PPP Loan Forgiveness Guidelines

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PPP Loan Forgiveness Graphic

The Paycheck Protection Program (PPP), established under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), provides funds to businesses for the purpose of paying up to 8 weeks of payroll and operating costs. PPP funds were offered as a forgivable loan as long as certain criteria on the use of the funds are met.

On May 15, 2020 the Small Business Administration (SBA) and the Treasury Department released the Paycheck Protection Loan Forgiveness Application (SBA Form 3508). Recently the SBA released its guidance to assist businesses in completing the application. PPP loans are forgivable if during an 8-week period beginning on the date a business receives funds (the “Covered Period”):

  • At least 75% of the loan proceeds are used for payroll costs (wages, salary, commissions, family medical and sick leave, group health benefits including insurance premiums) as further detailed below;
  • No more than 25% of the loan proceeds are used for operating costs paid or incurred during the Covered Period such as (a) rent or lease payments on real or personal property (for agreements in place before February 15, 2020) (b) mortgage interest payments on real or personal property (incurred before February 15, 2020), and (c) utilities for which service began before February 15, 2020 (electricity, gas, water, transportation, telephone or internet access); and
  • The business must maintain the same average number of full-time employees (FTE) at the end of the 8-week period

For businesses with bi-weekly or more frequent payroll periods, an “Alternative Covered Period” may be used which begins on the first day of the business’ first payroll period after it received the loan proceeds and ends at the end of an 8-week period.

NEW:  The SBA has added a new Loan Forgiveness Application Form EZ with instructions which take into account new rules issued on June 16, 2020 clarifying the new limits on income replacement that apply to owner-employees and partners. The EZ form requires less calculations and documentations for qualified borrowers.

Qualified borrowers can use the EZ form when applying for loan forgiveness if they meet one of the following:

  • If the borrower is self-employed, an independent contractor or sole proprietor and had no employees when submitting the PPP loan application and did not provide employee salaries in computing average monthly payroll on the application
  • If the borrower did not reduce the annual salary or hourly wages of any employee by more than 25% during the Covered Period or Alternative Covered Period compared to the period between January 1, 2020 and March 31, 2020 AND borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period
  • Borrower did not reduce the annual salary or hourly wages of any employee by more than 25% during the Covered Period or Alternative Covered Period compared to the period between January 1, 2020 and March 31, 2020 AND borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020 due to compliance established or guidance issued between March 1, 2020 and December 31, 2020 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, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

NEW:  The new rules under the EZ Form provide:

  • If a borrower elects the 8-week covered period, the maximum forgivable payroll for owners AND highly compensated employees is $15,385 ($100,000 prorated to 8 weeks)
  • If a borrower elects the 24-week covered period, the maximum forgivable payroll for owners is $20,833 ($100,000/12 x 2.5 months of 2019 net profit). For highly compensated employees the maximum forgivable payroll is $46,154 ($100,000 prorated to 24 weeks)
  • Health insurance costs for S corporation owners cannot be included in calculating payroll costs; however, retirement costs for S corporation owners are eligible costs
  • Safe harbors for excluding salary and hourly wage and FTE reductions from loan forgiveness reductions can be applied as of the date the loan forgiveness application is submitted. Borrowers do not have to wait until December 31 to apply for forgiveness to use the safe harbors

Eligible Payroll Costs Explained

Payroll costs paid or incurred (earned) during the Covered Period or an Alternative Covered Period are eligible for forgiveness. Payroll incurred during the last pay period of the Covered Period must be paid on the next regular payroll date to be eligible for forgiveness.

Cash Compensation

Payroll costs include cash compensation of an employee of up to $100,000 annually (prorated at $15,385 for the Covered Period). Cash compensation includes (a) gross wages (b) gross tips (c) gross commissions (d) paid leave (vacation, family, medical or sick leave, not including leave covered under the CARES Act) and (e) severance payments. Cash compensation for owner-employees, partners and self-employed individual is capped at the lower of (a) $15,385 (8-week equivalent of $100,000 annually) or the eight-week equivalent of the owner’s applicable compensation in 2019.

                Non-cash Compensation

Payroll Costs also include non-cash compensation such as (a) contributions to self-insured or employer sponsored group health plans (b) contributions to employee retirement plans and (c) employer state and local taxes such as state unemployment taxes.

Exclusions from Payroll Costs

Certain payroll expenses are excluded from payroll costs eligible for forgiveness under the PPP:

  • Cash compensation of an employee or self-employed individual in excess of $100,000 annually (prorated at $15,385 for the Covered Period)
  • Employer’s share of federal payroll taxes (e.g., Social Security and Medicare)
  • Any employer state and local taxes withheld from employees’ earnings
  • Payments to independent contractors
  • Pre-tax and after tax employee contributions to employer sponsored group health plans and employee retirement plans
  • Compensation of employees whose principal place of residence is outside the United States
  • Qualified sick leave of Family Medical Leave Act (FMLA) for which a credit is available under the Families First Coronavirus Response Act (FFCRA)

FTE and Employee Wage Requirements

                FTE Requirement

To be eligible for complete loan forgiveness, the SBA requires that the borrower maintain the same average number of FTE employees during the Covered Period as compared to a chosen reference period (either between February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020). The SBA provides rules for calculating the average number of FTE (with employees who work 40 hours or more as 1 FTE and employees who work less than 40 hours per week as .5 FTE). Loan forgiveness may be reduced if there is a reduction in the average number of FTE during the Covered Period as compared to the chosen reference period.

A few exceptions to the no reduction rule apply: any reduction in the FTE due to (a) rejections of offers by employees after the employer made a good faith effort to rehire (b) terminations for cause (c) voluntary resignations or (d) voluntary requests for reduction in employees’ hours.

The SBA also provides a safe harbor for businesses if both of the following conditions are met: (a) the business reduced its number of FTE employees during the time period beginning February 15, 2020 and ending on April 26, 2020 and (b) the employer restored its number of FTE employees by June 30, 2020 that was in existence during the pay period including February 15, 2020. There is no requirement that the same employees that were employed on February 15, 2020 be rehired.

                Wage Requirement

Loan forgiveness may also be reduced if employees’ wages are reduced by more than 25% during the Covered Period as compared to the period of January 1, 2020 to March 31, 2020. The reduction guidelines however do not apply to employees with compensation in excess of $100,000 annually.

IRS Guidelines

In April 2020, the Internal Revenue Service (IRS) issued guidance stating that PPP loans will not be included in businesses’ and taxpayer’s gross income and that expenses related to the PPP loans will not be tax deductible.


Businesses applying for PPP loans are required to make a good faith certification regarding the need of the loan. Businesses who (together with affiliates) receive PPP loans of $2 million or more will be audited by the Treasury Department. Form 3508 requires businesses that (together with affiliates) receive $2 million or more to check a box. Businesses who receive less than $2 million will be deemed to have made the required certification regarding the necessity of PPP funds.

Use of Funds and Practical Guidelines

All PPP proceeds must be used during the 8-week period in order to be forgiven and as outlined above, and at least 75% of the proceeds must be used for payroll costs. Any proceeds not used for payroll or operating expenses during the Covered Period will not be eligible for forgiveness and will need to be repaid. If any PPP proceeds are left over at the 8-week period, businesses should consider accelerating payroll or contributing to employee benefit programs. If less than 75% of the proceeds are used for payroll costs, or not all PPP proceeds are used, businesses will be eligible for loan forgiveness on the amount of proceeds actually used for payroll and operating expenses.

Any proceeds not forgiven will need to be paid back over a 24-month period at an interest rate of 1%. No payments are required to be made during the first 6 months of the repayment period, however interest will accrue during the 6 month period. Businesses who received PPP proceeds and decided they did not need the funds had until May 7, 2020 to return the funds.

Businesses that receive PPP funds should carefully track the use of the funds keeping loan forgiveness in mind. Keeping a spreadsheet of expenses paid with PPP loan proceeds, opening a separate checking account, issuing separate checks or billing against PPP loan funds for eligible expenses can minimize the administrative burden later on when completing the application for loan forgiveness.

Regulations on the PPP are changing regularly and this article is a summary of the PPP forgiveness guidelines as of the date of the article. We are constantly monitoring changes in the regulations related to COVID-19 and providing updates on our COVID-19 Business and Real Estate Page. For additional details please contact Natalya Belonozhko at natalya@horensteinlawgroup.com, Cindy Horenstein at cindy@horensteinlawgroup.com, Maren Calvert at maren@horensteinlawgroup.com or Steve Horenstein at steve@horensteinlawgroup.com.

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