PPP Loan Forgiveness Application Released: A Guide To PPP Loan Forgiveness


The Small Business Administration (“SBA”) has now published the Paycheck Protection Program (“PPP”) Loan Forgiveness Application and its related instructions, providing some much anticipated clarification on a number of PPP loan provisions. 

The application provides detailed instructions for borrowers on how to obtain and calculate PPP loan forgiveness, guidance regarding what is includable in payroll costs and the timing of inclusion of payroll costs incurred, as well as information on a number of other issues.  The PPP application form and accompanying instructions and worksheets can be found here.  You can find more information on PPP loans in our previously issued alerts here, here, and here.

Flexible Periods for Calculating Payroll Costs

In order to be eligible to receive full forgiveness, a borrower must use at least 75% of the PPP loan proceeds on payroll costs.  Up until now, SBA guidance provided that payroll costs were to be calculated using the eight-week (56-day) period following the origination of the PPP loan (the “Covered Period”).  The application provides some welcomed flexibility with respect to this calculation period. 

Borrowers with biweekly or more frequent pay periods now have an option of choosing to either use the Covered Period or an Alternative Payroll Covered Period to calculate payroll costs.  The Alternative Payroll Covered Period starts on the first day of the first pay period following the PPP loan disbursement date and ends eight weeks (56 days) following that date. 

Timing of Payroll Costs

Many borrowers have questioned whether payroll costs are to be calculated using the cash or accrual method.  The application clarifies that payroll costs include both payroll paid and incurred during the Covered Period or, if so elected, the Alternative Payroll Covered Period.  In general, payroll costs include cash compensation (salary, wages, commissions, cash tips or the equivalent, vacation, paid leave, and allowances for dismissal or separation) paid to employees whose principal place of residence is in the United States, along with group health care coverage, retirement contributions, and state and local taxes assessed on compensation.  The SBA’s interim rule that defines payroll costs is found here

Payroll costs are considered to have been paid on either (i) the day paychecks are distributed to employees or (ii) the day an ACH credit transaction is originated.  Payroll costs are considered incurred on the day the employee earns the pay, as long as the earned pay is paid on the next regular payroll date.

Finally, the application provides that the maximum amount of cash compensation that can be included for an employee during the Covered Period or Alternative Payroll Covered Period is $15,385.  This guidance clarifies the requirement that payroll costs only include cash compensation paid to an employee up to $100,000 on an annualized basis.

Permissible Nonpayroll Costs

New guidance was also provided regarding what may be included as nonpayroll costs.  Nonpayroll costs which can be paid with PPP funds for loan forgiveness purposes include mortgage interest, rent, and utilities.  Pursuant to the application instructions, rent obligations include both real and personal property rent that is paid pursuant to a lease agreement.  Utility payments include gas, water, transportation, telephone, or internet access.  All nonpayroll costs must be subject to an underlying obligation which was initially incurred before February 15, 2020. 

Although the Covered Period must be used for non-payroll costs, there is nonetheless some good news as to the timing of inclusion of nonpayroll costs.  As was the case with payroll costs, nonpayroll costs paid or incurred during the Covered Period which are paid on or before the next regular billing date are includable in the loan forgiveness calculation. 

Calculation of Loan Forgiveness and Loan Forgiveness Reduction

If a borrower uses 75% or more of the PPP loan proceeds on payroll costs and the remainder on permissible nonpayroll costs, the total amount of the PPP loan is eligible for forgiveness, subject to the application of any loan forgiveness reduction.  If less than 75% of the PPP loan proceeds are used on payroll costs, a borrower may still be eligible for some loan forgiveness, but the maximum amount of that loan forgiveness will be the total of the borrower’s actual includable payroll costs divided by 75 percent, again subject to the application of any loan forgiveness reduction. 

Under the loan forgiveness reduction, a borrower’s maximum loan forgiveness may be reduced if the borrower has a reduced number of average full time equivalent (“FTE”) employees during the Covered Period or the Alternative Payroll Covered Period as measured against, as chosen by the borrower, either the period beginning on January 1, 2020 and ending on March 31, 2020, or the period beginning on February 15, 2019 and ending on June 30, 2019 (subject to certain safe harbors). 

Average FTEs are based on the average number of hours for which an employee is paid per week, divided by 40 and rounded up to the nearest one-tenth of an hour (with a cap of 1.0).  Borrowers can also use a simplified method of assigning 1.0 to each employee who worked 40 hours per week and 0.5 to each employee who worked less than 40 hours per week.

The application clarifies that borrowers will not need to count toward their reduced headcount any individuals whose employment was terminated for cause, who voluntarily resigned, who voluntarily requested and received a reduction of their hours, or with respect to whom the borrower made a written good faith offer to rehire which was declined.

Other Significant Provisions

In completing the application, borrowers must confirm whether the borrower, together with its affiliates, received a PPP loan or loans in excess of $2 million.  This means that borrowers must make a determination prior to submitting the PPP application as to whether there are any related entities which received PPP loans and would be considered to be an affiliate of the borrower.  Under SBA rules, entities may be considered to be affiliates based on such factors as stock ownership, overlapping management, and identity of interest.  The SBA’s affiliation rule is found here.

Significantly, the application form and instructions include certifications that the borrower must make, which include various acknowledgements of the potential penalties for a fraudulent application or the misuse of PPP loan funds.

The application requires that borrowers maintain documentation related to the PPP loan for at least six years after the loan is forgiven or repaid in full.  We suggest that businesses diligently document all aspects of the PPP loan and the forgiveness application and retain that documentation, as the SBA will certainly be conducting audits of PPP loans in the coming months and years.  

As a final note, in addition to a borrower familiarizing itself with the SBA forgiveness application and related instructions, it is also essential that each borrower consider and comply with any additional requirements or procedures required by such borrower’s specific lender. 

If you have questions on the Paycheck Protection Program, you can reach out to the attorneys at Atkinson, Andelson, Loya, Ruud & Romo.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process. 

©2020 Atkinson, Andelson, Loya, Ruud & Romo



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