Main Menu
Print PDF

“Forgive Me SBA, For I Have Complied With the PPP”: SBA Releases PPP Loan Forgiveness Application

Corporate and Securities Alert | May 18, 2020
By: Ryan J. Udell and Adam J. Chelminiak

On May 15, 2020, the U.S. Small Business Administration (SBA) and the U.S. Department of the Treasury (Treasury) released the Paycheck Protection Program (PPP) loan forgiveness application and related instructions (Application). The Application offers eagerly awaited guidance on some, but not all, of the lingering questions concerning on how and for what costs borrowers can receive forgiveness for their PPP loans, the engine that fueled the intense popularity of the PPP.

The CARES Act provided a powerful incentive for borrowers by making PPP loans eligible for forgiveness up to the full principal amount of the loan. Under Section 1106 of the CARES Act, “costs incurred and payments made” with respect to certain designated uses during the eight-week period following the initial disbursement of the loan (the Covered Period) would be eligible for forgiveness.[1] But in order to incentivize PPP recipients to keep their employees on the payroll (or bring back furloughed or laid off employees) and restore substantial pay reductions, the Act included a mechanism for reducing the amount of a borrower’s forgiveness based on reductions on the borrower’s number of full-time equivalent employees and/or reductions of more than 25% in the salary or wages of certain employees during the Covered Period. The framework for forgiveness outlined in Section 1106, however, left many fundamental questions unanswered.

Subsequent interpretative guidance issued by the SBA and the Treasury addressed loan forgiveness in limited instances (for example, introducing a requirement that 75% of the forgiveness amount be used on payroll costs), but generally deferred any deeper discussion to a pending SBA interim final rule to be focused entirely on loan forgiveness. That interim final rule still has not been released; meaning borrowers who received PPP loans have now burnt weeks off their “Covered Period shot clock” operating in the dark on deciding how the loan proceeds should be used without disturbing future eligibility for forgiveness. As a result, the information provided on the Application form and accompanying instructions is welcome direction for borrowers, although the SBA’s interim final rule will ultimately be needed to resolve all questions.

This alert outlines the key points on PPP loan forgiveness addressed by the Application.

Eligible Costs Incurred and Paid

One of the most significant questions raised by the CARES Act is whether eligible costs had to be both “incurred and paid” during the Covered Period. If so, since payroll is typically paid in arrears, this would have seemed to exclude, for example, payroll costs that were paid during the Covered Period that related to services performed prior to the Covered Period, as well as payroll costs incurred for services performed during the Covered Period that are not paid until after the conclusion of the Covered Period. The Application answers this question by extending the period in which borrowers can pay payroll costs and other eligible costs that are incurred.

In particular, the Application explains that payroll costs incurred, but not paid, during the last pay period of the Covered Period (or Alternative Payroll Covered Period, discussed below) 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). Payroll costs are considered paid when the checks are distributed or a borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day the employee’s pay is earned. The Application does not directly answer whether a borrower is able to pay bonuses to employees during the Covered Period and include such amounts in the forgiveness amount, although it appears that at least the portion of any such bonus accruing during the Covered Period would be eligible.

Eligible non-payroll costs must be paid during the Covered Period 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). Accordingly, the Application answers another question many have had – borrowers cannot prepay rent or utility payments during the Covered Period.

Regardless, payroll and other eligible non-payroll costs that were both paid and incurred during the Covered Period can be included in the forgiveness amount only once.

Alternative Payroll Covered Period

The Application adds a new option for borrowers with a biweekly (or more frequent) payroll schedule to elect to calculate payroll costs eligible for forgiveness during the eight-week (56-day) period that begins on the first day of their first pay period following the disbursement date (the Alternative Payroll Covered Period). Borrowers electing to use the Alternative Payroll Covered Period to determine their forgiveness amount must continue using that period consistently, for example, when calculating possible forgiveness reductions based on average FTE’s and wage reductions. The Alternative Payroll Covered Period only applies with respect eligible payrolls costs

Full-Time Equivalent Calculation

The CARES Act provides that the amount of forgiveness will be reduced based on a reduction in a borrower’s average monthly full-time equivalent employees (FTE’s), but did not define or explain how to calculate FTE’s. Despite widespread speculation that the PPP FTE determination would be consistent with Affordable Care Act’s 30 hours per week definition, the Application now explains that the FTE calculation is determined for each employee by dividing the average weekly hours by 40, rounded to the nearest tenth.

FTE Reduction

A borrower’s loan forgiveness amount will be reduced (the FTE Reduction) if its average weekly FTE employees during the Covered Period (or, if elected, the Alternative Payroll Covered Period) is less than during the borrower’s average weekly FTE employees during a chosen reference period (Reference Period) of either (i) February 15, 2019-June 30, 2019, (ii) January 1, 2020-February 29, 2020 or (iii) in the case of seasonal employers only, either of the two the preceding periods or a consecutive 12-week period between May 1, 2019-September 15, 2019. In the event of a reduction in average FTE level, the FTE Reduction is then obtained by the dividing the Covered Period average FTE by the Reference Period average FTE.

FTE Reduction Exceptions; Safe Harbor

For purposes of determining the FTE Reduction, a borrower may include the following in its Covered Period average FTE (and as a result, these employment losses will not reduce a borrower’s loan forgiveness amount):

  1. Any positions for which the borrower made a good-faith, written offer to rehire an employee during the Covered Period (or Alternative Payroll Covered Period, if elected) but was rejected by the employee; and
  2. Any employees who during the Covered Period (or Alternative Payroll Covered Period, if elected):
    1. were fired for cause;
    2. voluntarily resigned; or
    3. voluntarily requested and received a reduction of their hours.

A borrower can only include such former employees in the FTE average if the borrower has not filled the position with a new employee. Tangentially, this also resolves the question of whether new employees can be included in the FTE count.

In addition, a borrower is exempt from the FTE Reduction entirely if both of the following safe harbor conditions are met (but restoring employees to these levels will not be included in the forgiveness amount unless the payroll increases during the Covered Period or Alternate Payroll Covered Period, if elected):

  1. the borrower reduced its FTE employee levels during the period from February 15, 2020 through April 26, 2020; and
  2. the borrower restored its FTE employee level by not later than June 30, 2020 to its FTE employee level in the pay period that included February 15, 2020.

Salary/Hourly Wage Reduction

A borrower’s loan forgiveness amount is subject to reduction (the Salary/Hourly Wage Reduction) if an employee’s average annual salary or hourly wage during the Covered Period (or, if elected, the Alternative Payroll Covered Period) is less than 75% of such employee’s average annual salary or hourly wage between January 1, 2020 and March 31, 2020. The Salary/Hourly Wage Reduction is determined on an employee-by-employee basis (as opposed to an average of all borrower employees). However, the Application provides for a safe harbor if an employee’s average annual salary or hourly wage as of February 15, 2020 is equal to or less than the employee’s average annual salary or hourly wage as of June 30, 2020.

The Application clarifies that even though the time periods being compared are different (three months vs the applicable eight weeks), since salary reductions are determined on average annual basis, average compensation reductions of less than 25% will not result in any reductions in the forgiveness amount. Previously, some had thought that the reduction would be based on the actual pay of each time period.

Borrower Certifications

An authorized representative of a borrower is required to certify to each of the following points on the Application:

  • The dollar amount of the forgiveness requested (i) was used to pay costs eligible for forgiveness, (ii) includes all applicable FTE Reductions and Salary/Hourly Wage Reductions, (iii) does not include eligible non-payroll costs in excess of 25% of the amount requested and (iv) does not exceed eight weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner ($15,385 per individual);
  • An acknowledgement that the government may pursue recovery of PPP loan amounts and/or civil or criminal fraud charges if the funds were knowingly used for unauthorized purposes;
  • The borrower accurately verified payments for the eligible payroll and non-payroll costs;
  • The borrower submitted the required documentation to its lender verifying payroll costs, covered mortgage interest, covered rent obligations and covered utility payments;
  • The information in the Application and supporting documents is true and correct in all material respects and an acknowledgement that making false statements to obtain forgiveness is punishable by imprisonment and/or fines under various federal statutes;
  • The tax documents submitted to its lender are consistent with tax documents submitted, or to be such submitted, to the IRS and state tax authorities; and
  • The SBA may request additional information and failure to provide the information requested may result in a denial of loan forgiveness or a determination borrower was ineligible for the PPP loan.

Supporting Documentation

Borrowers are required to include the following supporting information when submitting the Application:

  • Payroll: Documentation verifying the eligible cash compensation and non-cash benefit payments from the Covered Period (or, if elected, the Alternative Payroll Covered Period) consisting of:
    • bank account statements or third-party payroll service provider reports;
    • tax forms for the periods that overlap with the Covered Period (or if elected, the Alternative Payroll Covered Period) including payroll tax filings reported to the IRS and state quarterly wage reporting and unemployment insurance tax filings; and
    • payment receipts, cancelled checks or account statements documenting the contributions to employee health insurance retirement plans.
  • FTE: Documentation showing the average FTE employees on payroll during the Reference Period selected by the borrower. Documents may include payroll tax filings reported to the IRS and state quarterly wage reporting and unemployment insurance tax filings.
  • Eligible Non-payroll Costs: Documentation verifying the existence of the obligations/services prior to February 15, 2020 and eligible payments made during the Covered Period.

Borrowers are further required to maintain all other records related to the PPP loan in their files for a period of sic (6) years after the date the loan is either forgiven or repaid in full, and permit authorized representatives of the SBA to access such files upon request.

If you have questions or would like more information, please contact Ryan J. Udell (; 215.864.7152), Adam J. Chelminiak (; 215.864.7078) or another member of the Corporate and Securities Group.

As we continue to monitor the novel coronavirus (COVID-19), White and Williams lawyers are working collaboratively to stay current on developments and counsel clients through the various legal and business issues that may arise across a variety of sectors. Read all of the updates here.

[1] A bipartisan bill has been introduced in the Senate by Senators Mitt Romney and Joseph Manchin to increase the covered period to 16 weeks following disbursement; We will continue to monitor the progress of that bill.

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
Back to Page