. **Non-payroll costs (40% maximum)**: Business mortgage interest (not principal), business rent/lease payments, business utility payments (electric, gas, water, phone, internet), covered operations expenditures (software, cloud services, supplier costs), covered property damage costs (vandalism/looting 2020), covered supplier costs, covered worker protection expenditures (PPE, barriers, sanitization). **24-week vs 8-week covered period**: Borrowers choose 24-week (168 days) or 8-week (56 days) period starting from loan disbursement for First Draw, or PPP loan disbursement date for Second Draw. **60/40 payroll rule**: At least 60% of forgiveness amount must be payroll costs, maximum 40% non-payroll.

Failing this ratio reduces forgiveness proportionally. **Example calculation**: $100,000 PPP loan, $70,000 payroll (70%), $30,000 non-payroll (30%) = **$100,000 full forgiveness** ✅.

But $50,000 payroll (50%), $50,000 non-payroll (50%) = only $83,333 forgiven (50/0.6 = 83.3%) ❌. **Documentation required**: Payroll reports, tax filings (Form 941), payment receipts, cancelled checks, account statements for all expenses. **Final deadline**: Applications accepted through 2025 for loans originated in 2020-2021, though most deadlines passed.

**FTE calculation**: Full-time = 1.0 FTE (40+ hours/week), part-time = hours/40 (20 hours = 0.5 FTE).

Total all employees during covered period, divide by weeks, average = **FTE average**. **Reduction formula**: (FTE during covered period) ÷ (FTE during reference period) = FTE ratio.

If <1.0, forgiveness reduced by that percentage. **Reference period options** (choose most favorable): Feb 15 - June 30, 2019, Jan 1 - Feb 29, 2020, or seasonal employers Feb 15 - June 30, 2019 alone. **Example scenario**: Business had 10 FTE (reference period), reduced to 8 FTE (covered period).

FTE ratio = 8/10 = 0.80 = **20% forgiveness reduction**. $100k PPP × 0.80 = $80,000 forgiven, $20k must be repaid. **Safe harbors (avoid FTE reduction)**: **Safe Harbor #1**: Restore FTE by Dec 31, 2020 (First Draw) or to pre-Feb 15, 2020 levels. **Safe Harbor #2**: Unable to rehire Feb 15, 2020 employees by Dec 31, 2020, AND unable to hire similarly qualified employees by Dec 31, 2020 (document good-faith recruitment efforts). **Safe Harbor #3**: Unable to return to same level of business activity due to COVID-19 compliance requirements (capacity limits, social distancing). **Safe Harbor #4 (2021 update)**: FTE reduction between Feb 15, 2020 - April 26, 2021 does not reduce forgiveness if borrower can document inability to operate at same capacity due to HHS/CDC/OSHA requirements. **Exemptions**: Voluntary employee quits, voluntary reductions in hours, terminations for cause, employee written offers to return rejected. **Documentation**: Offer letters, rejection emails, recruitment records, termination documents, CDC/OSHA compliance notices.

**Salary/wage reduction rule**: If any employee earning <$100,000 annualized (2019) had wages reduced >25%, forgiveness is reduced by the excess amount. **Calculation**: (2019 average wage) × 0.75 = minimum threshold.

Any shortfall reduces forgiveness dollar-for-dollar. **Example #1 - violation**: Employee earned $52,000/year in 2019 ($1,000/week).

Reduced to $600/week in covered period.

Threshold = $1,000 × 0.75 = $750/week minimum.

Shortfall = $750 - $600 = $150/week × 24 weeks = **$3,600 forgiveness reduction**. **Example #2 - compliant**: Same employee, reduced to $800/week. $800 > $750 threshold ✅ **No reduction**.

Even though wage dropped 20% ($52k → $41.6k), it's within 25% limit. **Multiple employees**: Calculate separately for each employee earning <$100k, sum all reductions. **Highly-paid exemption**: Employees earning >$100k annualized are exempt from this calculation.

Can reduce wages without forgiveness penalty. **Safe harbors**: **Restore by end of covered period**: If wages restored to ≥75% of 2019 levels by last day of covered period, no reduction. **Voluntary reduction**: Employee voluntarily requested reduction (documented in writing). **Feb 15, 2020 baseline option**: Alternatively use Feb 15, 2020 - April 26, 2020 wages as baseline instead of 2019 annual. **Example #3 - combined reductions**: $100k PPP loan.

FTE reduction = 10% penalty ($10k).

Wage reduction = $3,600.

Total forgiveness = $100k - $10k - $3.6k = **$86,400**.

Remaining $13,600 becomes 2-year loan at 1% interest. **Documentation**: 2019 payroll records, covered period payroll, Form 941, state wage reports.

**First Draw PPP (March-May 2020)**: Loan amount = 2.5× average monthly payroll (2019 or 12 months before loan).

Maximum $10 million. **Second Draw PPP (Jan-May 2021)**: Loan amount = 2.5× (most industries) or 3.5× (NAICS 72 accommodation/food service) average monthly payroll.

Maximum $2 million. **Revenue decline requirement**: Second Draw requires ≥25% gross revenue reduction in any 2020 quarter vs same 2019 quarter (First Draw had no revenue requirement). **Forgiveness differences**: Both use same 60/40 payroll rule, both have 24/8 week options, both subject to FTE/wage reduction calculations. **Simplified application**: **EZ Form 3508EZ** (no FTE calculations) if: Self-employed with no employees, did not reduce salaries/wages >25%, or did not reduce FTE AND did not reduce salaries/wages >25%. **Form 3508S** (one-page) for loans ≤$150,000: Certify spent on eligible expenses, no calculations required, attestation only, still subject to audit. **Forgiveness timeline**: **Application**: Submit to lender (most deadlines passed, final extensions through 2025). **Lender review**: 60 days for lender decision. **SBA decision**: 90 days for SBA review if requested. **Automatic forgiveness**: For loans ≤$150k, automatic if no application filed before 18 months after last day of covered period. **Example**: $100k First Draw + $75k Second Draw.

First Draw: $100k full forgiveness (60/40 compliant, FTE maintained).

Second Draw: $75k full forgiveness (revenue down 30% Q2 2020, used Form 3508S).

Total $175k forgiven, $0 repayment ✅. **Tax treatment (2021 final rule)**: **100% tax-free**, expenses remain deductible, no income recognition, no state recapture (IRS Rev.

Proc. 2021-48, 2021-20).

**Required for all borrowers**: **PPP Loan Forgiveness Application** (Form 3508, 3508EZ, or 3508S depending on loan size/situation). **Payroll documentation**: Bank account statements showing cash compensation, payroll tax filings (Form 941, state quarterly reports), income/payroll documents from payroll provider, retirement/health insurance payment proof. **Non-payroll documentation**: Business mortgage interest payments (lender statement, cancelled checks), business rent/lease payments (lease agreement, landlord receipts, cancelled checks), business utilities (copies of invoices, proof of payment for electric/gas/water/phone/internet). **FTE documentation** (if applicable): Payroll reports showing employee counts and hours, documentation of offers to rehire/hire, documentation of rejections, documentation of COVID-19 compliance inability. **Wage reduction documentation** (if applicable): 2019 payroll records, covered period payroll records, employee-by-employee comparison <$100k annualized. **Additional for Second Draw**: Quarterly revenue documentation (tax filings, bank statements, accounting records) showing ≥25% decline. **Simplified documentation for loans ≤$150k (Form 3508S)**: Description of eligible expense amounts, employee count, attestation of compliance, lender may request supporting documents during audit. **Retention period**: **6 years** from forgiveness or repayment date.

SBA can review at any time during this period. **Common audit triggers**: Round numbers (suspicious), 100% forgiveness on large loans, industry outliers (high non-payroll %), affiliated entities, prior SBA default history. **Best practices**: Separate bank account for PPP funds, contemporaneous memos for each transaction, scanned copies of all checks, spreadsheet tracking 60/40 ratio weekly, screenshot online bill payments, third-party CPA review before submission. **Submission method**: Lender portal (online), email to lender (PDF), or paper mail to lender. **Processing time**: Average 60-90 days for decision, up to 6 months for complex cases or appeals.

**Top 10 PPP forgiveness mistakes (2024-2025 SBA audit findings)**: **#1 - Failing 60/40 rule**: Using >40% for non-payroll. **Impact**: Proportional reduction. **Example**: 50/50 split reduces $100k loan to $83,333 forgiven. **Fix**: Increase payroll costs (bonuses, retirement contributions, health insurance). **#2 - Wrong covered period**: Starting from wrong date. **Impact**: Mismatched expenses, ineligible costs. **Fix**: Start from **loan disbursement date**, not application date.

Verify with bank statements. **#3 - Including ineligible payroll**: Owner compensation >$20,833 (8-week) or $46,154 (24-week), wages >$100k annualized, independent contractors, family members in certain cases. **Impact**: Dollar-for-dollar reduction. **Example**: Paid owner $50k in 8 weeks, only $20,833 counts, $29,167 overclaim. **Fix**: Cap owner comp at 2.5/12 × 2019 net profit (Schedule C) or 2019 salary (W-2). **#4 - Not documenting FTE safe harbors**: Failing to prove good-faith recruitment, COVID-19 capacity limits. **Impact**: FTE penalty applied. **Fix**: Save job postings, applicant emails, CDC/state capacity orders, written offers, rejection letters. **#5 - Mortgage principal payments**: Including principal instead of interest-only. **Impact**: Ineligible expense, reduction. **Fix**: Use lender amortization schedule, only count interest portion. **#6 - Personal expenses**: Home office utilities (unless dedicated business line), personal vehicle, personal phone line. **Impact**: Fraud investigation, loan recapture. **Fix**: Only use business-dedicated accounts, get separate business phone/internet. **#7 - Wrong reference period**: Choosing unfavorable FTE baseline. **Impact**: Unnecessary reduction. **Fix**: Calculate all 3 options (2019, early 2020, seasonal), choose highest FTE. **#8 - Missing alternative payroll cycle**: Using calendar dates instead of payroll cycle for first/last periods. **Impact**: Lost eligible payroll expenses. **Fix**: Use "Alternative Payroll Covered Period" starting with first payroll date in period. **#9 - Insufficient documentation**: No receipts, missing bank statements, unrecorded cash payments. **Impact**: SBA denies expenses, borrower must repay. **Fix**: Paper trail for every dollar, bank statements, cancelled checks, third-party invoices. **#10 - Late application**: Missing forgiveness deadline triggers automatic loan repayment. **Impact**: $100k at 1% over 2 years = $2,575 interest cost + principal. **Fix**: Apply ASAP, most portals still open through 2025 for 2020-2021 loans.