Does Not Reflect Recent Legislation Changes (More Coming Soon)

With the bulk of PPP loans issued from April-June 2020, the 24-week covered period is beginning to come to an end for many borrowers.  Even those who have a bit more time are advised to begin reviewing forgiveness prior to year end. Understanding what’s required on the forgiveness application will allow borrowers to track expenditures, collect documentation and be prepared to apply for - and, if necessary, estimate the impact of - PPP forgiveness in a timely manner.  Applicants who have not already done so are also encouraged to segregate PPP funds, to begin tracking spending and payroll and otherwise help ensure that opportunities to optimize forgiveness aren’t overlooked.  

Applications, Timing and Taxes

Multiple applications - which is right for you

There are now three PPP forgiveness applications.

Even businesses using the Form E-Z or 3508S will be required to attest that they meet the criteria, so it’s important to understand the key elements of forgiveness

Tax considerations

The IRS has ruled that expenses eligible for PPP forgiveness will not be deductible for income tax purposes.  This has several implications for PPP recipients:

  • Since the PPP itself is not taxable revenue, the expense offset should have a neutral impact on the business.  However, without these expenses, taxable income may be higher than might be expected based on internal financial reporting.  
  • PPP recipients should review their income statements and expenses to understand how this ruling may affect their business and reported income.  Businesses that are able to do so may wish to discuss with their tax professional whether deferring revenues into January might be beneficial.
  • This makes it even more important that PPP recipients collect PPP spending data as part of their tax preparation process.
    • Recipients will need to be able to estimate whether, and to what extent, the PPP is likely to be forgiven in order to correctly reflect tax-deductible expenses
    • Businesses do not need to have applied for forgiveness prior to tax filing, but they will need to have collected documentation on - or, at least, a careful estimate of - forgiveness-eligible spending

 Process and Timing

The deadline for filing a forgiveness application is technically not until the maturity of the PPP loan (five years for PPPs received after June 5; two years for those prior to that date, if not renegotiated).  However, we recommend that recipients aim to apply for forgiveness by about 11 months from the original date of receipt of funds. 

  • If no forgiveness amount has been approved by 16 months from receipt, PPP recipients will begin to owe interest on the full PPP beginning, including amounts subsequently forgiven.
  • Since the forgiveness process can take up to five months from the time the application is submitted until the SBA issues final approval, recipients should aim to apply by the 11-month mark to ensure that they are not charged interest on amounts ultimately forgiven.

Understanding PPP Forgiveness

Key elements of PPP Forgiveness

PPP loans will be forgiven, entirely or in part, based on three criteria

  • Spending during the covered period (24 weeks, unless borrowers who received a PPP before June 8 choose the original, 8-week period) on payroll, rent, mortgage interest and utilities.  Of this, 60% of the forgiven amount must be spent on payroll
  • Maintenance of salaries and hourly wages of at least 75% of pre-crisis levels
  • Retention of headcount (FTE) consistent with pre-crisis levels 

Each of these have elements, choices and exceptions explained in more detail below.  Also, while forgiveness is attractive, borrowers should bear in mind that amounts not forgiven convert into a low-cost loan with no collateral or personal-guarantee requirements, as described below.

PPP loan terms

While forgiveness is attractive, PPP recipients should be aware that amounts not forgiven will convert into a loan at generally attractive terms which can be repaid at any point.  PPP loan terms are:

  • Interest rate: all PPP loans carry a 1% interest rate
  • Deferral period: the PPPFA extended the period in which no payments are due from the original 6 month term to the date at which the SBA approves the amount to be forgiven.  This ensures that applicants will not owe interest on PPP amounts that are ultimately forgiven
  • Maturity: all PPPs issued after June 5, 2020 have a 5-year maturity. Those issued earlier have the original, 2-year maturity.  However, borrowers can negotiate directly with lenders for a longer maturity 

The Forgiveness Application


Regardless of which forgiveness application you are using, certain concepts and terms are applicable to all PPP recipients:

  • Covered Period and Alternative Payroll Covered Period (“APCP”):  
    • The standard Covered Period represents the 24-week (168 day) period beginning the day PPP funds are received.  For example, if the borrower received PPP loan proceeds on April 20, the Covered Period runs from April 20 through October 4. The Covered Period can not extend beyond December 31, 2020
    • Borrowers who received PPP funds prior to June 5 may elect an 8-week (56 day) Covered Period
    • For payroll only, borrowers may choose an Alternative Payroll Covered Period beginning on the first day of the first pay period following receipt of PPP funds.  See “advanced topics”, below for more details
  • Eligible payroll and non-payroll costs:
    • These can include amounts incurred but not paid during the covered period.  See “Advanced topics” for explanation and details on eligible costs and “incurred but not paid”
    • Borrowers do not need to list covered-period spending for which they are not seeking forgiveness.  For example, total spending on rent during the covered period may be greater than the amount available after allocating at least 60% of forgiveness to payroll
  • FTE reduction quotient: further reduces the forgivable amount for any reduction in headcount (measured in Full Time Equivalency, or “FTE””) not restored by year end.  See FTE discussion below.
    • This applies directly only to recipients using the standard application
    • However, those with PPP loans greater than $50K who would like to use the Form E-Z will need to attest that they have not reduced FTE headcount
  • Salary / Hourly Wage Reduction: reduces the forgivable amount for salaries and hourly wages cut by more than 25% from pre-crisis levels which are not restored by December 31.  
    • Again, only those using the standard application need to report this calculation, but those wishing to use the E-Z form will need to understand concept to determine their eligibility
    • Payroll cost: provides a check that at least 60% of the amount to be forgiven has been spent on payroll

Application Form and Process (long-form application)

Detailed, step-by-step instructions for the PPP Loan Forgiveness Application are available on the US Treasury website.

  1. Page 1 summarizes the key information, spending and calculations, as outlined above.  
    • Payroll and headcount information are pulled from Schedule A and the supporting worksheets
    • Key information derived on page 1 include the dates of the covered period and APCP (if used), payroll schedule, as well as a listing of non-payroll costs to be forgiven

  2. Page 2 requires representations and certifications by the borrower, including:

  • Borrower understands the rules for eligible spending, has completed the application accordingly and verified and documented all spending
  • Anyone claiming the FTE reduction Safe Harbor certifies that the business was unable to operate at the same level of business as before February 15, 2020 due to compliance with HHS, CDC or OSHA directives
  • Borrower acknowledges that:
    • The SBA may request additional documentation
    • False statements may result in a fine or imprisonment 

 3. Page 3 collects compensation, salary / wage and FTE data from the worksheet (page 4) and compiles for page 1 of the application

  • Total compensation (line 10) is the total of

    • Cash compensation for employees making $100K or less (line 1) plus those making more than $100K (line 4)
    • Employer contributions for health insurance (line 6)
    • Contributions to retirement plans (line 7)
    • Employer portion of state & local payroll taxes (line 8)
    • Amounts paid to owner-employees, self employed individuals and general partners (line 9).  Compensation for these individuals is not to be included elsewhere.  For more information, see Owner Compensation in Advanced Topics, below

  • Salary /Hourly Wage Reduction calculation for employees making $100K or less, based on the total of individual calculations from the worksheet

  • Basis for the FTE reduction calculation or Safe Harbor (more information on both in the FTE Calculation section, below)

    • The application asks borrowers to attest to one of the three criteria for FTE Safe Harbor 
    • Only those who fail to meet the Safe Harbor criteria have to complete the FTE Reduction Quotient calculation 

​​ 4.  Page 4 provides the underlying salary, wage and FTE data and calculation of FTE Safe Harbor 2

  • Table 1 is for employees paid at an annualized rate of $100K or less

    • Each employee is listed individually, along with the total cash compensation paid to the employee and that employee’s average FTE during the covered period or APCP.  Employers can report FTE based on a 40-hour week or use the simplified method - see “Calculating Headcount (FTE)”, below
    • If any employee’s salary or hourly wage has been reduced by more than 25% compared to January 1 - March 31, 2020, the borrower must calculate the reduction for that employee, or show that they meet the Salary / Wage Safe Harbor (see below for more information)
  • Table 2 is for employees paid at an annualized rate above $100K and similarly totals cash compensation and FTE; a salary reduction calculation is not necessary for these employees

  • The FTE Reduction Safe Harbor 2 calculation checks whether headcount has been restored by year end.  This need only be completed by borrowers who have reduced headcount but can not certify that this was driven by compliance with governmental directives (see FTE calculation and Safe Harbor, below)  

​ 5. Page 5 collects borrower information and demographics

Definitions, Calculations and Advanced Topics

Note: for simplicity, “covered period” in this section refers to APCP, if used

Full Time Equivalency (“FTE”) Calculation

The purpose of the FTE calculation is to ensure that headcount remains at or is restored to pre-crisis levels. This is done by comparing average weekly headcount, measured in Full Time Equivalency, or FTE, versus that of a reference period.  The actual calculation is more complicated, involving choices of methodology and reference period

  • FTE calculation and Safe Harbor: Borrowers do not have to complete the FTE reduction calculation if they meet any one of these criteria:
    • No reduction in headcount between January 1, 2020 and the covered period
    • Unable to operate between February 15 and the end of the covered period at the same level of activity as prior to February 15 due to compliance with HHS, CDC or OSHA directives or guidance
    • FTE is restored to February 15 levels by December 31, 2020 (Safe Harbor 2)
  • Reference period: The borrower can choose to compare covered-period headcount to:
    •  February 15 to June 30, 2019
    • January 1 to February 29, 2020, or
    • in the case of seasonal employers, either of the preceding periods or any consecutive 12-week period between May 1, 2019 and September 15, 2019
  • Calculating headcount (FTE): Borrowers can choose to either:
    • Calculate FTE on an hourly basis for all employees by dividing the hours worked each week by 40.  (This number can not exceed 1.0)
    • Designate employees who work 40 hours or more per week as full time (1.0 FTEs) and all those who work less than 40 hours as part-time (0.5)

Salary / Hourly Wage Reduction and Safe Harbor

Forgiveness levels will be reduced if the borrower has cut salary or hourly wage rates by more than 25% compared to January 1 - March 31, 2020.  (This only applies to reductions in pay rates themselves; employee pay reductions due to fewer hours worked are captured by the FTE calculation).  The process works as follows:

1.  Determine if salaries or wages have been reduced by more than 25%​

  • Each employee’s average salary or hourly wage for the covered period or APCP is listed, as well as the rate for January 1-March 31
  • The covered period rate is divided by the Jan-March rate.  If the result is 0.75 or higher, there is no reduction.  If it’s lower, borrowers must complete Step 2

2.  Determine if Safe Harbor is met: this applies only to those individual employees whose salary or wages were reduced by more than 25%.  

  • First, the employee’s average salary or hourly wage as of February 15 is compared to the average for February 15 - April 26.  
  • If the February-April rate is lower than the February 15 level, the borrower then compares levels at year end.  If the December 31 levels are equal to or higher than those at February 15, the Safe Harbor has been met

3. Calculate the Salary / Hourly Wage reduction: this applies only to employees showing a reduction of more than 25% in Step 1 and who did not meet the Safe Harbor in Step 2

  • The average salary during the covered period or APCP is subtracted from 75% of first quarter 2020 salaries.  
  • For hourly employees, this is then multiplied by the average hours worked per week from January 1 - March 31, 2020 to achieve a weekly total
  • The resultant totals are then converted to 8- or 24-week totals based on the covered period.  For salaried employees, the total is divided by 52 to achieve a weekly total
  • The weekly total is multiplied by 8 or 24, as appropriate, to calculate the total covered-period reduction

Other Advanced topics

  • Alternative Payroll Covered Period (“APCP”): Electing to use an APCP may make it easier for borrowers to use normal pay period data for the forgiveness application

    • As explained, the standard covered period begins on the date funds are received
    • The APCP allows borrowers to instead choose to begin payroll calculations beginning with the first day of the next payroll period.  
    • For example, if a borrower’s standard pay period runs from Sunday thru Saturday and PPP  proceeds are received on Monday, April 20, the borrower could elect to use an APCP beginning Sunday, April 26
    • The APCP is likely to be attractive to borrowers with weekly or bi-weekly pay periods, although it may be preferable for others as well

  • Incurred but not paid: Borrowers are also allowed to include payroll and other eligible costs that are incurred but not yet paid during the covered period, as long as they are paid on or before the next regular due date.  
    • This allows for borrowers to include payroll, rent, mortgage or utilities that reflect operations during the covered period, but are actually paid soon thereafter
    • For example, if rent is paid monthly on the first day of the following month, a borrower whose covered period ends September 15 could include half of September’s rent, even though the payment is made on October 1, after the end of the covered period

  • Payroll costs: include gross salary, wages and tips, gross commissions, paid leave (vacation, family, medical or sick leave - excluding leave covered by the Families First Coronavirus Response Act), and allowances for dismissal or separation paid or incurred during the Covered Period or the APCP

  • Owner compensation: the forgivable portion of amounts paid to owner-employees, self-employed individuals, independent contractors or general partners is capped at the lower of $20,833 (the 2.5-month equivalent of $100,000 per year) or the 2.5-month equivalent of their 2019 compensation

  • Eligible rent and mortgage: must reflect obligations in place prior to February 15, 2020.  Eligible mortgage payments include mortgage interest only; prepayments of principal are not eligible.

  • Eligible utilities: include business payments for electricity, gas, water, telephone, transportation, or internet access on services begun before February 15, 2020