PPP Loan Forgiveness - The Big Surprise - The Salary/Hourly Wage Reduction

I worked through the PPP Loan Forgiveness Application for my first client that completed his eight week coverage period. I read the instructions but to grasp the application and explain it I had to jump in and fill it out. I learned a lot along the way that I can share with you. I am working on another post about what you will need to complete the application, but I need to talk to about The Big Surprise - The Salary/Hourly Wage Reduction.

That Doesn't Mean What You Think It Means

One of my new favorite expressions is "that doesn't mean what you think it means" and that certainly applies here. I thought The Salary/Hourly Wage Reduction had to do with how much less you paid someone on an hourly basis, but no it is much more. Looking at the instructions for the application on page 7 it takes you through this calculation, and it is a long winding road with a big surprise at the end.  How could a paycheck for a gross amount of about $50 result in a reduction of forgiveness of over $150? Well let me tell you.

Calculation of the Salary/Hourly Wage Reduction

Here is the calculation of the Salary/Hourly Wage Reduction. Start with the average hourly rate during the coverage period. Is that less than 75% of the average hourly rate during the base period? If so: multiply the the average hourly rate during the base period by .75 and subtract the average hourly rate during the coverage period. Take that number and multiply it by the average hours worked per week from the BASE PERIOD and multiply that by 8. The result is you get hit not just for the reduction in the hourly rate but also for the reduction in average hours worked per week and oh yeah also multiply that by the eight weeks of the coverage period. BAM! TAKE THAT.

It is interesting to note the calculation for The Salary/Hourly Wage Reduction is included in the original forgiveness application but I don't see it in the revised version just released today.

Election for a Longer Coverage Period

If the borrower elects a longer coverage period then he could be exposing his business to an even greater risk of reducing the forgiveness amount. Here is a quote from a Forbes article on this subject.

[Here’s another downside of the 24-week period. A longer covered period means a greater reduction in forgiveness if an employees salary or hourly rate are reduced during that time. After all, you’re multiplying the average salary or hourly rate reduction by 24 instead of 8.


So a business owner may think he was being kind and paying someone who didn't even "show -up" and work for him but his forgiveness amount is reduced by over 3 times (or more if a longer coverage period is elected) what he paid the employee out of the kindness of his heart thinking it would be forgiven. Not only was it not forgiven but it reduced his forgiveness amount by 3 times (or more) what he paid the person.

Stay Tuned

That is the big surprise. My next post is about the surprise you need all this information and your accounting software does not include a useful report. No point and click and there is your information. Also, there are these somewhat obscure requirements for information from what seems like random periods. Oh yeah and most of it is by employee.

If you got a PPP loan for your business you will likely need help with the forgiveness application. I prepared one already for one of my clients and I have been asked to work on another next week. If you would like my help too use my information below to email me to arrange a consultation via a phone, Zoom, or Skype call.


Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.