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SBA Provides Significant Guidance Regarding Loan Forgiveness, But More is Still Needed

On Friday evening, the Small Business Administration (SBA) created a Paycheck Protection Program (PPP) Loan Forgiveness Application that provided clarification regarding questions PPP borrowers have been waiting for surrounding debt forgiveness, including if eligible expenses for loan forgiveness need to be paid and incurred, as well as full-time employee equivalent hour requirements.

The original CARES Act legislation, Section 1106 Loan Forgiveness, provided that an eligible recipient is eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of costs incurred and payments made during the covered period for:

  • Payroll costs.
  • Any payment of interest on any covered mortgage obligation.
  • Any payment on any covered rent obligation.
  • Any covered utility payment.

Ensuring Eligibility is Still the First Concern

While I may sound like a broken record, the first requirement for debt forgiveness is ensuring that the business is an eligible recipient of a PPP loan. Many businesses who received a PPP loan have been active in creating contemporaneous documentation surrounding their good faith certification that the current economic uncertainty existing at the time of the loan created a need for funding to support their business’s ongoing operations. Fortunately, the SBA provided additional certification guidance on May 13 that delivered a sigh of relief for many small businesses. The SBA, in consultation with the Department of Treasury, confirmed that any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification in good faith.

Even so, for businesses with a PPP loan with an original principal amount of $2 million or more (including affiliated entity loans) contemporaneous documentation must not only certify that current economic uncertainty at the time of the loan made the loan request necessary to support ongoing operations, but must also take into account business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business through May 18. Such documentation is critical considering the lack of definition surrounding the additional requirement assessing business activity and what is considered to be “significantly detrimental.”

Payroll Costs


Provided that the business is eligible for a PPP loan, the SBA guidance clarified that, in general, payroll costs paid or incurred are eligible expenses for purposes of debt forgiveness. For purposes of measuring what time period to apply when determining the eligible payroll costs, the employer can elect to include expenses paid during the standard covered period or an alternative payroll covered period. As a reminder, the standard covered period starts on the PPP loan disbursement date and ends eight-weeks (56 days) afterward. For example, if the Borrower received its PPP loan proceeds on Monday, April 20, the first day of the covered period is April 20 and the last day of the covered period is Sunday, June 14.

However, the alternative covered payroll period was provided for administrative convenience to follow the payroll schedule of the PPP borrower. Under the alternative covered payroll period, the borrower can start the eight weeks on the first day of their first pay period following their PPP loan Disbursement Date. For example, if the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the alternative payroll covered period is April 26 and the last day of the alternative payroll covered period is Saturday, June 20. It is important to note that this alternate covered payroll period is only for payroll. Payments of interest on a covered mortgage obligation, payments on a covered rent obligation, and any covered utility payments would still follow the traditional covered period definition. In addition, if the alternative covered period is selected, that will also be utilized for determining the full-time employee equivalent testing (see example further below).

Either during the covered period, or alternative payroll covered period, eligible payroll costs that can be included in the calculation include payroll costs that are paid on the day that paychecks are distributed or the Borrower originates an ACH credit transaction. In addition, payroll costs incurred but not paid during the Borrower’s last pay period of the covered period (or alternative payroll covered period) are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the covered period (or alternative payroll covered period). It would appear based on this language if a business has back pay it has not been able to provide, from March or April, and paid it during the covered period or alternative payroll covered period, it would be included in the debt forgiveness calculation. The delay in this guidance most likely limited the ability for PPP businesses to maximize that opportunity. This would have been especially welcomed in the service industry sector, such as restaurants, where they are struggling to maximize their payroll to meet the 75 percent threshold when they aren’t allowed to be open.

Based on the application instructions for PPP Schedule A, the SBA indicates that the amount of payroll can include amounts paid to owners, including owner-employees, a self-employed individual, or general partners. While this is welcome news that partners can include their compensation in the debt forgiveness calculation, read carefully. The instructions go on to state that the amount is capped at the lesser of $15,385 for each individual or the eight-week equivalent of their applicable compensation in 2019. While it was clear in prior SBA guidance that a sole proprietor’s debt forgiveness would include payroll based on 8 weeks of 2019 Schedule C net profit reported, this would also require partners and S Corporation owners to realize that their compensation in 2020 cannot be greater than their 2019 compensation. In addition, the inclusion of payroll amounts paid to owners is after the inclusion of employee health insurance, contributions to employee retirement plans, and state and local taxes assessed on compensation. Therefore, only covered benefits for employees, not owners, should be included in the eligible payroll expenses.

In addition, PPP borrowers have been concerned with regards to the need for employers to pay employee covered benefits during the covered period, or now the alternative payroll covered period. While many businesses may be eligible to pay employee health insurance payments within the elected payroll covered period, the ability for employers to make payments to employee retirement plans during the covered period does not appear to be as flexible. Based on the SBA guidance, in order for payroll costs (which include employer payments for employee covered benefits), to be included in the debt forgiveness calculation they must be paid during the covered period (or alternative payroll covered period) or paid on or before the next regular payroll date. That may be easier said than done.

Nonpayroll Costs

Nonpayroll costs eligible for forgiveness include:

  • Payments of interest on any business mortgage obligation on real or personal property incurred before February 15, 2020.
  • Covered rent obligations: business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020.
  • Covered utility payments: 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.

In order for these expenses to be includible in the debt forgiveness calculation, they must be paid during the covered period (there is not an alternative covered period for these payments) 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. This clearly does not allow any pre-payment of mortgage interest, rent, or utilities to occur. However, if there were outstanding payments not yet made from March and April, it would appear that if they are paid during the covered period, they would be eligible expenses when determining debt forgiveness. However, the fact still remains that eligible nonpayroll costs cannot exceed 25 percent of the total forgiveness amount. There was no mention of related party rent payments in the most recent guidance, confirming whether it is allowable. This continues to make many PPP business owners nervous.

Further Calculations That Could Reduce Your Debt Forgiveness

After gathering information and documentation regarding the eligible expenses for debt forgiveness, you might be dismayed to learn that the journey has just begun. There are additional calculations that could decrease the amount of your debt forgiveness, even if the entire amount was spent on eligible expenses. PPP businesses must track full-time employee equivalency during specific testing periods and determine if there was a reduction pre- and post-PPP loans, while also monitoring if employees who make less than $100,000 annually had a 25 percent or greater salary reduction.

Full-Time Employee Equivalency (FTE’s)

Businesses must perform multiple calculations when trying to determine their FTEs. PPP borrowers must track the total average weekly FTE during the following time periods:

  • February 15, 2019 through June 30, 2019.
  • January 1, 2020 through February 29, 2020.
  • Any consecutive 12-week period between May 1, 2019, and September 15, 2019 for seasonal employers.
  • 8-week Covered Period or the Alternative Payroll Covered Period (as discussed above).

The SBA guidance has required the average number of hours per employee per week be tracked and that employees who work 40 or more hours per week will count as 1.0 FTE and the hours of employees who do not work 40 hours per week will be totaled and divided by 40 and rounded to the nearest tenth.

For example, assume the following:

  • Employee A: 50 hours.
  • Employee B: 40 hours.
  • Employee C: 20 hours.
  • Employee D: 30 hours.

Employee A and B would both count as 1.0 FTE and employee C and D would be equivalent to 1.3 (20+30/40), for a total FTE count of 3.3.

Alternatively, the SBA allows the borrower to elect a simplified method that would assign a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours. In the previous example, that would create an FTE count of 3 (1+1+0.5+0.5).

There are planning opportunities to maximize FTE counts for purposes of debt forgiveness during the covered or alternative payroll covered period provided PPP business start the process now, rather than waiting until after the covered period is complete. In addition, the SBA provides that a PPP borrower will not have to reduce FTE’s for:

  • Any positions for which the borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Payroll Covered Period which was rejected by the employee.
  • Any employees who during the Covered Period or the Alternative Payroll Covered Period:
    • Fired for cause.
    • Voluntarily resigned.
    • Voluntarily requested and received a reduction of their hours.

There is still a safe harbor if FTE employee levels can be restored by June 30, 2020. Specifically, SBA guidance states a PPP borrower is exempt from the reduction in loan forgiveness based on FTE employees if both of the following conditions are met:

  1. The Borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020.
  2. Also, the Borrower then restored its FTE employee levels by not later than June 30, 2020 to its FTE employee levels in the Borrower’s pay period that included February 15, 2020.

Unfortunately, the SBA did not provide any guidance regarding a de minimis exception. In other words, it would be ideal if a PPP borrower on June 30, 2020, is within 5 percent of their FTE on February 15, 2020, that the reduction in loan forgiveness would either not occur or be adjusted for the additional increase after the covered period until June 30, 2020. The SBA is not providing much incentive for PPP businesses to increase FTE after their covered period if they are unable to get to the full February 15, 2020, FTE count as of June 30, 2020. During such turbulent times, one would hope that the focus would be on increasing FTE count as much as possible, even if businesses are not able to fully recover by June 30th.

Taking it a step further, many industries, such as the accommodation and foodservice industries, are still in lockdown depending on their State’s reopening requirements and are unable to increase their payroll to meet the 75 percent requirement in order to maximize debt forgiveness. This does not reflect that these businesses don’t need funding, but instead the interplay between state and local government shut down and the ability to put people back to work. Many wonder why Congress can’t pivot and realize the need to adjust the June 30, 2020 date to be more reflective of need based on industry and geography. For example, could the June 30, 2020 date instead be interlinked with 30 or 60 days after your industry is allowed to open in your geographic location? The current HEROES Act that was recently pushed through the House included an extension of the covered period from June 30 to December 31st and the repeal of the requirement that 75 percent of the loan be spent on payroll. However, due to many other unrelated non-PPP provisions contained within the $3 trillion bill, which passed the House on Friday, there does not seem to be much support in the Senate, and the White House has announced the President does not support the bill.

Salary/Hourly Wage Reduction

The amount of loan forgiveness the borrower will receive can be further reduced, depending on whether the salary or hourly wages of certain employees during the covered period or the alternative payroll covered period was less than during the period from January 1, 2020, to March 31, 2020. Only employees who make $100,000 or less annually in 2019 or employees who were not employed by the borrower in 2019 are considered for this calculation. To make this determination, the following steps are required

Step 1:

(a). Enter the average annual salary or hourly wage during the Covered Period or Alternative Payroll Covered Period.

(b). Enter average annual salary or hourly wage between January 1, 2020, and March 31, 2020.

(c). Divide a/b. If it is .75 or more, you will not have a reduction. Determine if the safe harbor is met under Step 2. If safe harbor is not met, go to Step 3:

Step 2:
Safe Harbor Calculation (see application for more details)

Step 3:

  • Multiply the amount entered in 1b by .75.
  • Subtract the amounted entered in 1.a from 3.a.
  • Hourly worker computation.
  • Hourly worker computation.
  • If the employee is a salaried worker, the reduction in debt forgiveness is determined by multiplying the amount generated in 3.b by 8 and dividing by 52.

For example, let’s assume Chris made $65,000 for the 2019 year, was paid $6,400 for the covered period, and earned $16,250 for the time period between January 1, 2020 through March 31, 2020.

Under the required calculation would be as follows:

Step 1:

  • Average annual salary or hourly wage during the Covered Period: $41,600 (6,400/8*52).
  • Average annual salary or hourly wage between January 1, 2020, and March 31, 2020: $65,000 (16,250*4).
  • Percentage of Salary: 64 percent (41,600/65,000).

Assuming the safe harbor is not met, Step 3 would require that the amount of debt forgiveness be reduced by $1,100.

Step 3:

  • $48,750 (65,000 x 75 percent).
  • $7,150 (48,750-41,600).
  • N/A
  • N/A
  • $1,100 (7,150 * 8/52).

Determining whether the safe harbor is met requires yet another calculation. In summary, the safe harbor requires that an employee who received a greater than 75 percent salary reduction as calculated above must compare the employee annual salary or hourly wages as of February 15, 2020 to the period from February 15, 2020, through April 26, 2020. If the average annual salary or wages as of June 30, 2020, is equal to or greater than the amount paid to the employee on February 15, 2020 the safe harbor has been met. Again, there does not seem to be a de minimus policy, and the full debt forgiveness adjustment will occur (as calculated above) unless the entire salary paid on February 15 is fully restored by June 30.

Application Certifications


In addition, the SBA requires an authorized representative of the borrower to certify the following:

  • The dollar amount for which forgiveness is requested:
    • Was used to pay costs that are eligible for forgiveness (payroll costs to retain employees; business mortgage interest payments; business rent or lease payments; or business utility payments).
    • Includes all applicable reductions due to decreases in the number of full-time equivalent employees and salary/hourly wage reductions.
    • It does not include nonpayroll costs in excess of 25 percent of the amount requested.
    • It does not exceed eight weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385 per individual.
  • Applicants understand that if the funds were knowingly used for unauthorized purposes, the federal government may pursue recovery of loan amounts and/or civil or criminal fraud charges.
  • The Borrower has accurately verified the payments for the eligible payroll and nonpayroll costs for which the Borrower is requesting forgiveness.
  • Applicants have submitted to the Lender the required documentation verifying payroll costs, the existence of obligations and service (as applicable) prior to February 15, 2020, and eligible business mortgage interest payments, business rent or lease payments, and business utility payments.
  • The information provided in this application and the information provided in all supporting documents and forms is true and correct in all material respects. I understand that knowingly making a false statement to obtain forgiveness of an SBA-guaranteed loan is punishable under the law, including 18 USC 1001 and 3571 by imprisonment of not more than five years and/or a fine of up to $250,000; under 15 USC 645 by imprisonment of not more than two years and/or a fine of not more than $5,000; and, if submitted to a Federally insured institution, under 18 USC 1014 by imprisonment of not more than thirty years and/or a fine of not more than $1,000,000.
  • The tax documents I have submitted to the Lender are consistent with those the Borrower has submitted/will submit to the IRS and/or state tax or workforce agency. I also understand, acknowledge, and agree that the Lender can share the tax information with SBA’s authorized representatives, including authorized representatives of the SBA Office of Inspector General, for the purpose of ensuring compliance with PPP requirements and all SBA reviews.
  • Applicants understand, acknowledge, and agree that SBA may request additional information for the purposes of evaluating the Borrower’s eligibility for the PPP loan and for loan forgiveness and that the Borrower’s failure to provide information requested by SBA may result in a determination that the Borrower was ineligible for the PPP loan or a denial of the Borrower’s loan forgiveness application.

The guidance also provides a list of documents that each borrower must submit with their PPP Loan Forgiveness Application along with documents that the borrower must maintain but is not required to submit.

While this guidance is appreciated, there still seems to be an elephant in the room. It is still unclear what happens if a borrower does not use all of the PPP loan proceeds by June 30, and even some doubt of the time frame a borrower is allowed to evaluate when determining if the PPP principal amount was used on allowable expenses. While the covered period, and now alternative payroll covered period, is definitive for the debt forgiveness calculation, some are advising that only expenses paid after the loan was received are allowed to be evaluated as to whether you have utilized the PPP funding on eligible expenses by June 30th. The alternative argument, t which is consistent with the wording of the CARES Act itself, is that PPP funding can be used on eligible expenses paid between February 15, 2020 through June 30, 2020. You may be asking, who cares? While it has not happened to date, wouldn’t we all be surprised if the SBA were to issue guidance that any unused PPP funding has to be immediately paid back to the SBA and not allowed to be carried over a two-year period at a 1 percent interest rate? This uncertainty is causing some businesses to “overspend” after they received their loan proceeds to ensure they have utilized all the PPP proceeds on eligible expenses. However, this approach will ultimately only hurt their cash position moving forward.

Overwhelmed? You’re not the only one. While the additional SBA guidelines are welcomed for debt forgiveness, the guidelines can be cumbersome to many PPP borrowers. The good news is that advisors have been working closely with their clients, realizing the importance of planning and advising on ways to maximize debt forgiveness during the covered period and not afterward. Please do not hesitate to get in touch with our experts at Bonadio for help in understanding how to navigate these increasingly complex rules. Learn more by contacting us today in the button below.

The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement.  We, therefore, make no warranties, expressed or implied, on the services provided hereunder.