New Guidance Regarding Loan Forgiveness under the Paycheck Protection Program

June 5, 2020

If you received a loan under the Paycheck Protection Program, you are probably starting to wonder how to apply for forgiveness of that loan.  On May 15, 2020, the SBA released the Paycheck Protection Program Loan Forgiveness Application (“SBA Forgiveness Application”), which provides a fillable application to calculate the amount of the loan that can be forgiven. The application can be accessed here. The SBA published additional guidance regarding the loan forgiveness portion of the PPP in the form of an Interim Final Rule on May 22, 2020.

On June 3, 2020, the U.S. Senate passed bipartisan legislation (previously passed in the U.S. House on May 28, 2020) that makes certain changes to the PPP forgiveness rules.  The legislation, entitled the Paycheck Protection Program Flexibility Act (“PPP Flexibility Act”), was signed into law by the President on June 5, 2020. The legislation will, among other things, reduce the percentage of the PPP loan that must be used for payroll costs from 75 percent to 60 percent and increase the time period to utilize the loan and still qualify for forgiveness from 8 weeks to 24 weeks.  We expect that the SBA will issue new FAQs and rules regarding implementation of this new law.

Highlighted below are some of the key takeaways from the Interim Final Rules and SBA Forgiveness Application.  These highlights incorporate the new legislation set forth in the PPP Flexibility Act.

Overall Eligibility Requirements for Forgiveness


      • To be eligible for full forgiveness, no less than 60% (changed from 75% per the PPP Flexibility Act) of the PPP funds must be used for payroll costs and borrower must not have (a) reduced the salary/wages (by more than 25 percent) for any employee (who made $100,000 or less) year over year from any pay period in 2019 or (b) reduced its average weekly number of full-time equivalent (FTE) employees.   
      • Under the PPP Flexibility Act, borrowers who fail to reach the 60% threshold for payroll costs will not be allowed any PPP loan forgiveness. There is some discussion whether this was the intent of the legislation, and may be addressed in future guidance. (This is a change from the prior rules, which subjected borrowers who failed to meet the 75% threshold to a reduction in the forgiveness amount of the loan equivalent to 1.33 times the payroll costs deficit.)
      • If a borrower falls short on the non-payroll costs, they will still be eligible for forgiveness, but they will be subject to a dollar for dollar reduction in loan forgiveness.
      • For example, under the new PPP Flexibility Act, if the borrower receives a PPP loan of $500,000, they must use $300,000 for payroll costs.  If they fall short on payroll costs by $20,000, they will not be entitled to any loan forgiveness. If the borrower falls short on the non-payroll costs in an amount of $20,000, it will result in a reduction of loan forgiveness of just $20,000.


      • For purposes of determining eligible expenses for forgiveness purposes, under the PPP Flexibility Act, the Covered Period has been extended to 24 weeks (up from the eight-week [56 day] period) starting on the Loan Disbursement Date (the date the loan proceeds were received by the borrower).  Existing borrowers may still elect to use the original eight-week Covered Period for determining loan forgiveness.
      • Borrowers who are on weekly or bi-weekly payroll schedules may choose the Alternative Payroll Covered Period for purposes of calculating payroll expenses. The Alternative Payroll Covered Period begins on the first day of the pay period following their Loan Disbursement Date and continues for a 24-week period (or, if elected, the original eight-week [56 day] period).
      • Borrowers will be allowed to include, for forgiveness purposes, amounts incurred but not paid during  the Covered Period or Alternative Covered Period as long as those amounts are paid before the next billing date (for mortgage, rent and utilities) or the next payroll date (for payroll costs).
      • Payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction.  Payroll costs are considered incurred on the day that the employee’s pay is earned.   Payroll costs that are incurred but not paid prior to the end of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date.  The language allows you to count both payroll paid within the period, and payroll incurred within the period (if paid on or before the next payroll date), but you can count any specific payroll cost only once in your calculation.


      • Eligible payroll costs include gross salary, gross wages, gross tips and gross commissions, and paid leave not including leave covered by the Families First Coronavirus Response Act (FFCRA), up to $100,000 of annualized cash compensation per employee (capped at $15,385 per individual.)  It also includes payments relating to separation or dismissal, employee benefits such as group health care coverage, including insurance premiums, and retirement.  It also includes, for an independent contractor or sole proprietor, wages, commissions, income or net earnings from self-employment.
      • The new guidance clarifies that bonuses paid during the Covered Period to employees count toward eligible payroll costs up to the annualized cash compensation cap of $15,385 per employee.
      • The new guidance provides special rules for “owner-employees.”  The guidance states that, for purposes of forgiveness, the compensation paid to owner-employees cannot exceed the lesser of $15,385 of cash compensation or 8/52nds of their 2019 cash compensation PLUS what is spent for their health insurance and retirement benefits.   Self-employed individuals filing on Schedule C are capped by the amount of their owner compensation replacement, calculated based on 2019 net profits.  General partners are capped by their 2019 net earnings from self-employment (reduced by claimed 179 expense deduction and unreimbursed partnership expenses) multiplied by 92.35 percent.  For self-employed individuals and general partners, compensation does not include health insurance or retirement plan contributions. The PPP Flexibility Act did not revise this limitation.


      • Non-payroll costs include the following:
        • Covered mortgage obligations, which includes payment of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real OR personal property, where the mortgage was in place before February 15, 2020;
        • Covered rent obligations, which include any business rent or lease payments pursuant to lease agreements for real OR personal property in force before February 15, 2020 (the new guidance clarifies that rent on personal property is included); and
        • Covered utility payments, which include any business payments for a service for the distribution of electricity, gas, water, transportation, telephone or internet access for which service began before February 15, 2020.
      • An eligible nonpayroll cost must be paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.

Reductions to Loan Forgiveness Resulting from Reduction in Number of Employees or Reduction in Salary or Wages

  • Borrowers may be subject to certain reductions in loan forgiveness based on reductions in full-time equivalent employees or in employee salary and wages during the Covered Period.
  • Borrowers will not be subject to these reductions in loan forgiveness if they have rehired employees that were laid off between February 15, 2020 and April 26, 2020, and restored any reductions in salary and wages that occurred between February 15, 2020 and April 26, 2020, by December 31, 2020 (previously June 30, 2020 prior to PPP Flexibility Act).  For example, if on March 1, 2020, an employer laid off an employee or reduced an employee’s wages, then on August 1, 2020 rehired the same employee for the same salary and number of hours or restored the reduction in hours, the borrower’s loan forgiveness will not be reduced.


      • The SBA requires that a borrower calculate average full-time equivalent (FTE) for all employees.  The guidance explains that a borrower must, for each employee, enter the average number of hours paid per week, divide by 40 and round the total to the nearest tenth.  No one may be counted as more than 1 FTE.  For example, if a part-time employee worked 30 hours, they would be considered a .75 FTE employee.   A borrower may elect to use a simplified method and simply assign a 1 for employees who work 40 hours or more per week and a .5 for employees who work fewer than 40 hours a week.
      • This calculation will be used to determine whether the Borrower’s loan forgiveness amount must be reduced based on a reduction in full-time equivalents.  Specifically, the actual loan forgiveness amount that the borrower will receive may be required to be reduced if the borrower’s average weekly number of FTE employees during the Covered Period or Alternative Covered Period is less than the average number of FTE employees during the Borrower’s chosen period used for comparison.  For example, if borrower had 50 FTE employees during the chosen period and decreased to 40 employees during the Covered Period, that would result in a decrease of 20 percent.  Hence, only 80 percent of eligible expenses may be forgiven.
      • For purposes of this calculation, the chosen period (or look back period) shall be either:
        • February 15, 2019 through June 30, 2019;
        • January 1, 2020 through February 29, 2020; or
        • in the case of a seasonal employee, either of the two prior dates or a consecutive 12-week period between May 1, 2019 and September 15, 2019.
      • A borrower is allowed to exclude a reduction in FTE employee headcount attributable to an individual employee if

(a) the employee is terminated for cause;

(b) the employee voluntary resigns;

(c) the employee voluntarily requests a reduction in hours that changes their FTE status; or

(d) the employee is laid off by the borrower and

        • the borrower made a good faith, written offer to rehire the employee during either the Covered Period or the Alternative Payroll Covered Period;
        • the offer was for the same salary or wages or same number of hours as earned by the employee in the past pay period prior to separation or reduction in hours;
        • the employee rejected the offer;
        • the borrower maintained records documenting the offer and its rejection; and
        • the borrower informed the applicable state unemployment insurance office of the employee’s rejected offer within 30 days of the employee’s rejection of the offer.

Under the PPP Flexibility Act, in addition to the exceptions set forth in the interim rules and described above, borrowers that are unable to restore FTEs or salaries by December 31, 2020, will not receive a reduction in loan forgiveness due to FTE or pay rate decreases if:

      1. Borrower documents an inability to return to the same level of activity as prior to February 15, 2020 due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention or the Occupational Safety and Health Administration during the period beginning on March 1, 2020 and ending on December 31, 2020, relating to the maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement related to COVID-19; or
      2. Borrower documents that it was unable to rehire individuals who were employees on February 15, 2020 and unable to hire similarly qualified employees.


      • A reduction in an employee’s average salary or wages in excess of 25 percent for the Covered Period or Alternative Payroll Covered Period will result in a reduction in the borrower’s loan forgiveness amount.  This reduction only applies to employees who were not paid more than $100,000 annualized based on any pay period in 2019. For all other employees, the borrower must reduce their total forgiveness amount by the total dollar amount of the reduction that is in excess of 25 percent of the average base salary or wages paid to such employee between January 1, 2020 and March 31, 2020.  This calculation is performed on a per employee basis, not in the aggregate.  By way of example, assume the borrower reduced a full-time employee’s salary from $3,000 per week to $2,000 per week.  The employee is still considered a full-time employee and counts as 1 FTE for that purpose.  For purposes of the salary and wage reduction, the first $750 of the reduction (25 percent of old wages) is ignored.  Assuming the 8-week Covered Period, the remaining $250 per week is multiplied by 8 weeks, resulting in $2,000 being subtracted from the eligible forgiveness amount.  Note that this wage and salary limitation may impact borrowers with employees that are paid based on sales commissions and borrowers with employees that make a significant amount of their wages from tips.  We expect there will be SBA guidance regarding how this will work within the new 24-week Covered Period.
      • Avoidance of Double Penalty: To avoid a penalty or reduction in forgiveness under both the salary and wage reduction calculation and the FTE reduction calculation, the guidance states that the salary/wage reduction only applies to the portion of the decline in salary and wages that is not attributable to the FTE employee reduction.

Other Key Points

  • The loan forgiveness application requires the borrower to check a box indicating whether it received (together with its affiliates) a PPP loan of greater than $2 million.  We assume that the SBA will track this information for purposes of the certification safe harbor provided by SBA FAQ 46 relating to the business necessity of receiving the loan and the likely audit of any borrower receiving more than $2 million.
  • The new guidance suggests that all borrowers may be audited by the SBA and that borrowers should maintain records related to the PPP loan for a period of 6 years.
  • When applying for forgiveness, lenders will require borrowers to submit details regarding each employee and their cash compensation and hours worked as well as evidence verifying the existence, as of February 15, 2020, of mortgage obligations, rent or lease obligations, and utility services.
  • Under current guidance, the forgiveness amount is not subject to federal income tax, but the expenses paid with the funds are also not deductible by the borrower.  The House and Senate have expressed interest in making the expenses deductible but legislation on this issue has not yet passed.
  • Under current guidance, is unclear whether interest accrued on the PPP loan prior to the date of forgiveness may be forgiven.


This article is for informational purposes only and is not intended to be legal advice. If you have any questions on the above or any new guidance issued or legislation passed, please reach out to Jason Schneider at Schneider Law Group at (919) 324-3599.

Schneider Law Group is a business boutique law firm primarily focused on general corporate, M&A, securities, and tax strategy for growth-oriented businesses.  For more information, please visit