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Loan Forgiveness under the PPP

Last Updated: May 15, 2020

UPDATE: On June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act of 2020 (the “Act“), which changes many of the terms and features described in this note. Among other things, borrowers now have 24 weeks to use the funds. Please see our summary of the Act here

UPDATE: On May 15, 2020, the SBA released the PPP Loan Forgiveness Application (the “Loan Forgiveness Application“), which can be found here. The Loan Forgiveness Application provides instructions and guidance regarding PPP loan forgiveness, along with formulas and a worksheet to help borrowers calculate their forgivable amounts. Borrowers should review the Loan Forgiveness Application as soon as possible to determine their potential loan forgiveness and evaluate actions that may increase loan forgiveness.

Businesses that received loans under the Payroll Protection Program (“PPP“) should turn their attention to a significant benefit of the PPP – loan forgiveness. Most business that received PPP loans did so with the expectation of loan forgiveness. But forgiveness is far from automatic; the PPP and subsequent guidance provide specific criteria that a business has to meet in order to be eligible for and maximize its loan forgiveness.

While there are many unanswered questions regarding the calculation of loan forgiveness, the basic criteria are set forth in the CARES Act and subsequent guidance. This note provides an overview of the current state of loan forgiveness under the PPP. We expect that significant guidance from the SBA and Treasury Department is forthcoming.

Eligible Costs

Loan forgiveness under the PPP is available only to the extent that loan proceeds are used for the following costs:

  • Payroll costs (e.g., salaries, commissions, tips, vacation, leave, and separation payments, payments for medical and retirement benefits, and payments for state and local taxes), excluding the cash compensation of any employee in excess of $100,000 per year
  • Payment of interest on mortgage obligations incurred before February 15, 2020
  • Payment of rent obligations under a lease that was in effect before February 15, 2020
  • Payment of utilities for which service began before February 15, 2020

Use of Proceeds

Only proceeds that are used during the 8-week period following loan disbursement are eligible for forgiveness. In addition, not more than 25% of the forgivable amount may be used for non-payroll costs. Businesses should be mindful to use at least 75% or their loan amount for payroll costs in order to maximize forgiveness.

UPDATE: For administrative convenience, the Loan Forgiveness Application allows borrowers that have a bi-weekly (or more frequent) payroll period to elect to use an “alternative payroll covered period” to calculate their forgivable payroll costs. The alternative payroll covered period is the eight-week period commencing on the first day of the borrower’s next regular payroll cycle following loan disbursement (as opposed to the normal “covered period”, which commences on the date of loan disbursement). Borrowers will also be able to include amounts incurred but not paid during the eight-week covered period (or alternative payroll covered period) so long as those amounts are paid on or before the next the next regular payroll date (for payroll costs) or before the next billing date (for non-payroll costs).

Reductions for Headcount and Salary Decreases

The forgivable amount of a PPP Loan may be reduced based on a decrease in the business’s full-time equivalent employees (“FTEs“) or 25% decreases in salary.

Reductions Based on Decrease in Headcount

Reductions based on decreases in FTEs will occur if, during the 8-week period following loan disbursement, the business’s average number of FTEs is less than its average number of FTEs during either (a) February 15, 2019 – June 30, 2019, or (b) January 1, 2020 – February 29, 2020, whichever is lower (the “Base Period“). If that is the case, the forgivable amount of the loan will be reduced by multiplying:

  • the maximum forgivable amount, times
  • a percentage determined by dividing (a) the average number of FTEs during the 8-week period following loan disbursement, by (b) the average number of FTEs during the Base Period.

UPDATE: The Loan Forgiveness Application provides that FTEs are determined based on a 40-hour per week standard. Specifically, the application provides the following formula for the average full-time equivalency during the applicable period: “For each employee, enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0. A simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours may be used at the election of the Borrower.”

In addition, employees who were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in their hours (and who were not replaced with new FTEs) will not be counted in determining whether a reduction in FTEs applies to limit forgiveness.

Reductions based on 25% Salary Decreases

Loan forgiveness will also be reduced by the amount of any decrease in the salary or wages of an employee of more than 25% during the 8-week period following loan disbursement, relative to the employee’s salary during the most recent full quarter in which she was employed (this should be Q1 2020). Employees who earned annualized pay of $100,000 or more in 2019 are excluded from this computation.

Cure for Reductions Based on Decreases Made from February 15, 2020 through April 26, 2020

If a business decreased its FTEs or made 25% salary decreases during the period from February 15, 2020 through April 26, 2020, it can cure those decreases by rehiring the employees or reinstating the salaries on or before June 30, 2020. In that case, those employees will be treated as having been employed at their full salary during the entire 8-week period following loan disbursement.

It is worth nothing that, while a delayed rehire date will not cause issues with the employee retention fraction or 25% salary threshold, it may cause a business to spend less than the required 75% threshold on payroll costs, which would result in a reduction of the forgivable amount.

UPDATE: On May 3, 2020, the SBA issued guidance providing that a borrower’s loan forgiveness will not be reduced with respect to a laid-off employee if the borrower offers to rehire the employee (for the same salary/wages and same number of hours) on or before June 30, 2020, but the employee rejects of the offer. To qualify for the exception, the borrower must have made a good faith, written offer of rehire and the employee’s rejection of the offer must be documented by borrower.

Applying for Forgiveness

Businesses will have to submit applications for forgiveness to their lenders, including documentation supporting the use of the loan proceeds, FTE headcount, and pay rates. Businesses will have to certify the accuracy of the documents. The SBA may request any additional information necessary to make a forgiveness determination.


Businesses should carefully follow the PPP’s requirements in order to maximize loan forgiveness. If possible, businesses should use loan proceeds only for forgivable costs and ensure that 75% or more of the loan proceeds are used for payroll costs. Businesses should be aware of the reductions for decreases in FTEs and salaries and make an informed decision regarding whether any reduction will apply and whether it makes sense to remedy any decreases. Finally, businesses should carefully account for and document their use of the loan proceeds to support their applications for forgiveness.

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