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) has 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 rules have been an evolving process. Up until now, the SBA has provided clarification by updating its PPP loan FAQs. More guidance and regulations from the SBA are expected in the future. In the meantime, 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.

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 eight-week 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 eight-week “covered period” are eligible for forgiveness. The covered period for PPP loan forgiveness commences on the date the PPP loan proceeds are disbursed and ends eight weeks (56 days) later.

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.

One issue under consideration is extending the loan forgiveness period from eight to 24 weeks. Many borrowers and others contend that the eight-week period for determining loan forgiveness is not enough time given that many businesses are still unable to open due to shelter in place rules.

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 June 30, 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. This June 30th safe harbor for restoring employee levels and pay rates applies regardless of when your eight-week covered period starts and ends.

Costs Can Be Paid or Incurred

The loan forgiveness application clarifies that you can include nonpayroll costs paid or incurred during the applicable eight-week 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 eight-week 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 eight-week 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 75 percent of your loan forgiveness amount. The other 25 percent can be for mortgage interest debt, rent, and utilities but these nonpayroll costs cannot exceed 25 percent of the total loan forgiveness amount.

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