Additional PPP Loan Forgiveness Guidelines

06/02/2020 by Ray W. King, Esq.

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 May 22, 2020.  The information is subject to change as additional guidance is provided.


The SBA has published the PPP Loan Forgiveness Application (SBA Form 3508) which can be downloaded here and on May 22, 2020 the SBA published its Interim Final Rule on PPP Loan Forgiveness (“Rule”).  This Rule provides additional guidance on the uses of PPP Loan proceeds that will be eligible for forgiveness.

Generally, the following costs incurred and payments made during the Covered Period may be forgiven:

    1. Payroll Costs;
    2. Interest payments on any business mortgage obligation on real or personal property that was incurred before February 15, 2020 (but not any prepayment or payment of principal);
    3. Payments on business rent obligations on real or personal property under a lease agreement in force before February 15, 2020; and
    4. Business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

Payroll Costs consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation.  The Rule clarifies that if a Borrower pays furloughed employees their compensation even though they may not be doing productive work, those Payroll Costs are eligible for forgiveness, so long as they do not exceed an individual annual salary of $100,000, prorated for the Covered Period or Alternate Payroll Covered Period (defined below).  Also, hazard pay and bonuses paid to employees are similarly eligible for forgiveness so long as an employee’s compensation does not exceed $100,000 annualized.

Payroll Costs paid or incurred during the eight consecutive week (56 days) “Covered Period” or “Alternate Payroll Covered Period” are eligible for forgiveness.  For Payroll Costs Borrowers may choose to use either (i) a “Covered Period” of 56 days beginning on the date of disbursement of the Borrower’s PPP loan proceeds from the Lender; or (ii) an “Alternate Payroll Covered Period” of 56 days beginning on the first day of the first payroll cycle in the Covered Period.  Payroll Costs are considered paid on the day that paychecks are distributed or the Borrower originates an ACH credit transaction. Payroll Costs incurred during the Borrower’s last pay period of the Covered Period or the Alternative 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) to be eligible for forgiveness.  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 that the employee would have performed work).

Payroll Costs paid to owner-employees and self-employed individuals are eligible for forgiveness, but subject to limitations.  The amount forgiven may not exceed the lesser of 8/52 (approx. 15.38%) of their 2019 cash compensation or $15,385.00 for the Covered Period or Alternate Payroll Covered Period.  In particular, owner-employees are capped by the amount of their 2019 employee cash compensation, employer retirement and health care contributions.  Schedule C filers are capped by the amount of their owner compensation replacement, calculated based on 2019 net profit. General partners 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.

Non-Payroll Costs, that is, mortgage interest payments, rent and utility payments are eligible for forgiveness if the payment was:

    1. paid during the Covered Period or Alternate Payroll Covered Period; or
    2. incurred during the Covered Period or Alternate Payroll Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.

Pre-payments of mortgage interest and rent are not eligible for forgiveness.

The CARES Act mandates that the amount of a PPP Loan forgiven will be reduced based on reductions (i) in full-time equivalent employees (“FTEE”) or (ii) in employee salary and wages during the Covered Period or Alternate Payroll Covered Period. 

    1. FTEE — The Rule specifies that a FTEE means an employee who works 40 hours or more, on average, each week. The hours of employees who work less than 40 hours are calculated as proportions of a single full-time equivalent employee and aggregated. Borrowers must document their average number of FTEE during the Covered Period (or the Alternative Payroll Covered Period) and their selected Reference Period (defined below).  For purposes of this calculation, Borrowers must divide the average number of hours paid for each employee per week by 40, capping this quotient at 1.0.  For example, an employee who was paid 48 hours per week during the Covered Period would be considered to be an FTE employee of 1.0.  For employees who were paid for less than 40 hours per week, Borrowers may choose to calculate the full-time equivalency in one of two ways.  First, the Borrower may calculate the average number of hours a part-time employee was paid per week during the Covered Period.  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 FTEE of 0.75.  Alternately, Borrowers may elect to use a full-time equivalency of 0.5 for each part-time employee. Borrowers shall select a method and apply that method consistently to all of their part-time employees for the Covered Period or the Alternative Payroll Covered Period and the selected Reference Period (defined below).

In general, a reduction in FTEE during the Covered Period or the Alternative Payroll Covered Period reduces the PPP Loan forgiveness by the same percentage as the percentage reduction in FTEE.  The Borrower must first select a “Reference  Period” of: (i) February 15, 2019 through June 30, 2019; (ii) January 1, 2020 through February 29, 2020; or (iii) in the case of a seasonal employer, either of the two preceding methods or a consecutive 12-week period between May 1, 2019 and September 15, 2019.  If the average number of FTEE during the Covered Period or the Alternative Payroll Covered Period is less than during the Reference Period, the total eligible expenses available for forgiveness is reduced proportionally by the percentage reduction in FTEE.  The Borrower shall provide the aggregate total of FTEE for both the selected Reference Period and the Covered Period or the Alternative Payroll Covered Period, by adding together all of the employee-level FTEE calculations. Then divide the average FTEE during the Covered Period or the Alternative Payroll Covered Period by the average FTEE during the selected Reference Period, resulting in the reduction quotient.

ii. Employee Salary and Wage Reduction — The CARES Act also requires that a reduction in an employee’s salary or wages in excess of 25 percent will generally result in a reduction in loan forgiveness. Specifically, for each new employee in 2020 and each existing employee who was not paid more than the annualized equivalent of $100,000 in any pay period in 2019, the Borrower must reduce the total forgiveness amount by the total dollar amount of the salary or wage reductions that are in excess of 25 percent of base salary or wages between January 1, 2020 and March 31, 2020 (the reference period), subject to exceptions for Borrowers who restore reduced wages or salaries). This reduction calculation is performed on a per employee basis, not in the aggregate. The Rule provides the following example:

A Borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the Covered Period. The employee continued to work on a full-time basis during the Covered Period with an FTEE of 1.0. In this case, the first $250 (25 percent of $1,000) is exempted from the reduction. Borrowers seeking forgiveness would list $400 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by eight weeks).

But, to ensure that Borrowers are not double penalized, the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTEE reduction.  This is demonstrated by the following example provided in the Rule:

An hourly wage employee had been working 40 hours per week during the Borrower selected reference period (FTEE of 1.0) and the Borrower reduced the employee’s hours to 20 hours per week during the Covered Period (FTEE of 0.5). There was no change to the employee’s hourly wage during the Covered Period. Because the hourly wage did not change, the reduction in the employee’s total wages is entirely attributable to the FTEE reduction and the Borrower is not required to conduct a salary/wage reduction calculation for that employee.

The CARES Act also provides that if certain employee salaries and wages were reduced between February 15, 2020 and April 26, 2020 (the safe harbor period) but the Borrower eliminates those reductions by June 30, 2020 or earlier, the Borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in salaries and wages. Similarly, if a Borrower eliminates any reductions in FTEE occurring during the safe harbor period by June 30, 2020 or earlier, the Borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in FTEE.  This does not change or affect the requirement that at least 75 percent of the loan forgiveness amount must be attributable to Payroll Costs.

The Rule also provides for relief from forgiveness reductions for terminated employees whom the Borrower offered to rehire and for an employee whose hours were previously reduced and the Borrower offered to restore the employee’s hours at the same salary or wages and the employee declined.  In calculating the loan forgiveness amount, a Borrower may exclude any reduction in FTEE headcount that is attributable to an individual employee if:

    1. the Borrower 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;
    1. the offer was rejected by such employee;
    1. the Borrower has maintained records documenting the offer and its rejection; and
    2. the Borrower 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 Rule further clarifies that Borrowers should not be penalized for changes in employee headcount that are the result of employee actions and requests.  When an employee of the Borrower is fired for cause, voluntarily resigns, or voluntarily requests a reduced schedule during the Covered Period or the Alternative Payroll Covered Period, the Borrower is permitted to count such employee at the same full-time equivalency level for FTEE purposes. Borrowers are required to maintain records demonstrating that each such employee was fired for cause, voluntarily resigned, or voluntarily requested a schedule reduction and provide such documentation to Borrower’s lender or the SBA upon request.

Generally, in order to ensure that a PPP Loan is forgiven in full must expend the PPP Loan proceeds only on approved costs, scrupulously document the spending during the Covered Period or Alternative Payroll Covered Period and meet the following requirements:

    1. At least 75% of the loan proceeds must be spent on eligible Payroll Costs;
    2. The company must maintain the average number of FTEEs for the Covered Period or the Alternate Payroll Covered Period at the same level experienced by the employer during the FTEE Measuring Period; 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.

The PPP Loan Forgiveness Application is made up of several parts including (1) a Loan Forgiveness Calculation Form, (2) a PPP Schedule A, (3) a PPP Schedule A Worksheet, (4) a list of documents and information that must be submitted with the completed Application and a list of documents that must be maintained by the Borrower for a period of 6-years, (5) a PPP Borrower Demographic Information Form and (6) instructions for each.  The PPP Schedule A Worksheet walks the Borrower through the necessary calculations to determine whether the entire amount of the PPP Loan is eligible for forgiveness, and if not, calculates the amount of necessary reductions.

Each Borrower is required to maintain the following documents and/or information for a period of 6-years after the date the loan is either forgiven or paid in full:

    1. PPP Schedule A Worksheet or its equivalent.
    2. Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 1, including the “Salary/Hourly Wage Reduction” calculation, if necessary.
    3. Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 2; specifically, that each listed employee received during any single pay period in 2019 compensation at an annualized rate of more than $100,000.
    4. Documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule.
    5. Documentation supporting the PPP Schedule A Worksheet “FTE Reduction Safe Harbor.”
    6. All records relating to the Borrower’s PPP loan, including:
      1. documentation submitted with its PPP loan application,
      2. documentation supporting the Borrower’s certifications as to the necessity of the loan request and its eligibility for a PPP loan,
      3. documentation necessary to support the Borrower’s loan forgiveness application, and
      4. documentation demonstrating the Borrower’s material compliance with PPP requirements.

The Borrower is also required to permit authorized representatives of SBA, including representatives of its Office of Inspector General, to access such files upon request.


About the Author

Ray W. KingRay W. King focuses his practice on commercial real estate, real estate litigation and commercial foreclosures. His commercial real estate practice encompasses all aspects of commercial real estate transactions including representing clients in the purchase, sale, financing and defeasance of high rise office buildings, office parks, shopping centers and apartment complexes in the eastern United States. 

For more information, please contact Ray at