Borrower’s Guide to the PPP Loan Forgiveness Application

On May 16th, the Small Business Administration (SBA) issued its Paycheck Protection Program (PPP) Loan Forgiveness Application. The Forgiveness Application is a combination of instructions, line items, and formulas—not unlike a tax return—that determines the amount of loan forgiveness each PPP borrower is eligible for.

The Forgiveness Application has three required sections: (1) the PPP Loan Forgiveness Calculation Form; (2) PPP Schedule A; and (3) the PPP Schedule A Worksheet. An optional fourth section collects borrower demographic information. Each required section is prefaced with detailed instructions, including several pieces of new guidance.  

This article provides an overview of the Forgiveness Application by addressing the following questions: 

• What costs are eligible for loan forgiveness?
• What circumstances can reduce the amount of loan forgiveness?
• What new Borrower certifications must be made for loan forgiveness?

Forgivable Costs:

A borrower’s eligible payroll and non-payroll costs incurred or paid during the "Covered Period" can qualify for loan forgiveness.

What is the Covered Period? The Covered Period is the 8-week (56-day) period during which a PPP borrower’s eligible expenses can qualify for loan forgiveness. 

When does the Covered Period begin? The Forgiveness Application clarifies that the Covered Period begins on the date the borrower’s PPP loan is disbursed.

What is the "Alternate Payroll Covered Period"? For payroll expenses only, a borrower with a biweekly or more frequent pay period can elect to use the Alternate Payroll Covered Period instead of the Covered Period. 

The Alternate Payroll Covered Period begins on the first day of the first pay period after the PPP loan is disbursed. It is intended for administrative convenience by syncing the 8-week period with the borrower’s pay period.

Note: The Alternate Payroll Covered Period should not be used when calculating non-payroll expenses.

What are Eligible Payroll Costs? The following expenses incurred or paid during the Covered Period (or Alternate Payroll Covered Period) are eligible for loan forgiveness as payroll costs:

• Cash compensation. Up to $15,385 per employee ($100,000 annualized for 8 weeks). 
  • Include as cash compensation: gross salary, gross wages, gross tips, and gross commissions; paid vacation, family, medical, and sick leave*; allowances for dismissal or separation. 
  • Do NOT include: compensation paid to non-US resident employees or to independent contractors; *sick or family leave wages for which the employer receives a Families First Coronavirus Response Act tax credit.
• Health Insurance. Employer contributions for employee health insurance.
• Retirement Plans. Employer contributions to employee retirement plans.
• Employer Paid Tax on Employee Compensation. State and local tax on employee compensation paid by the employer.
• Compensation to Owners. The equivalent of 8 weeks of 2019 compensation (capped at $15,385) for each owner-employee, self-employed individual, or partner. Note: This compensation should not be classified as “cash compensation” (above).

What are Eligible Non-payroll Costs? The following expenses incurred or paid during the Covered Period are eligible for loan forgiveness as non-payroll costs, provided they do not exceed 25% of the total amount of forgiveness being sought and are based on agreements or services that began before February 15, 2020:

• Business mortgage interest payments. 
• Business rent or lease payments. 
• Business utility payments.

Costs Incurred or Paid. The Forgiveness Application gives borrowers the option to count expenses when they are “incurred or paid,” which provides some additional flexibility in measuring costs. 

For example, payroll expenses incurred during the final work week in a borrower’s Covered Period can be eligible for forgiveness, even if employees will not be paid until after the Covered Period is finished. 

Incurred expenses that will be paid after the Covered Period must be paid within the next payroll period or billing cycle. 

PPP Loan Interest Not Forgivable? Although prior SBA guidance had said both the PPP loan principal and interest would be forgivable, the Forgiveness Application’s formulas do not account for interest incurred on the PPP loan itself. So, it is currently unclear if interest on the PPP loan can be forgiven.

Forgiveness Reductions:

Reductions to the number of employee hours or wages during the Covered Period can limit the forgivable amount of the loan. A loan may also be reduced by the amount of an EIDL Advance Payment. 

Reductions in the Number of Full-Time Equivalent (FTE) Employees can Decrease Loan Forgiveness. When a borrower has fewer full-time equivalent (FTE) employees during the Covered Period (or Alternate Covered Period) than it did during one of two comparison periods, the available amount of forgiveness amount can be decreased. 

The Borrower can choose either (1) February 15, 2019 to June 30, 2019 or (2) January 1, 2020 to February 29, 2020 as the comparison period.

How is the Number of FTE Employees Measured? By taking the average number of working hours per week (max 40) for each employee, dividing by 40, and rounding to the nearest tenth. 

Alternatively, borrowers may elect to measure FTE employees through a simplified method: assigning all full-time employees a value of 1.0 and all part-time employees a value of 0.5. 

How do FTE Reductions Affect Loan Forgiveness? The forgiveness amount can be reduced by the ratio of average FTE during the Covered Period and average FTE during the selected comparison period. 

For example, if a Borrower had an average of 50 FTE employees during the Covered Period, compared with an average of 100 FTE employees during the selected comparison period, the available amount of loan forgiveness can be reduced by half. Note: This reduction is applied against all eligible expenses.

Permitted FTE Reductions (Safe Harbors). The following types of FTE reductions will NOT reduce the amount of loan forgiveness available to the Borrower:

• FTE reductions between February 15, 2020 and April 26, 2020 if FTE levels are restored to February 15 levels by June 30, 2020.
• Good faith, written offers to rehire an employee during the Covered Period that were rejected by the employee.
• FTE reductions due to firings for cause, voluntary resignations, or voluntarily requested reductions in hours.

Salary/ Wage Reductions can Decrease Loan Forgiveness. The forgiveness amount can also be decreased if the borrower reduces the salary or wages of any employee whose annualized earnings for 2019 were $100,000 or less, (or any employee who did not work for the borrower in 2019). 

Whether a salary or wage reduction has occurred is determined on an employee-by-employee basis by comparing the employee’s average annualized pay during the Covered Period/Alternate Covered Period to the employee’s average annualized pay from January 1, 2020 to March 31, 2020.

Permitted Salary/Wage Reductions (Safe Harbors). The following reductions to salary or wages will NOT decrease the forgiveness amount:

• Salary or wage reductions of 25% or less. 
• Salary or wage reductions that are restored to February 15, 2020 levels by June 30, 2020. 
• Salary or wage reductions to employees who earned more than $100,000 annualized in 2019.
• Reductions to compensation of owner-employees, self-employed individuals, or partners. 

EIDL Advances. Previous guidance indicated that the maximum amount of PPP loan forgiveness would be reduced by the amount of any Economic Impact Disaster Loan (EIDL) Advance Payments (up to $10,000). 

How are EIDL Advances Handled on the Forgiveness Application? The borrower only needs to list the amount of any EIDL Advance received or applied for, along with its EIDL application number. EIDL Advance amounts are not incorporated into the Forgiveness Application formulas. The SBA will independently review the borrower’s EIDL application, and, if necessary, reduce the amount of PPP forgiveness distributed to the borrower. 

New Certifications by Borrowers:

The borrower must make additional certifications when applying for loan forgiveness.

Loans over $2 million. A borrower must certify if it (together with any of its affiliates) received a PPP loan in excess of $2 million. As previously announced, the SBA may review the applications of these larger borrowers to see if they have made the required good faith certification that the PPP loan was necessary due to economic uncertainty. 

The SBA has announced a safe harbor for borrowers who received $2 million or less; it will deem these smaller borrowers to have made the required good faith certification.

All borrowers must certify that: 

• The amount of loan forgiveness requested was used for eligible expenses.
• Any applicable forgiveness reduction formulas (FTE or salary/wages) have been applied.
• No more than 25% of the amount loan forgiveness requested was used for non-payroll costs (i.e. 75% or more was used for eligible payroll costs). 
• The amount forgiveness requested does not exceed 8 weeks’ worth of 2019 compensation for any owner-employee, self-employed individual, or partner, capped at $15,385 per individual.  

Future Developments:

The rules and regulations governing PPP loans have been evolving rapidly. Simmons Perrine Moyer Bergman will continue to monitor the situation and provide updates this page. Of note as of this writing:

• The SBA has announced it intends to release further guidance on PPP loan forgiveness.
• Congress and other government officials are considering extending the Covered Period beyond eight weeks, which would make it significantly easier for borrowers to maximize the forgivable amount of their PPP loan.

For questions, please contact a member of our banking and finance group. You can also visit our COVID-19 Resource Center for regular updates and practical information relating to the Coronavirus.

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Disclaimer: This information is intended for general information purposes only and is not intended, nor should it be construed or relied on, as legal advice. Please consult your attorney if specific legal information is desired.