Understanding Which Utility Expenses Qualify for PPP Loan Forgiveness

When small business owners applied for PPP loans during the pandemic, many focused primarily on payroll requirements—understandably, since at least 60% of the funds had to cover employee wages. But what about the remaining 40%? If you're still navigating PPP loan forgiveness, understanding which utility expenses qualify can make a significant difference in maximizing your forgiveness amount.

Here's something that surprises many business owners: the PPP program defines "utilities" more broadly than standard tax definitions. This means you might be eligible to claim expenses you didn't initially consider. However, there are specific rules and a critical deadline that determine what qualifies. Let's break down everything you need to know about utility costs and PPP loan forgiveness.

What Counts as Utilities for PPP Forgiveness?

The SBA defines eligible utilities as "business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access." This broader definition includes several categories beyond traditional utility bills.

Traditional Utilities

These are the straightforward expenses most business owners expect:

• Electricity: Power bills for your business location
• Gas: Natural gas or propane for heating and operations
• Water: Water and sewer services
• Sewage: Wastewater treatment services

Extended Utility Categories

The PPP program expands the definition to include:

• Telephone Services: Both landlines and cell phones used for business
• Internet Access: Broadband, fiber, cable, or DSL internet services
• Transportation Costs: Certain fees assessed by state and local governments based on business use of transportation systems (not general vehicle expenses or fuel)

This extended definition gives businesses more flexibility in allocating their PPP funds. If you've been paying for business internet or phone services, these expenses can count toward your forgiveness calculation.

The Critical February 15, 2020 Deadline

Here's the most important rule many businesses overlook: all utility service agreements must have been in place before February 15, 2020.

This means:

• You cannot claim forgiveness for utilities you started using after February 15, 2020
• The service contract or agreement must show an establishment date prior to this deadline
• Even if the actual payments occurred during your covered period, the service itself must predate February 15, 2020

Why does this matter? If you switched internet providers in March 2020 or added a new phone line in April 2020, those new services won't qualify for PPP forgiveness—even if they're legitimate business expenses. The SBA implemented this rule to ensure businesses were claiming expenses for services they already had before the pandemic, not new services added specifically to maximize forgiveness.

What This Means for Your Business

Review your utility contracts and service agreements carefully. You'll need documentation showing when each service began. This includes:

• Initial service agreements or contracts
• First billing statements showing service establishment dates
• Account setup confirmations from utility providers

If you can't prove a service existed before February 15, 2020, don't include it in your forgiveness application. The risk of audit findings or forgiveness reductions isn't worth it.

The 60/40 Spending Rule

Understanding the overall spending requirements helps you strategically allocate utility expenses within your PPP loan forgiveness application.

The basic rule: At least 60% of your PPP funds must be spent on payroll costs. The remaining 40% can be allocated to:

• Rent or lease payments
• Mortgage interest (not principal)
• Utilities

This means if you received a $50,000 PPP loan:

• Minimum $30,000 must go toward payroll (60%)
• Up to $20,000 can cover rent, mortgage interest, and utilities (40%)

Common Mistake to Avoid

Some businesses assume they must spend exactly 40% on non-payroll costs. This isn't true. You can spend more than 60% on payroll—there's no maximum. However, spending less than 60% on payroll will reduce your forgiveness amount proportionally.

For example, if you spend only 55% on payroll and 45% on other costs, your forgiveness will be reduced even if all expenses are eligible and properly documented.

Documentation Requirements for Utility Expenses

Proper documentation is essential for PPP forgiveness. The SBA and your lender will require proof that:

1. The utility service existed before February 15, 2020
2. You made payments during your covered period
3. The expenses were legitimate business costs

What Documentation You Need

For each utility you're claiming, gather:

Proof of Service Establishment:

• Original service agreement or contract
• First invoice showing account setup date
• Account history from the utility provider

Proof of Payment:

• Copies of invoices from your covered period
• Canceled checks, ACH confirmations, or wire transfer receipts
• Bank statements showing payments
• Credit card statements (if utilities were charged to business cards)

Business Connection:

• Bills must be in your business name or show your business address
• For home-based businesses, documentation that you claimed these expenses on your 2019 Schedule C

Organizing Your Documentation

Create a dedicated folder (physical or digital) for utility forgiveness documentation. Organize it by utility type:

• Electricity folder
• Internet folder
• Phone folder
• Water/sewer folder

Within each folder, include both the pre-February 15, 2020 proof and your covered period payment records. This organization will make completing your forgiveness application much smoother and help you respond quickly if your lender requests additional information.

Home-Based Business Considerations

If you operate from a home office, special rules apply to utility claims. The SBA tightened requirements here to prevent abuse.

What Home-Based Businesses Can Claim

You can claim home utility expenses for PPP forgiveness only if:

• You claimed a home office deduction on your 2019 Schedule C
• The utility expense was directly attributable to business use
• You can document the business portion of the expense

What You Cannot Claim

If you worked in an external office space during 2019, you cannot switch to claiming home utility expenses for PPP forgiveness, even if you worked from home during the pandemic. The SBA looks at your 2019 tax return to determine your baseline business structure.

Calculating the Business Portion

For home-based businesses, you typically cannot claim 100% of utility costs. Instead, calculate the business portion using:

• Square footage method: Business space as a percentage of total home square footage
• Dedicated space calculation: If you have a dedicated home office

For example, if your home office occupies 200 square feet of a 2,000-square-foot home (10%), you can claim 10% of your home utility costs for PPP forgiveness, provided you used the same calculation on your 2019 Schedule C.

Transportation Costs: A Gray Area

The inclusion of "transportation" in eligible utilities created confusion because the SBA provided limited guidance on what qualifies.

What Likely Qualifies

Based on SBA guidance, eligible transportation costs include:

• Tolls paid for business transportation
• Parking fees for business locations
• Public transportation passes for business travel
• State and local government fees for business use of transportation systems

What Does Not Qualify

These transportation expenses are not eligible utilities under PPP:

• Fuel or gasoline purchases
• Vehicle maintenance and repairs
• Auto insurance
• Vehicle lease or loan payments
• Mileage reimbursements

The key distinction: PPP utilities cover fees for transportation services or systems, not the costs of owning and operating vehicles. If you're unsure whether a specific transportation cost qualifies, consult with your accountant or SBA lender before including it in your forgiveness application.

Common Mistakes That Reduce Forgiveness

Learning from others' errors can save you significant headaches during the forgiveness process.

Mistake #1: Including Services Started After February 15, 2020

This is the most common error. Business owners assume that because they made payments during the covered period, the expense qualifies. Remember: the service must have existed before February 15, 2020, even if payments occurred later.

Mistake #2: Misallocating Covered Period Dates

Your covered period is either 8 or 24 weeks from when your PPP loan was disbursed. Some businesses include utility payments that fall outside this window, which triggers audit flags.

Calculate your exact covered period and only include utility payments made during those specific weeks. If a payment date falls one day outside your covered period, it doesn't qualify.

Mistake #3: Claiming Personal Expenses

For home-based businesses, some owners claim 100% of home utilities without properly calculating the business portion. This is a red flag for auditors.

Always use the same calculation method you used on your 2019 taxes. If you claimed 15% business use of home on Schedule C, claim 15% of utilities for PPP forgiveness—not more.

Mistake #4: Insufficient Documentation

Incomplete records are another common issue. Some businesses provide proof of payment but not proof that service existed before February 15, 2020, or vice versa.

You need both: evidence the service was established before the deadline AND evidence you made payments during your covered period.

Mistake #5: Exceeding the 40% Non-Payroll Limit

While less common, some businesses focus so heavily on maximizing utility and rent forgiveness that they don't spend enough on payroll. Remember: payroll must be at least 60% of your total forgiveness request.

Before finalizing your application, calculate your payroll percentage. If it's below 60%, increase payroll expenses or reduce non-payroll items to stay compliant.

Best Practices for Maximizing Utility Forgiveness

Now that you understand the rules, here are strategic tips for optimizing your utility forgiveness claims.

1. Conduct a Pre-Application Audit

Before submitting your forgiveness application, review all utility accounts:

• List every utility service your business uses
• Check the establishment date for each service
• Verify which ones predate February 15, 2020
• Calculate total eligible expenses for your covered period

This audit helps you identify all eligible expenses and avoid including ineligible ones that could trigger reviews or reductions.

2. Separate Business and Personal Utilities

If you haven't already, now is the time to clearly separate business and personal utility accounts in your recordkeeping. For home-based businesses:

• Calculate your business percentage using square footage or dedicated space
• Apply this percentage consistently to all home utilities
• Document your calculation method in case of audit

3. Track Utilities by Covered Period

Create a spreadsheet showing:

• Utility type
• Service provider
• Account number
• Establishment date
• Payment dates during covered period
• Payment amounts
• Total claimed for forgiveness

This tracking document becomes your reference when completing Form 3508, 3508EZ, or 3508S.

4. Keep Digital and Physical Copies

Don't rely on a single format for storing documentation. Maintain:

• Digital scans of all invoices and payment records
• Physical copies in organized folders
• Cloud backup of digital files
• Multiple formats (PDF and original document types)

The SBA may request documentation months after you submit your forgiveness application. Having multiple accessible copies prevents scrambling to recreate records later.

5. Consult with Your Accountant

PPP forgiveness has numerous nuances, and utility expenses are just one component. Before submitting your application:

• Review your complete forgiveness calculation with your accountant
• Verify you're maximizing eligible expenses without overstepping
• Ensure your documentation meets SBA requirements
• Confirm your payroll percentage meets the 60% minimum

Professional guidance often uncovers additional eligible expenses you might have missed or identifies potential red flags before submission.

What Happens If You Make a Mistake?

If you realize after submitting your forgiveness application that you made an error with utility expense claims, you have options.

Before Forgiveness Is Granted

If your application is still under review, contact your lender immediately to:

• Explain the error you discovered
• Provide corrected information and documentation
• Submit an amended forgiveness application if necessary

Most lenders appreciate proactive correction and will work with you to fix honest mistakes before making a forgiveness decision.

After Forgiveness Is Granted

If you discover an error after receiving forgiveness, the situation is more complex. Intentional misrepresentation can lead to serious consequences, but honest mistakes typically have remedies:

• Contact your lender to report the error
• Consult with your accountant or attorney
• Be prepared to repay any overforgiven amount

The SBA has shown willingness to work with borrowers who made good-faith errors, especially when borrowers self-report issues. However, waiting for the SBA to discover problems through audit is far less favorable than proactively addressing them.

Looking Beyond PPP: Long-Term Financial Management

Whether you're completing PPP forgiveness now or have already finished the process, the experience offers valuable lessons for financial management going forward.

The Value of Organized Records

The detailed documentation required for PPP forgiveness highlights how important organized financial records are for any business. Tracking expenses by category, maintaining service agreements, and keeping thorough payment records aren't just for loan forgiveness—they're fundamental business practices that:

• Simplify tax preparation
• Provide clarity for business decision-making
• Enable accurate financial forecasting
• Support future financing applications
• Streamline audit responses

Utility Expense Management

Beyond PPP, actively managing utility expenses can significantly impact your bottom line:

• Review service agreements annually to ensure competitive rates
• Consider energy-efficient upgrades that reduce long-term utility costs
• Monitor usage patterns to identify waste or inefficiencies
• Negotiate better rates with providers, especially for internet and phone services

The detailed attention you paid to utilities for PPP forgiveness can translate into ongoing cost management that improves profitability.

Simplify Your Financial Management

As you navigate PPP forgiveness and utility expense tracking, maintaining clear, accurate financial records is essential. Beancount.io offers plain-text accounting that gives you complete transparency and control over your financial data—no black boxes, no vendor lock-in. With version-controlled records and AI-ready formatting, you can track every expense category precisely while maintaining the flexibility to adapt to changing requirements. Get started for free and see why developers and finance professionals are switching to plain-text accounting.