Five Key Issues: PPP Loans and Loan Forgiveness Requirements


UPDATE 6/3/2020: Congress passed H.R. 7010 and the bill will be going to the President for his signature. This article will be updated to reflect any changes to the PPP process once the details are finalized.

The first businesses to receive funds from Paycheck Protection Program (PPP) loans are now reaching the end of their “covered period.” Certain costs incurred during the covered period are eligible for loan forgiveness.

To have your PPP loan forgiven, it’s imperative to understand how PPP funds can be used and the criteria for forgiveness. This article compiles the important issues around PPP loans, including some key questions and answers.


If you would like more guidance on your PPP loan, Woods Rogers has developed a PPP Loan Forgiveness Calculator to assist you in providing accurate information on your SBA Loan Forgiveness Application. Contact Zach Agee for a customized estimate of our program fees based on your business needs and the size of your workforce. Read more about this service.

The U.S. House of Representatives passed H.R. 7010 on May 28, 2020.  H.R. 7010 would make technical changes to the PPP.  Woods Rogers attorneys are aware of the potential changes and this article will be updated to address those changes if and when H.R. 7010 becomes law.

It’s important to note Paycheck Protection Program loans are still available. Small business owners who did not apply for a PPP loan initially have another opportunity under the Paycheck Protection Program and Health Care Enhancement Act (PPP-HCEA), signed into law on April 24, 2020. Loan applications should be submitted through a federally insured bank, credit unions, and farm credit institutions.

See The SBA’s Paycheck Protection Loan Program Through the CARES Act for more information about the program and eligibility requirements.

See also “SBA Economic Injury Disaster Loans Are an Additional Option for Emergency Working Capital to learn more.


If you have obtained, or have applied for a PPP loan, at least 75% of the total amount spent must be used for payroll costs specifically. The remaining 25% of the amount may also be spent on qualifying non-payroll costs, i.e. costs related to continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; rent; mortgage/debt interest; and utilities.

“Payroll Costs” Defined

Payroll costs are considered paid on the day paychecks are distributed or the Borrowing Entity (“BE”) originates an ACH credit transaction. Payroll costs are generally incurred on the day the employee’s pay is earned (i.e., on the day the employee worked). For employees who are not performing work but are still on the borrower’s payroll, payroll costs are incurred based on the schedule established by the borrower (typically, each day the employee would have performed work).

“Payroll costs” equal the sum of payments of any compensation to employees that includes any of the following:

  1. Salary, wage, commission, or similar compensation (including draws and distributions to partners and LLC members treated as net earnings from self-employment that is subject to self-employment taxes);
  2. Payment of cash tip or equivalent based on employer records of past tips, or in the absence of such records, a reasonable, good-faith employer estimate of such tips;
  3. Payment for vacation, parental, family, medical, or sick leave;
  4. Allowance for dismissal or separation;
  5. Payment required for the provision of group health care benefits, including the employer-paid portion of insurance premiums;
  6. Any employer-paid retirement benefits; or
  7. Payment of state of local tax assessed on the compensation of employees.

“Payroll Costs” Do Not Include:

  1. Compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period of February 15, 2020 through June 30, 2020 (but not including employer provided health benefits and retirement benefits);
  2. Federal employment taxes imposed between February 15, 2020 and June 30, 2020, including the employer’s and employee’s share of FICA (Social Security and Medicare), the Railroad Retirement Act, and other payroll taxes;
  3. Any compensation to an employee whose principal place of residence is outside of the United States;
  4. Qualified sick leave or family leave wages for which a credit is already allowed under the Families First Coronavirus Response Act; and
  5. Payments to independent contractors.

Sole Proprietors or Independent Contractors

“Payroll costs” for these classifications include payments that are wages, commissions, incomes, or net earnings from self-employment, or similar compensation that does not exceed $100,000 in one year, as prorated for the covered period of February 15, 2020 through June 30, 2020.

Hazard Pay

PPP loan recipients may pay hazard pay or bonuses to an employee and have the bonus included in the loan forgiveness amount, if the employee’s total compensation does not exceed $100,000 on an annualized basis. However, loan recipients should avoid paying bonuses or hazard pay to any of its owners (including general partners, managing members, and those considered self-employed).

Consequences for Misuse of the PPP Loan

PPP loans are nonrecourse loans, meaning the SBA has no recourse against any individual shareholder, member, or partner of a BE for nonpayment the PPP loan, unless the PPP loan is knowingly used for an unauthorized purpose. In that case the government may charge a BE and/or its officers, directors, managers, shareholders, members, or partners with fraud for knowingly making a false statement to obtain a guaranteed loan from the SBA.


To receive loan forgiveness, a BE must complete and submit the Loan Forgiveness Application (SBA Form 3508 or lender equivalent form) to its lender. Lenders are expected to perform a good-faith review, in a reasonable time, of the BE’s calculations and supporting documents concerning amounts eligible for loan forgiveness.

It is the BE’s responsibility to provide an accurate calculation of the loan forgiveness amount. Furthermore, the BE must attest to the accuracy of its reported information and calculations on the Loan Forgiveness Application.

If the lender identifies errors in the BE’s calculation or a lack of substantiation in the BE’s supporting documents, the lender should work with the BE to remedy the issue.

Timing Is Important

Loan forgiveness is 100% for the total of certain costs incurred and paid during the covered period. The forgiveness is calculated under the timeframe of eight weeks from the disbursement of the loan. For payroll costs only, the borrower may choose to use the alternative payroll covered period, where the timeframe is the eight weeks after the first day of the first payroll cycle in the covered period.

Costs that can be included during the covered period:

  1. Cash compensation of up to $100,000 of annualized pay per employee (for eight weeks, a maximum of $15,385 per individual employee);
  2. Non-cash employee benefits incurred and paid by the employer during the covered period (without regard to the $100,000 limitation above) including:
    1. Employer contributions to defined benefit or defined-contribution retirement plans;
    2. Employer payments for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and
    3. Employer payment of state and local taxes assessed on employee compensation.
  3. Any interest payment on any mortgage on real or personal property that was incurred in the ordinary course of business before February 15, 2020;
  4. Any payment on any rent obligation under a lease agreement of which was in force before February 15, 2020; and
  5. Any utility payment for electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

A Payroll Cycle May Not Align With the Covered Period

The eight week covered period may not always align with a BE’s payroll cycle. If so, a BE with a bi-weekly (or more frequent) payroll cycle may choose to use the alternative payroll covered period. As long as those payroll costs are paid by the next regular payroll date, they will be eligible for forgiveness.

Non-Payroll Costs: Eligibility and the Covered Period

A non-payroll cost is eligible for forgiveness if it was:

  1. Paid during the covered period; or
  2. 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.

BE’s are NOT eligible to use the alternative payroll covered period for non-payroll costs.  However, the BE may seek loan forgiveness for the portion of a non-payroll cost bill through the end of the covered period, if it was incurred during the covered period and paid on the next regular billing date.

Owner-Employees and Self-Employed

The loan forgiveness amount requested for owner-employees and self-employed individuals payroll compensation can be no more than the lesser of 8/52 of 2019 compensation (i.e., approximately 15.38% of 2019 compensation) or $15,385 per individual in total across all businesses.

In particular, owner-employees are capped by the amount of their 2019 employee cash compensation and any employer retirement and health care contributions made on their behalf. Schedule C filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit.


General partners (including managing members of a limited liability company) are capped by the amount of their 2019 net earnings from self-employment (reduced by claimed Section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235.

No additional forgiveness is provided for retirement or health insurance contributions for self-employed individuals, including Schedule C filers and general partners, as such expenses are paid out of their net self-employment income.

Calculating the “Full-Time Equivalent Employee”

A BE must document their average number of full-time equivalent employees (FTE) and designate the selected reference period as the covered period or the alternative payroll covered period.

An employee who was paid for 40 hours or more per week during the covered period is considered to be a FTE employee of 1.0. For employees paid less than 40 hours, a BE has two options to determine FTE numbers:

  1. Calculate the average number of hours a part-time employee was paid per week during the covered period and divide that average by 40. For example, if an employee was paid for 30 hours per week on average during the covered period, the employee could be considered to be an FTE employee of 0.75. Similarly, if an employee was paid for ten hours per week on average during the covered period, the employee could be considered to be an FTE employee of 0.25.
  2. For administrative convenience, a BE may elect to use a full-time equivalency of 0.5 for each part-time employee.

Use of either method must be applied consistently to all part-time employees for the covered period or the alternative payroll covered period and the selected reference period.


There are few loan forgiveness limitations and importantly, the forgiveness amount cannot exceed the total principal amount of the PPP loan. In addition:

  1. BE is only eligible to be forgiven for what it incurs and spends during the selected eight week covered period or alternative payroll covered period, up to 100% of the total principal amount of the PPP loan.
  2. If a BE spends less than the full PPP loan amount during its selected period, the unspent portion will not be forgiven and will continue as a loan (to be repaid over two years).
  3. To be eligible for forgiveness, at least 75% of the total amount spent must by for payroll costs only. The remaining 25% of the amount may also be spent during the covered period on qualifying non-payroll costs, i.e. rent, mortgage/debt interest, and utilities.
  4. The remaining two-year loan amount (i.e., any amount of the PPP loan not forgiven) must also continue to be spent in the same 75/25 proportion. A BE must use the PPP loan consistent with the certifications made in the original PPP loan application and the subsequent forgiveness request.

Limitations and Forgiveness Tests

Employee Retention Test

The forgiveness amount will be reduced, but not increased, by multiplying the eligible forgiveness amount by the average number of FTE employees per month during the covered period compared to a reference period. BEs can choose either of these reference periods:

  1. Average number of FTE employees per month during February 15, 2019 to June 30, 2019, or
  2. Average number of FTE employees per month during January 1, 2020 to February 29, 2020, or
  3. Seasonal employers may choose either (a) or (b) above or a consecutive 12-week period between May 1, 2019 and September 15, 2019.

If the average number of FTE employees during the covered period or the alternative payroll covered period is less than during the reference period, the total eligible expenses available for forgiveness are reduced proportionally by the percentage reduction in FTE employees.

Rehire and Repaid Test

A BE should review employment levels from February 15, 2020 to April 26, 2020. If any staff were let go during this time, by June 30, 2020, the BE must bring the number of FTE employees back to the exact number of FTEs on February 15, 2020. The BE also should review if it reduced salary or wages of any employee during the period from February 15, 2020 to April 26, 2020. If so, June 30 is the deadline to use the PPP loan funds to make up the difference in pay resulting from such reduction.

Salary/Wage Test

The forgiveness amount will be reduced further if during the covered period, there is a more than 25% reduction in the salary and wages of employees who do not receive more than $100,000 in annualized salary or wages as compared to January 1, 2020 through March 31, 2020. The reduction calculation is performed on a per employee basis, not in the aggregate.


For Cause Exemption

When a BE fires an employee for cause, or the employee voluntarily resigns, or voluntarily requests a reduced schedule during the covered period or the alternative payroll covered period (FTE reduction event), the BE may count that employee at the same equivalency level before the FTE reduction event when calculating FTE employee reduction penalty.

A BE must maintain records demonstrating each such employee was fired for cause, voluntarily resigned, or voluntarily requested a schedule reduction. Documentation must be provided to the SBA upon request.

Rehire/Repaid Offer Exemption

Employees whom the BE offered to rehire are generally exempt from the CARES Act’s loan forgiveness reduction calculation. This exemption is also available if a BE previously reduced the hours of an employee and offered to restore the employee’s hours at the same salary or wages. Specifically, in calculating the loan forgiveness amount, a BE may exclude any reduction in FTE employee headcount that is attributable to an individual employee if:

  1. BE made a good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or the alternative payroll covered period;
  2. The offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;
  3. The employee rejected the offer;
  4. BE has maintained records documenting the offer and its rejection; and
  5. BE informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.


The loan recipient must submit an application to the lender servicing the loan for any portion of loan forgiveness (SBA Loan Forgiveness Application). The application includes:

  1. The PPP Loan Forgiveness Calculation Form;
  2. PPP Schedule A;
  3. PPP Schedule A Worksheet; and
  4. PPP Borrower Demographic Information Form (optional).

Timeframes on Notification and Follow Up From Lender

The lender will issue decisions within 60 days after receiving a complete loan forgiveness application. Here are the possible decisions and next steps:

  • Approval (in whole or in part): If the lender determines the BE is entitled to forgiveness of some or all of the loan amount, then the lender must submit a request for payment to the SBA. Subject to possible review of the loan, within 90 days after the lender issues its decision to the SBA, the SBA will remit the appropriate forgiveness amount to the lender plus any interest accrued through the date of payment.
  • Denial OR a Denial Without Prejudice due to a pending SBA review of the loan: If the lender, through its own review, determines the BE is not entitled to forgiveness in any amount, the lender must inform the BE of the decision in writing. The BE has 30 days from receipt of the lender’s denial decision to request a review of the lender’s decision from the SBA.

How will the Lender and the SBA review a BE’s PPP Loan?

The SBA may review any PPP loan of any size at any time in the SBA’s discretion. If it chooses to review an BE’s loan, the SBA will notify the lender in writing and the lender must notify the BE in writing within five business days of receipt of the SBA’s review notice to the Lender.

How long will PPP loan documentation be subject to review by the SBA?

The PPP loan documents will be subject to review by authorized representatives of the SBA, including representatives of its Office of Inspector General. A BE must retain the following documentation for six years after the date the loan is forgiven or repaid in full:

  1. All documentation submitted with its PPP loan application,
  2. All documentation supporting BE’s certifications for necessity of the loan;
  3. All documentation supporting BE’s eligibility for a PPP loan,
  4. All documentation necessary to support BE’s loan forgiveness application, and
  5. All documentation demonstrating the BE’s material compliance with PPP requirements.

Can I respond to the SBA review?

Yes, a BE will be contacted for a response if loan documentation or other information submitted to the SBA by the lender indicates the BE may be ineligible for a PPP loan or may be ineligible to receive the loan amount or loan forgiveness amount claimed. In that case, the SBA will either require the lender to contact the BE in writing to request additional information or the SBA will contact the BE directly.

Failure to respond to the inquiry may result in a determination the BE was ineligible for a PPP loan or ineligible to receive the loan amount or loan forgiveness amount claimed by the BE.

What happens if the SBA determines the borrower is ineligible?

  1. If the SBA determines a BE was never eligible for the PPP loan program in the first place and should not have ever received a PPP loan, then the SBA will direct the lender to deny the loan forgiveness application.
  2. If SBA determines the borrower is ineligible for the loan amount or loan forgiveness amount claimed, then the SBA will direct the lender to deny the loan forgiveness application in whole or in part, as appropriate. The SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies.

SBA decisions can be appealed and the SBA will issue further guidance on the appeal process.

The Paycheck Protection Loan Program is a complicated system with many pitfalls. It will only become more so as additional and supplemental guidance is issued by the SBA. Woods Rogers attorneys are able to guide you through completing your SBA and PPP documentation—including the Loan Forgiveness Calculation form, PPP Schedule A, and other important pieces of information. With the requirement to retain PPP documentation for at least six years, you must be sure of your calculations.

Read more legal updates on COVID-19 from Woods Rogers attorneys.


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