PPP Loan Forgiveness


NOTE—The Paycheck Protection Program Flexibility Act of 2020 amends the CARES Act and this article updates the information below>> click here to read more. 

This Article is based on information available as of April 29, 2020.  The information is subject to change as additional guidance is provided. In its interim rules dated April 2, 2020, the SBA stated that it will issue additional guidance on loan forgiveness. Additional guidance may change and/or clarify the manner in which loan forgiveness and related reductions in loan forgiveness are calculated.

Your business applied for and with luck received a loan ("PPP Loan") through the Payroll Protection Program ("PPP") established in the CARES Act.  While designed to maintain wages and salaries during the Coronavirus pandemic, the greatest appeal of the PPP Loan for most companies is the potential for loan forgiveness.  The two steps you need to take to ensure that your PPP Loan is forgiven in full is to spend the PPP Loan proceeds only on approved costs[1] and scrupulously document your spending during the eight weeks following receipt of the PPP Loan proceeds.

The amount of loan forgiveness can be up to the full principal amount of the PPP Loan and any accrued interest, provided the borrower uses all of the loan proceeds for forgivable purposes and employee and compensation levels are maintained.  Subject to the requirements described below, a company with a PPP Loan is eligible for forgiveness of the PPP loan in an amount equal to the sum of the following "costs incurred and payments made" during the eight weeks following its receipt of the loan proceeds:

Payroll Costs;

Interest on any covered mortgage obligation (not including any prepayment or payment of principal on a covered mortgage obligation);

Payment on any covered rent obligation; and

Payment of covered utility payment, which limited to electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020;

The CARES Act provides no guidance on the meaning or application of the phrase "costs incurred and payments made".   Does use of "and" in the phrase require any expense to be BOTH incurred AND paid within the eight-week period?  At the daily SBA Richmond District Office webinar on SBA Economics Resources for COVID-19 on April 29, 2020, the moderator stated that the SBA will not be looking at payroll expenditures to see when the Payroll Costs were incurred.  The SBA simply wants the funds to be spent on payroll.  The guidance being that the SBA will only look for verification that the PPP Loan proceeds were used for Payroll Costs. 

To ensure that 100% of your PPP Loan is forgiven, the following requirements must be met:

      1. At least 75% of the loan proceeds must be spent on eligible payroll costs;
      2. The company must maintain the average number of full-time equivalent employees ("FTEEs")[2] for each pay period falling within the eight weeks at the same level experienced by the employer during the FTEE Measuring Period (defined below);  and
      3. The company must maintain employee salaries for employees making under $100,000 annually at a level equal to 75% or greater than their previous salary, but for the employees with an annual salary of over $100,000, salaries can be reduced to $100,000.

To calculate the amount of loan forgiveness, the loan amount will be reduced proportionally by any reduction in FTEEs compared to the FTEE Measuring Period as well as any reduction in payment to an employee beyond 25% of their prior compensation (for those employees who otherwise make less than $100,000 per year). Further, to incentivize employers to retain and re-hire employees, borrowers will not be penalized for having a reduced payroll at the beginning of the period, if workers are re-hired or salaries restored to prior levels no later than June 30, 2020.

The reduction formula for fewer employees is: (a) the maximum available forgiveness, multiplied by (b) (i) the average number of FTEEs per month — calculated by the average number of FTEEs for each pay period falling within a month — during the eight week period, (ii) divided by either (at election of the borrower), the average number of FTEEs per month employed from February 15, 2019 to June 30, 2019, or from January 1, 2020 until February 29, 2020 (the "FTEE Measuring Period").[3]

To obtain forgiveness of the PPP Loan the borrower must promptly apply to its servicing lender following the eight-week period after initial receipt of the loan proceeds. . The application must include:

Documentation verifying the number of FTEEs, pay rates, including IRS payroll tax filings and State income, payroll and unemployment insurance filings;

Documentation verifying payments on covered mortgage obligations, lease obligations, and utilities; and

Certification from a representative of the business or organization that is authorized to certify that the documentation provided is true and that the amount for which forgiveness is requested was used in accordance with the PPP guidelines for use.

The lender is required to issue a decision on an application for loan forgiveness within 60 days after the date on which it receives the application.  The amount of loan forgiveness, which would ordinarily for tax purposes be reported as income, shall be excluded from gross income of the borrower.[4]

Any amount of a PPP Loan that is not forgiven must be paid within two years of the PPP Loan proceeds being paid to the borrower, together with interest at the rate of 1% per annum.  No payments will be due until six months after the PPP Loan proceeds are paid to the borrower.

[1] If PPP Loan proceeds are used for unauthorized purposes, such amounts are not eligible for loan forgiveness and the Small Business Administration will direct the borrower to repay those amounts. If a company knowingly uses PPP Loan proceeds for unauthorized purposes, the company will be subject to additional liability such as charges for fraud and possibly have recourse for those amounts against the principals for the unauthorized use.

[2] Note that for PPP Loan forgiveness, the company needs to compute the average number of FTEEs, but eligibility for a PPP Loan is based on the number of employees.  The CARES Act requires a business to determine its average number of FTEEs for each pay period falling within one of the many different months that are part of the prescribed formula, but provides no guidance on how to quantify FTEEs. Presumably, the standard approach of dividing the number of working hours for a pay period into the total hours worked will be permissible.

[3] For seasonal employers a FTEE Measuring Period of February 15, 2019 until June 30, 2019 may be used.

[4] Currently there is no guidance on whether payroll costs paid by a company with the forgiven portion of a PPP Loan may not be deducted by the company as expenses on its 2020 income tax returns.


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