A Borrower's Guide to the PPP Loan Forgiveness Application

Get answers to questions borrowers have about how the PPP loan forgiveness will work.

The Small Business Administration (SBA) released a loan application for the Paycheck Protection Program (PPP) loan. Many small businesses who received PPP loans have been struggling to figure out whether they will be eligible for loan forgiveness and, if so, how much of their loan will be forgivable. The PPP loan forgiveness application and instructions provide answers to some of the questions borrowers have had about how the PPP loan forgiveness will work.

On June 5, 2020, the Paycheck Protection Program Flexibility Act (PPPFA) was enacted changing some of the PPP rules to make it easier for small business to qualify for loan forgiveness. This article covers the PPP loan application and the new forgiveness rules under the PPPFA which are not reflected in the current application. See How Much Money Can Your Business Get From the Paycheck Protection Program? for more information on the PPP loan program and the PPPFA.

The Loan Forgiveness Application

The loan forgiveness application includes detailed instructions on how to apply for loan forgiveness and how to calculate your loan forgiveness amount. You must complete the Loan Forgiveness Calculation Form and Schedule A. The application also includes the Schedule A Worksheet, and the Borrower Demographic Information Form which is optional.

On the first page of the Loan Forgiveness Calculation Form, you provide the information necessary to calculate your loan forgiveness amount, including:

  • your PPP loan amount and loan disbursement date
  • the number of employees you had at the time of your loan application and at the time of your loan forgiveness application
  • the amount of any Economic Injury Disaster Loan (EIDL) advance you received
  • your payroll schedule (weekly, biweekly, monthly)
  • the covered payroll period (or new alternative payroll covered period--see below), and
  • whether your PPP loan (including affiliate loans) is in excess of $2 million.

After providing this information, you then calculate step-by-step the amount of loan forgiveness you are entitled to receive. To do this, you will need to complete Schedule A (if you have employees). The Schedule A worksheet helps you make calculations you'll need to determine your loan forgiveness amount.

The application provides clarification on a number of important items.

New "Covered Period" for Bi-Weekly Payrolls

Only loan proceeds spent during the loan forgiveness "covered period" are eligible for forgiveness. Under the PPP, the covered period for PPP loan forgiveness was eight weeks starting on the date the PPP loan proceeds are disbursed. The PPPFA extends this eight-week period to 24 weeks (or December 31, 2020 whichever is earlier), giving businesses more time to spend the money and still obtain forgiveness. If your loan was disbursed under the PPP original rules (before June 5, 2020), you can use either the 24-week period or the eight-week period.

The loan forgiveness application adds a new "Alternative Payroll Covered Period" for borrowers with a biweekly (or more frequent) pay period. This alternative method allows you to calculate your payroll costs using an eight-week period beginning on the first day of the first pay period after the PPP loan funds are disbursed. Adding this ensures that borrowers with bi-weekly pay periods will be able to synch their payroll periods with the loan funding date and get four pay periods into their covered period for loan forgiveness. If you choose the eight-week period as your covered period, you can have it begin on the date you received the loan funds, or the first day of the first bi-weekly (or more frequent) pay period after you get the loan.

New Simplified Definition of Full-Time Equivalent (FTE)

The loan application allows for a new simpler method for determining employee full-time equivalency (FTE). Under this simplified method, you assign 1.0 for employees who work 40 hours or more per week and .5 for any employee who works fewer than 40 hours.

While this is easy to use and may work in some situations, there will be times when this wouldn't be to your advantage. For example, someone who works 35 hours per week would be counted at .5 under the simplified method but would be .9 under the traditional method, which tracks more closely the actual percentage of time worked. To calculate FTE under the traditional method, you take the average number of hours paid per week for each employee, divide that by 40, and round to the nearest tenth, up to a maximum of 1.0 per employee.

Payroll Reduction Safe Harbor

To obtain loan forgiveness, you must maintain the average number of full-time equivalent employees you had pre-COVID-19. If you lay off employees or reduce your pay rates by more than 25%, the amount of your loan forgiveness will also be reduced. The new guidance makes it clear, however, that you can keep in your employee headcount anyone who:

  • rejected a good faith, written offer to be rehired
  • was fired for cause
  • voluntarily resigned, or
  • requested and received a reduction in hours.

In addition, as long as by December 31, 2020, you have restored your full-time equivalent employee numbers and pay rates to their pre-COVID-19 levels, the loan forgiveness amount will not be affected. The safe harbor date was extended from June 30th to December 31 under the PPPFA and applies regardless of when your loan forgiveness covered period starts and ends.

The PPPFA also provides that the employee headcount for loan forgiveness purposes will not be reduced if you can document your inability to:

  • rehire people who were employees on February 15, 2020, or hire similarly qualified employees for unfilled positions by December 31, 2020, or
  • return to your pre-February 15, 2020 level of business activity due to COVID-19 regulations or guidance issued by 1) the Department of Health and Human Services, 2) Centers for Disease Control and Prevention, or 3) Occupational Safety and Health Administration between March 1 and December 1, 2020.

Costs Can Be Paid or Incurred

The loan forgiveness application clarifies that you can include nonpayroll costs paid or incurred during the applicable covered period. It wasn't clear before whether incurred costs could be included. This means you won't have to accelerate payment dates or alter payment schedules to make sure costs fall within your covered period.

How to Calculate Loan Forgiveness

The application takes you step-by-step through the calculation you must make to determine how much of your loan will be forgivable.

First, you add up all of your business's eligible payroll and non-payroll costs paid or accrued during your covered period. These eligible costs include payroll and business mortgage interest on real or personal property, business rent or lease payments for real or personal property, and business utility payments. (Another clarification provided by the application was that these eligible costs cover both real and personal property.)

The next step is to reduce this amount if you do not have the same number of full-time equivalent employees you had prior to the COVID-19 pandemic, or if you have reduced any of your employees' pay by more than 25 percent. You calculate the actual amount you need to subtract for these salary/hourly wage reductions on line 3 of Schedule A (using the Worksheet) and reduce your eligible loan forgiveness by that amount.

The final step is to make sure your payroll costs comprise at least 60 percent of your loan forgiveness amount. The other 40 percent can be for mortgage interest debt, rent, and utilities but these nonpayroll costs cannot exceed 40 percent of the total loan forgiveness amount. Under the original PPP rules, payroll costs had to be at least 75% of your loan forgiveness amount but this was reduced to 60% to give businesses more flexibility on how to spend their loan proceeds.

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