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PPP Loan Forgiveness--A How-To Guide

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Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Congress established the Paycheck Protection Program (PPP), a $669 billion-dollar loan program designed to help small businesses continue to pay their employees. The most attractive feature of the program is up to 100% loan forgiveness-if borrowers used the funds for an approved purpose. Until recently, employers who got a PPP loan received little guidance regarding how to obtain loan forgiveness. On May 15th, the Small Business Administration issued the PPP Loan Forgiveness Application, as well as instructions, to answer borrowers' questions. Below is a summary of the Application and its instructions.

Payroll Costs

Under the CARES Act, payroll costs are forgivable only if they are "incurred" and "paid" within the covered 8-week period after PPP funds are disbursed to the borrower. Pursuant to the SBA Application, payroll costs are:

(A) incurred on the day the employee's pay is earned, and

(B) paid on the day the borrower distributes paychecks.

If a payroll cost is incurred during the 8-week period, but the next paycheck is not issued until after the 8-week period, the cost will nonetheless be eligible for forgiveness as long as the payroll cost incurred is paid in the next pay period.

Alternative Payroll Covered Period

The CARES Act specified that eligible uses of PPP funds would be forgiven during the 8-week period beginning on the fund disbursement date; however, the new Application introduced an alternative 8-week period for payroll costs. The alternative 8-week period begins on date of the first pay period after the loan disbursement date. Borrowers who use this "Alternative Payroll Covered Period" for payroll costs must still apply the standard 8-week period, which begins on the date of disbursement, for nonpayroll costs such as rent and utilities.

Eligible Nonpayroll Costs

Under the CARES Act, eligible nonpayroll costs include mortgage interest payments, rent, and utilities. As with payroll costs, nonpayroll costs that are paid outside of the 8-week period are eligible for forgiveness if these costs were incurred during the covered period. Additionally, pursuant to the forgiveness Application, "rent" includes lease agreements for real and personal property. Prior to the release of the forgiveness Application, the SBA had not specified that personal property lease payments were eligible for forgiveness.

Cash Compensation

The Application confirms that forgivable cash compensation, per employee, is limited to $15,385.00 (the 8-week equivalent of the $100k annual salary cap). However, noncash payroll costs, such as health insurance and retirement plans, are not subject to this limit. It remains an open question whether bonuses paid to employees during the 8-week period are eligible for forgiveness. It is also unclear whether accelerated bonuses, not connected to work performed in the 8-week window, would be eligible, although it is unlikely because these are not costs that were "incurred" during the covered period.

Reductions in Workforce

Under the CARES Act, the portion of the PPP loan that is forgiven is reduced if the employer reduced its number of full-time equivalent employees (FTE's) during the covered period. While the CARES Act itself does not specify how to calculate the number of FTE's, the forgiveness Application sheds some light on the issue. According to the instructions, each employee must be assigned an FTE value between 0 and 1, which is calculated by:

  1. The average number of hours worked in a week;
  2. Divided by 40; and
  3. Rounded to the nearest tenth (but not to exceed 1.0)

Alternatively, employers can simply assign all employees who work 40 hours or more each week a value of 1.0, and all employees who work fewer than 40 hours a week a value of 0.5.

Under the CARES Act, borrowers can avoid a forgiveness reduction if they rehire laid-off employees before June 30, 2020. The forgiveness Application identifies 2 additional ways to avoid forgiveness reductions:

  1. Borrowers are eligible for full forgiveness if they made a good-faith, written offer to rehire any laid-off employees, but these offers were rejected.
  2. Borrowers are eligible for full forgiveness if the reduction in FTE's is the result of a for-cause termination, a voluntary resignation, or a voluntary request for a reduction in hours.

Reductions in Salary/Hourly Wages

As with reductions in FTE's, a borrower's total loan forgiveness will be reduced if they reduce their employees' salaries/wages by more than 25% during the 8-week period. However, there is an exception to this rule. If borrowers restore their employees' salaries/wages by June 30, 2020, then they are still eligible for full forgiveness.


Finally, the forgiveness Application requires borrowers to make several certifications. Among these, employers must certify that they used their PPP funds for approved purposes, and they understand that if they knowingly use PPP funds for unauthorized purposes, they will be subject to civil and criminal fraud charges.

If you have any questions related to the Paycheck Protection Program, or any other aspect of employment law, contact Thatcher Law Firm at 301-441-1400. Email me at [email protected].

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