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May 2020

PPP Loan Forgiveness – SBA Publishes Forgiveness Application; Clarifies Certain Forgiveness Requirements

May 20, 2020

On March 27, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted and established the Paycheck Protection Program (“PPP”), which offered forgivable loans through the United States Small Business Administration (“SBA”).  The PPP began accepting loan applications on April 3, 2020, and businesses throughout the country applied through their banks, though there has been continued confusion over the rules about which loan proceeds will actually be forgiven.

Finally, on May 15, 2020, the SBA and Department of Treasury published the PPP Loan Forgiveness Application and instructions (“Application”). The Application is available here.  Not only does the Application give insight into the forgiveness process, it clarifies a number of questions that have remained unanswered by rules and guidance published since the CARES Act was passed into law on March 27, 2020.

This update addresses: (i) the Application contents and required supporting documentation; (ii) the calculation for determining Full-time Equivalents (“FTEs”); (iii) clarification regarding forgiveness reductions based on salary or wage reductions; (iv) alternative payroll periods; and (v) expansion of non-payroll costs such as rent and mortgage interest to include those related to personal property.

The Application and Supporting Documentation

The Application is made up of the PPP Loan Forgiveness Calculation Form, at pages 3 through 4, and instructions. All Borrowers must submit with the Application a “PPP Schedule A” and “PPP Schedule A Worksheet.” Instructions for generating both the PPP Schedule A and the PPP Schedule A Worksheet are included in the Application. There is a demographic survey, but borrowers are not required to submit the survey with the forgiveness application.

In support of the Application, Borrowers must submit documentation evidencing both payroll and non-payroll costs:

            Payroll Costs Documentation

Documentation verifying the eligible cash compensation and non-cash benefit payments from the Covered Period or the Alternative Payroll Covered Period consisting of each of the following:

a. Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.

b. Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the Covered Period or the Alternative Payroll Covered Period:

i. Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941); and

ii. State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state.

c. Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the Borrower included in the forgiveness amount (PPP Schedule A, lines (6) and (7)).

FTE Documentation

Documentation showing (at the election of the Borrower):

a. the average number of FTE employees on payroll per month employed by the Borrower between February 15, 2019 and June 30, 2019;

b. the average number of FTE employees on payroll per month employed by the Borrower between January 1, 2020 and February 29, 2020; or

c. in the case of a seasonal employer, the average number of FTE employees on payroll per month employed by the Borrower between February 15, 2019 and June 30, 2019; between January 1, 2020 and February 29, 2020; or any consecutive twelve-week period between May 1, 2019 and September 15, 2019.

Non-payroll Costs Documentation

Documentation verifying existence of the obligations/services prior to February 15, 2020 and eligible payments from the Covered Period, including:

a. Business mortgage interest payments: Copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments from the Covered Period; or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments.

b. Business rent or lease payments: Copy of current lease agreement and receipts or cancelled checks verifying eligible payments from the Covered Period; or lessor account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments.

c. Business utility payments: Copy of invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks, or account statements verifying those eligible payments.

Further, Borrowers are not required to submit but must maintain all documentation evidencing any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule. Additional guidance on employees refusing reinstatement can be found here.

Calculating Full-Time Equivalents

The CARES Act and subsequent rules and guidance did not definitively state the calculation to determine full-time equivalents. In the absence of such, most borrowers reasonably assumed that the calculation used in many federal legislation and by the Internal Revenue Service was appropriate.

However, for the first time, the SBA makes clear that full-time equivalents are calculated as follows:

For each employee, enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. A simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the Borrower.

Of particular importance is the fact that the Application changes the CARES Act established “average monthly full-time equivalents” to “average weekly full-time equivalents.”

One thing remains as it was under the CARES Act: that Borrowers may choose the “look back” period for full-time equivalents. As a reminder, the look back period for comparing full-time equivalents during the covered period is the borrower’s choice of: (i) February 15, 2019 to June 30, 2019; (ii) January 1, 2020 to February 29, 2020; or (iii) in the case of seasonal employers, either of the preceding periods or a consecutive twelve-week period between May 1, 2019 and September 15, 2019.

Excluding from Full-Time Equivalents Employees Who Refused to Return to Work

The SBA previously announced that employers will not be penalized by reductions to full-time equivalents arising from any employee’s refusal to return to work so long as the employer made a good-faith written offer of reinstatement to the employee and documents the employee’s rejection of that offer. In addition to employees who refused to return to work, full-time equivalent hours may be excluded for any employee: (i) fired for cause, (ii) who voluntarily resigned, or (iii) who voluntarily requests reduced hours.

If full-time equivalent hours are reduced because of any instance described above, a borrower may avoid penalty by requesting related hours be excluded from the full-time equivalent calculation. The process for this is simple, as the Application contains a line item for the borrower to certify the number of full-time equivalents associated with such employees. Those full-time equivalents will not result in a reduction to the forgiven amount.

While borrowers are not required to submit documentation evidencing the written reinstatement offer and the employee’s rejection, they must maintain these records and be prepared to provide them to the SBA upon request.  

Safe Harbor for Full-Time Equivalent Employees

As explained above, a reduction in FTE employees during the covered period will generally cause a penalty, and the forgivable amount of the loan will be reduced by the percentage that the FTE’s were reduced.  The application, however, clarifies the exemption that allows borrowers to rehire employees that were terminated to avoid the corresponding penalty.  In order to obtain the safe-harbor, the employees that were laid off, furloughed, or terminated between February 15 and April 26, 2020 must be rehired by June 30, 2020. In order to qualify for this safe-harbor, this application makes clear that the FTE rehires must bring the FTE level back to the same or greater level than were present on February 15, 2020.  Practically, if a borrower is taking advantage of this safe harbor provision, the forgiveness application cannot be submitted before July 1, 2020.

Clarification regarding Forgiveness Reductions based on Salary/Wage Reductions

Among the CARES Act provisions governing PPP loan forgiveness is a requirement that any PPP amount forgiven by the SBA is to be reduced by any reduction to salary or wages. The CARES Act provided that the forgiven amount shall be reduced by: “the amount of any reduction in total salary or wages of any employee [earning less than $100,000 annually] … during the covered period that is in excess of 25 percent of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period.” A conservative interpretation of this provision provided that payroll reductions were to be based on the total compensation earned by an employee during the first quarter. Many were concerned about their ability to comply with this provision when, among other things, a fiscal quarter has more weeks than the eight weeks covered by the program.

The Application makes clear that the reduction to the forgiven amount due to salary/wage reductions is based on average pay rates, not total compensation. A reduction to the forgiven amount based on salary/wage reduction will only be triggered if the average annual salary or average hourly wage during the eight week covered period does not equal 75 percent or more of the average annual salary or average hourly wage during the first quarter of 2020. This provision is very helpful to employers that have hourly employees that do not work the same amount every week.

Convenient Remedies to the Covered Period Beginning with Loan Disbursement

The CARES Act limits forgiveness to a period of eight weeks following loan disbursement. For some, loan disbursement falls during a pay period, complicating forgiveness calculations. The Application provides two options for relieving this concern.

First, the Application creates an “Alternative Payroll Covered Period” for borrowers with biweekly or shorter payroll. This option makes forgiveness calculations and compliance administratively convenient for borrowers with shorter payroll schedules. If a borrower’s payroll schedule is biweekly or shorter, then the Borrower can adjust the eight weeks following loan disbursement so it may start on the first day of its first pay period following loan disbursement. For example:

if the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20.


If a Borrower utilizes the Alternative Payroll Covered Period, it must be careful to use the “Alternative Payroll Covered Period” and “Covered Period” where requested on the Application. There will be distinct instances where one or the other is required on the form even if a Borrower is electing to use the Alternative Payroll Covered Period.

Second, the Application makes clear that any amount incurred or paid during the eight weeks is eligible for forgiveness. The application states:

Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date.

Expansion of Non-Payroll Costs

Although the Application maintains that no more than 25 percent of the forgiven amount can be attributable to non-payroll costs, non-payroll costs have been expanded in limited instances. Such expansions include:

  • Mortgage interest includes any interest obligations on a loan secured by real or personal property.
  • Rental payments includes rent for real or personal property. This expansion makes equipment and vehicle lease payments eligible as non-payroll costs.

This guidance appears to be the SBA and Treasury’s final position on forgiveness processing.  While the House Democrats have passed the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, but it is unlikely to pass in its current form.  It is of note that it does propose a number of changes to the PPP forgiveness provisions, including lengthening the forgiveness covered period, extending the safe-harbor for rehires to a later date for businesses shuttered by government orders, reducing the required amount that needs to be spent on payroll, and explicitly including interest on other debt obligations as an eligible non-payroll cost. While it is worthwhile to keep an eye on these proceedings, none of these provisions currently apply and borrowers should strictly comply with the forgiveness application in its current form.

Visit our COVID-19 Task Force for ongoing updates.

Banking & Finance

Jonathan M. Boulahanis
W. Kent Carter
Tyler Duff
Craig S. Heryford


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