The CFO'S Perspective

PPP Loan Forgiveness – ‘To forgive or not to forgive, that is the question.’


In the case of a Small Business Administration Payroll Protection Program (“PPP”) loan, businesses have been presented with an opportunity to maintain their current employment levels and pay certain expenses with assistance from Uncle Sam, in the form of a loan. These loans carry a low-interest rate and up to five-year maturity.

Businesses can apply to have the loan treated as a grant; in which case the loan is forgiven.

This seems like an easy decision for the Chief Financial Officer. Ask for loan forgiveness and accept the gift. But would it ever make sense not to ask for forgiveness? Could the underlying economics of a long-term loan be almost as good as or even better than an immediate grant? The short answer is yes, but only under very specific circumstances. For most businesses, under most circumstances, and for most loan types, loan forgiveness is best.

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Scenario 1

Textbook World – No Taxes, No Interest Rates, Money is Free

Let’s leave the real world and hearken back to your Economics 101 textbook. Consider a world, call it Scenario 1, where there are no taxes, and interest rates are zero percent. In this textbook world, a dollar tomorrow is worth the same as a dollar today.

The question of whether to ask for forgiveness of a PPP loan in Scenario 1 becomes trivial. A $1 million loan will have to be repaid at a cost of $1 million, while the forgiven loan, or grant, is essentially free money. Assuming pretax income of $1 million, the company would net $1 million with the unforgiven loan ($1 million of Pretax Income plus $1 million of loan proceeds, less $1 million loan payback). By the same logic, with the grant, the company nets $2 million.

Scenario 1 - Take the grant.

Scenario 2

Add Back Taxes

Like a good economist, let’s begin to relax the assumptions of the very unrealistic Scenario 1, one by one, and begin to get back to the real world.

First, we will bring back taxes. Current PPP guidance from the IRS states that while the forgiven loan income is not taxable, the expenses that it was used for (payroll) are non-deductible.

This means that the grant is no longer worth $1 million, but taxes of $350,000 have to be paid in year one of the grant, assuming a 35% tax rate plus another $350,000 in tax on Pretax Income before the grant.

Here the net benefit to the company is $1,300,000 ($1,000,000 in Pretax Income plus the PPP grant less $700,000 in taxes).

Alternatively, assuming no loan forgiveness, the $1 million loan must be paid back in full and assuming pretax income of $1 million, the net benefit to the company is $650,000.

Scenario 2 - Take the grant.

Scenario 3

The Present Value of Money with a Balloon Loan

Finally, let’s bring back interest rates, where there is a cost of money. A dollar today is now worth more than a dollar tomorrow. This also means that amounts paid today (e.g., taxes) cost more than amounts paid in the distant future (e.g., unforgiven loan payback).

So, the question becomes: “Is the net benefit of the present value of the loan payoff in five years better than the net benefit of a grant, which is immediately taxable?”

Due to the limitations of the written medium, a full analysis is not presented here but can be provided on request. If you are interested in a full analysis, please reach out to us!


  • An interest rate of 1%
  • A tax rate of 35%
  • And a maturity of five years with a balloon payment,

…it turns out that the discount rate where a borrower would be indifferent between forgiveness and unforgiveness is around 25%, a very high discount rate.

In the more common instance where a company is unable to secure full forgiveness of the loan, we can see that the “penalty” of paying back a portion of the loan is mitigated by discounting the future loan payoff in five years to present value at a high cost of capital in this case.

Scenario 3 - For companies with an exceedingly high cost of equity capital that are taxable and with a balloon loan, the choice to forgive or not to forgive could be a tossup.

Scenario 4

The Real World: Amortizing PPP Loans

But alas, the only balloon loans offered by the Small Business Administration are issued under the Express Loan program. SBA Express loans are limited to a balance of just $350,000. The PPP loans issued under the SBA’s 7(a) loan cannot contain balloon provisions and must be amortizing loans.

The sum of the (negative) present value of the payments on an amortizing loan is significantly larger than the present value of interest-only payments with a balloon at the end. This makes intuitive sense.

As a result, the advantage of the unforgiven loan vs. a grant demonstrated in Scenario 3 is erased in the case of an amortizing loan. The present value of the non-forgiven loan proceeds after payoff at a discount rate of 25%, net of amortizing loan payments of principal and interest, is around $400,000, significantly less than the present value of the $1MM grant of $650,000 (after taxes), assuming there is at least $1 million of pretax income and taxes are paid upfront at a rate of 35%.

Adding taxable income as in the previous scenarios still yields a total benefit of $1.3 Million for the grant, while the unforgiven loan yields a total benefit of only $1.05 million.

Scenario 4 - Again, take the grant.

Additional Considerations

There are other factors that will affect the relative advantage of a grant over the unforgiven loan:

  • Discount rates – for most companies with discount rates of less than 25%, any relative advantage of the unforgiven loan, even with a balloon loan, is significantly reduced or eliminated.

  • General level of tax rates – all else being equal, higher tax rates favor the unforgiven loan, due to the upfront “tax penalty” on the grant and the tax-deductibility of interest. However, the tax deductibility of interest only has a small impact on the overall analysis.

  • Amount of taxable income – lower income favors the grant over the unforgiven loan since the upfront tax penalty of the grant is eliminated or deferred. This is likely the case for companies with reduced revenues that have received PPP loans.


This article presents an overly simplified analysis where the forgiven loan proceeds are taxable. Many have argued this was not the original intent of the PPP program. There stands the possibility of modifications to the current law that would make PPP loans entirely tax free, in which case it would always be better to forgive.

...which is also a nice way to end this article.

The author would like to thank the following for their input and thoughtful comments: Nick Frank, Mike Hiller, Jeanette Roatch, and Dan Whitaker.

About the Author

Larry-BreitbarthLarry A. Breitbarth, CFA, is an experienced financial executive with a proven track record in executive financial management, strategic and operational planning, performance improvement, corporate controllership, project management, and valuation consulting.  He began his career as a business valuation consultant with Arthur Andersen in Chicago and has served clients across a range of industries, including manufacturing and distribution, technology, retail and financial services

Learn more about Larry here >


Topics: PPP Debt Management