U.S. Department of Treasury and Small Business Administration Release Loan Forgiveness Application Form and Instructions for Paycheck Protection Program

May 21, 2020
May 28, 2020 Update. On May 22, 2020, the Small Business Administration, in consultation with the U.S. Department of Treasury, released the Interim Final Rule on Loan Forgiveness and the Interim Final Rule on SBA Loan Review Procedures and Related Borrower and Lender Responsibilities, which provide borrowers with further guidance regarding loan forgiveness and provide lenders with guidance on their responsibilities. The Interim Final Rule on Loan Forgiveness provides, among other things, that a borrower may exclude from the workforce reduction formula any reduction in full-time equivalent employee headcount attributable to a particular employee if: (1) the borrower made a good faith, written offer to rehire the employee or restore his or her hours (if applicable) during the covered period or the alternative payroll covered period; (2) the offer was for the same number of hours and the same salary or wages earned by the employee “in the last pay period prior to the separation or reduction in hours”; (3) the employee rejected the offer; (4) the borrower maintains appropriate records; and (5) within 30 days of the employee’s rejection of the offer, the borrower informs the applicable state unemployment insurance office of the rejection. This guidance has been incorporated into this updated post.
 
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Summary. The Paycheck Protection Program (“PPP”) is an unprecedented forgivable loan program, created by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). As set forth in our memorandum to clients, “Coronavirus Aid, Relief, and Economic Security Act—Key Employer Takeaways,” the PPP provides low-interest loans to qualifying small businesses and other eligible borrowers (“PPP Loans”). The PPP incentivizes businesses who receive PPP Loans (“Borrowers”) to retain and pay employees by forgiving all or a portion of PPP Loans spent on qualifying expenses. The CARES Act was enacted on March 27, 2020 and the application process for PPP Loans became operational on April 3, 2020. The application for PPP Loan forgiveness recently became available, as described below.
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On May 15, 2020, the Small Business Administration (the “SBA”), in consultation with the U.S. Department of Treasury (“Treasury”), released the Paycheck Protection Program Loan Forgiveness Application (the “Application”), which contains step-by-step instructions for Borrowers seeking forgiveness of some or all of their PPP Loan. Among other things, the Application provides: (1) additional information regarding the expenses eligible for forgiveness; and (2) instructions for calculating the loan forgiveness amount. The SBA noted that it would also soon issue regulations and guidance to further assist Borrowers as they complete their applications, and to provide lenders with guidance on their responsibilities.

I. Qualifying Expenses

The CARES Act provides that Borrowers are eligible for forgiveness of PPP Loans for amounts spent on qualifying expenses during the eight-week period starting with the loan disbursement date (the “Covered Period”). The loan disbursement date is the first date on which a Borrower received PPP Loan proceeds from its lender. Qualifying expenses include certain eligible payroll costs (“Payroll Costs”), as well as certain covered mortgage obligations, rent obligations and utility payments (collectively, “Non-Payroll Costs”), as set forth in more detail below.
  • Payroll Costs. Payroll Costs consist of eligible payroll costs “incurred or paid” during the Covered Period. SBA, in consultation with Treasury, provides further guidance regarding Payroll Costs in the Interim Final Rule on Paycheck Protection Program, 85 Fed. Reg. 20811, and a Frequently Asked Questions document regarding PPP Loans. Payroll Costs must comprise at least 75 percent of the loan forgiveness amount.
     
    • Alternative Payroll Covered Period. “For administrative convenience,” the Application allows Borrowers with a biweekly or more frequent payroll schedule to calculate Payroll Costs using an alternative eight-week period that aligns with their regular payroll cycles, and begins on the first day of their first pay period following the loan disbursement date for the PPP Loan (the “Alternative Payroll Covered Period”). Borrowers that choose to use the Alternative Payroll Covered Period must apply it wherever the Application references “the Covered Period or the Alternative Payroll Covered Period.”
       
    • Eligible Payroll Costs. Eligible payroll costs consist of compensation to U.S. employees, including: (1) gross salaries, gross wages, gross commissions or similar compensation; (2) tips; (3) vacation, parental, family, medical or sick leave payments; (4) severance payments; (5) employer contributions for employee health insurance, not including any pre-tax or after tax contributions by employees; (6) employer contributions to employee retirement plans, not including any pre-tax or after tax contributions by employees; (7) any federal, state and local taxes required to be withheld by the employer, including income taxes and the employee’s share of Social Security and Medicare taxes; and (8) the employer portion of state and local (but not federal) tax payments assessed on employee compensation, such as state unemployment insurance tax.
       
    • Per Employee Cap. Borrowers cannot receive loan forgiveness for cash compensation paid to employees in excess of an annual salary of $100,000, prorated for the eight-week Covered Period. In other words, Payroll Costs that are eligible for forgiveness are capped at $15,385 per employee. For owners (such as owner-employees, self-employed individuals, and general partners), the cap is the lower of $15,385 or “the eight-week equivalent of their applicable compensation in 2019.”
       
    • Ineligible Payroll Costs. Certain payroll costs are not eligible for loan forgiveness, including: (1) compensation to employees whose principal place of residence is not in the United States; (2) amounts paid exceeding the per employee cap described above; (3) the employer’s share of Social Security and Medicare taxes; (4) payments of qualified sick and family wages under the Families First Coronavirus Response Act, which are eligible for tax credits; and (5) payments made to independent contractors. 
       
  • Non-Payroll Costs. Non-Payroll Costs that are eligible for loan forgiveness consist of covered mortgage obligations, rent obligations and utility payments paid or incurred during the Covered Period. No more than 25 percent of the loan forgiveness amount may consist of Non-Payroll Costs. However, the Application provides that Borrowers are not required to report Non-Payroll Costs that they do not want to include in the forgiveness amount.
     
    • Covered Mortgage Obligations. Covered mortgage obligations consist of payments of business mortgage interest “for any business mortgage obligation on real or personal property incurred before February 15, 2020.” Prepayments of interest and payments of mortgage principal are not eligible. 
       
    • Covered Rent Obligations. Covered rent obligations consist of business rent or lease payments “for real or personal property . . . pursuant to lease agreements in force before February 15, 2020.”
       
    • Covered Utility Payments. Covered utility payments consist of business payments for electricity, gas, water, transportation, telephone or internet access for which service began before February 15, 2020.
II. PPP Loan Forgiveness Calculations

Borrowers may have all or a portion of their PPP Loans forgiven up to the principal amount of the PPP Loan. The PPP, as currently implemented, incentivizes Borrowers to retain employees at full hours and pay during the eight weeks after receiving PPP Loans by: (1) reducing the forgiveness amount if Borrowers conduct layoffs, reduce hours or reduce pay; and (2) capping the forgiveness amount relative to the amount spent on Payroll Costs. Certain exceptions and safe harbors apply, as set forth below.

In practice, the Application provides that the PPP Loan forgiveness amount is the lowest of:
  1. The sum of Payroll Costs and Non-Payroll Costs (together, the “Potential Forgiveness Amount”), reduced by the wage reduction and/or workforce reduction formulas (together, the “Reduction Formulas”) described below, if applicable;
     
  2. Payroll Costs divided by 0.75, such that Payroll Costs consist of no less than 75 percent of the forgiveness amount; or
     
  3. The principal amount of the PPP Loan.
(If applicable, the SBA will also deduct from the PPP Loan forgiveness amount any advance received by the Borrower under an Economic Injury Disaster Loan.)

If the Reduction Formulas are both applicable, a Borrower will first apply the wage reduction formula and then apply the workforce reduction formula. If a Borrower reduced salary and wages without conducting layoffs or reducing hours, or vice versa, the Borrower is required only to apply the applicable Reduction Formula. The Reduction Formulas do not consider any owners (such as owner-employees, self-employed individuals, or general partners), employees whose principal place of residence is outside the United States or independent contractors.
  • Wage Reduction Formula.  Unless an exception or the safe harbor applies, the Potential Forgiveness Amount will be reduced dollar-for-dollar for reductions to each employee’s salary or wages in excess of 25 percent, comparing the employee’s average annual salary or hourly wage during the Covered Period or Alternative Payroll Covered Period to the employee’s average annual salary or hourly wage during the period of January 1, 2020 through March 31, 2020 (the “First Quarter 2020”). To determine the reductions, if any, to the Potential Forgiveness Amount, Borrowers should follow the calculations described below.
     
    • Salaried Employees. For salaried employees, Borrowers should subtract the average annual salary during the Covered Period or Alternative Payroll Covered Period from 75 percent of the average annual salary during the First Quarter 2020, and prorate for the relevant eight-week period (that is, divide by 52 and multiply by 8).
       
      • Example. An employee was paid an average annual salary of $90,000 during First Quarter 2020 and $60,000 during the Covered Period or Alternative Payroll Covered Period. Because the Borrower reduced the employee’s salary by more than 25 percent, the wage reduction formula would apply to reduce the Potential Forgiveness Amount by about $1,154.
         
        $90,000 Average Annual Salary × 0.75 Multiplier For Allowable Reduction = $67,500 Allowable Average Annual Salary

        $67,500 Allowable Average Annual Salary − $60,000 Reduced Average Annual Salary = $7,500 Average Annual Salary Difference

        $7,500 Average Annual Salary Difference ÷ 52 Weeks Per Year = $144.23 Average Weekly Salary Difference

        $144.23 Average Weekly Salary Difference × 8 Weeks In Covered Period = $1,153.85 Salary Difference Prorated For Covered Period
 
  • Hourly Employees. For hourly employees, subtract the average hourly wage during the Covered Period or Alternative Payroll Covered Period from 75 percent of the average hourly wage during the First Quarter 2020. Multiply the difference by the weekly average number of hours worked during the First Quarter 2020, and multiply by eight weeks. 
     
    • Example. An employee was paid average hourly wages of $25 during the First Quarter 2020 and $15 during the Covered Period or Alternative Payroll Covered Period. The employee worked an average of 40 hours weekly during the First Quarter 2020. Because the Borrower reduced the employee’s average hourly wage by more than 25 percent, the wage reduction formula would apply to reduce the Potential Forgiveness Amount by $1,200.
       
      $25 Average Hourly Wage × 0.75 Multiplier For Allowable Reduction = $18.75 Allowable Average Hourly Wage

      $18.75 Allowable Average Hourly Wage − $15 Reduced Average Hourly Wage = $3.75 Average Hourly Wage Difference

      $3.75 Average Hourly Wage Difference × 40 Average Weekly Hours Worked During First Quarter 2020 = $150 Average Weekly Wage Difference

      $150 Average Weekly Wage Difference × 8 Weeks In Covered Period = $1,200 Wage Difference For Covered Period
 
  • Exceptions. The wage reduction formula does not reduce the Potential Forgiveness Amount if: (1) an employee’s average annual salary or hourly wage was reduced 25 percent or less; or (2) the employee whose average annual salary or hourly wage was reduced received compensation at “an annualized rate of more than $100,000 for any pay period in 2019.”
     
    • Example. In the hourly wage example above, if the Borrower instead reduced the employee’s average hourly wage to $20 per hour (a 20 percent reduction), the wage reduction formula would not apply.
       
      $25 Average Hourly Wage × 0.75 Multiplier For Allowable Reduction = $18.75 Allowable Average Hourly Wage

      $20 Reduced Average Hourly Wage ≥ $18.75 Allowable Average Hourly Wage, Therefore Wage Reduction Formula Does Not Apply
 
  • Workforce Reduction Formula. Unless an exception or the safe harbor applies, the Potential Forgiveness Amount will be reduced in proportion to any workforce reduction, comparing the Borrower’s average weekly full-time equivalent employee level during the Covered Period or the Alternative Payroll Covered Period to the Borrower’s average weekly full-time equivalent employee level during the Borrower’s choice of reference periods: (1) February 15, 2019 to June 30, 2019; (2) January 1, 2020 to February 29, 2020; or (3) for seasonal employers only, “a consecutive twelve-week period between May 1, 2019 and September 15, 2019.” If a Borrower has not reduced its number of employees or their average paid hours between January 1, 2020 and the end of the Covered Period, the workforce reduction formula will not apply. To determine the reductions, if any, to the PPP Loan forgiveness amount, Borrowers should follow the calculations described below.
     
    • Full-Time Equivalent Employee Levels. A Borrower’s average full-time equivalent employee level for a particular time period is the sum of the full-time equivalency (“FTE”) of all relevant employees during that time period. As noted above, the workforce reduction formula does not consider the FTE of any employees whose principal place of residence is outside the United States, owners or independent contractors. An employee’s FTE is calculated using his or her average number of paid hours per week, divided by 40, rounding the total to the nearest tenth and capped at 1.0.
       
      • Example. During the chosen reference period, a Borrower paid 20 employees to work an average of 40 hours weekly, and 10 employees to work an average of 30 hours weekly. During the Covered Period, the Borrower paid 15 employees to work an average of 40 hours weekly, and seven employees to work an average of 30 hours weekly. Because the Borrower reduced its average FTE levels, the workforce reduction formula would apply to reduce the Potential Forgiveness Amount in proportion to the reduction of the average FTE levels, or by 30 percent.
         
        Calculate FTE Per Employee

        40 Average Hours Worked Weekly ÷ 40 Hours Per Full-Time Equivalent Employee = 1 FTE For Employees Working 40 Hours Weekly

        30 Average Hours Worked Weekly ÷ 40 Hours Per Full-Time Equivalent Employee = 0.75 FTEs, Rounded To Nearest Tenth = 0.8 FTEs for Employees Working 30 Hours Weekly
         
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        Calculate Average FTEs During Reference Period

        1 FTE × 20 Employees Working 40 Hours Weekly During Reference Period = 20 FTEs For Employees Working 40 Hours Weekly During Reference Period

        .8 FTEs × 10 Employees Working 30 Hours Weekly = 8 FTEs For Employees Working 30 Hours Weekly During Reference Period

        20 FTES + 8 FTEs = 28 FTEs Total During Reference Period

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        Calculate Average FTEs During Covered Period (or Alternative Payroll Covered Period)

        1 FTE × 15 Employees Working 40 Hours Weekly During Covered Period = 15 FTEs For Employees Working 40 Hours Weekly During Reference Period

        0.8 FTEs × 7 Employees Working 30 Hours Weekly = 5.6 FTEs For Employees Working 30 Hours Weekly During Reference Period

        15 FTEs + 5.6 FTEs = 20.6 FTEs Total During Reference Period

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        Calculate FTE Quotient

        20.6 Average FTEs During Covered Period ÷ 28 Average FTEs During Reference Period = 0.7 FTE Reduction Quotient

        Potential Forgiveness Amount × 0.7 FTE Reduction Quotient = 30 Percent Reduction In Potential Forgiveness Amount
 
  • Alternative Calculation. Borrowers may choose to calculate FTE levels using 1.0 for full-time employees (those working 40 hours or more per week) and 0.5 for part-time employees (those working fewer than 40 hours per week).
     
    • Example. The same Borrower described above uses the simpler, alternative calculation. In this example, the workforce reduction formula would still apply to reduce the Potential Forgiveness Amount proportional to the reduction of the average FTE levels, or by 30 percent.
       
      Alternative FTE Per Employee

      Full-Time Employees = 1 FTE

      Part-Time Employees = 0.5 FTEs

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      Calculate Average FTEs During Reference Period

      1 FTE × 20 Employees Working 40 Hours Weekly During Reference Period = 20 FTEs For Employees Working 40 Hours Weekly During Reference Period

      .5 FTEs × 10 Employees Working 30 Hours Weekly = 5 FTEs For Employees Working 30 Hours Weekly During Reference Period

      20 FTES + 5 FTEs = 25 FTEs Total During Reference Period

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      Calculate Average FTEs During Covered Period (or Alternative Payroll Covered Period)

      1 FTE × 15 Employees Working 40 Hours Weekly During Covered Period = 15 FTEs For Employees Working 40 Hours Weekly During Reference Period

      0.5 FTEs × 7 Employees Working 30 Hours Weekly = 3.5 FTEs For Employees Working 30 Hours Weekly During Reference Period

      15 FTEs + 3.5 FTEs = 18.5 FTEs Total During Reference Period

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      Calculate FTE Quotient

      18.5 Average FTEs During Covered Period ÷ 25 Average FTEs During Reference Period = 0.7 FTE Reduction Quotient

      Potential Forgiveness Amount × 0.7 FTE Reduction Quotient = 30 Percent Reduction In Potential Forgiveness Amount
       
 
  • Exceptions. Reductions in full-time equivalent employees will not reduce the Potential Forgiveness Amount: (1) for positions where, during the Covered Period or the Alternative Payroll Covered Period, the Borrower made a good-faith, written offer to rehire an employee or restore his or her hours (if applicable), but was rejected by the employee; or (2) for any employees who, during the Covered Period or the Alternative Payroll Covered Period, were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction of their hours. To qualify for the first exception, the offer must be for the same number of hours and the same salary or wages earned by the employee “in the last pay period prior to the separation or reduction in hours,” and the Borrower must maintain records of the offer and rejection and inform the applicable state unemployment insurance office of the rejection within 30 days.
     
  • Interaction of Reduction Formulas. As set forth above, a Borrower that conducts layoffs or reduces hours and reduces pay must apply both Reduction Formulas. The Application provides that the Borrower first applies the wage reduction formula and then applies the workforce reduction formula.
     
    • Example. A Borrower received a $1 million PPP Loan and spent $600,000 in Payroll Costs and $300,000 in Non-Payroll Costs during the Covered Period, resulting in a Potential Forgiveness Amount of $900,000. The Borrower reduced the salaries and wages of relevant employees more than 25 percent during the Covered Period and calculates a wage reduction amount of $50,000. The Borrower also reduced its average FTE levels during the Covered Period and calculates a FTE reduction quotient of 0.7. Assuming no safe harbor applies, the Borrower subtracts the wage reduction amount and multiplies by the FTE reduction quotient, calculating a forgiveness amount of $595,000, as set forth below.

      In this example, the Borrower is eligible for loan forgiveness in the amount of $595,000, which is the lowest of (1) the principal amount of the PPP loan, or $1 million; (2) the amount at which Payroll Costs comprise 75 percent, or $800,000; and (3) the Potential Forgiveness Amount after applying the Reduction Formulas, or $595,000.
       
      Applying Reduction Formulas

      $600,000 Payroll Costs + $300,000 Non-Payroll Costs = $900,000 Potential Forgiveness Amount, Before Reduction Formulas Applied

      $900,000 Potential Forgiveness Amount − $50,000 Wage Reduction Amount = $850,000 Reduced Potential Forgiveness Amount

      $850,000 Reduced Potential Forgiveness Amount × 0.7 FTE Reduction Quotient = $595,000 Forgiveness Amount After Applying Reduction Formulas

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      Choose Lowest Forgiveness Amount

      $1 Million PPP Loan Principal Amount

      $600,000 Payroll Costs ÷ 0.75 Requirement = $800,000 Forgiveness Amount Applying 75% Payroll Costs Requirement

      $595,000 Forgiveness Amount After Applying Reduction Formulas
 
  • Safe Harbor. The PPP provides a safe harbor from the Reduction Formulas to incentivize Borrowers to rehire employees and reverse any hours reductions or pay cuts. The Application provides guidance regarding when Borrowers are entitled to the safe harbor.
     
    • Wage Reduction Safe Harbor. A Borrower is exempt from the wage reduction formula for a particular employee if (1) the Borrower reduced the employee’s average annual salary or hourly wage during the period from February 15, 2020 through April 26, 2020, and (2) the employee’s average annual salary or hourly wage as of June 30, 2020 is greater than that as of February 15, 2020. A Borrower may be exempt from the wage reduction formula for all or a number of its employees. A Borrower is not entitled to the safe harbor for a particular employee if it only partially reverses the pay cut of that employee, comparing June 30, 2020 to February 15, 2020.
       
    • Workforce Reduction Safe Harbor. A Borrower is exempt from the workforce reduction formula if (1) the Borrower reduced its average FTE levels during the period from February 15, 2020 through April 26, 2020, and (2) the Borrower “restored” its average FTE levels to the levels in the pay period including February 15, 2020 by June 30, 2020. A Borrower is not entitled to the safe harbor if it only partially reverses any layoffs or hours reductions.
       
The Coronavirus situation is fluid, and laws are changing rapidly. Our recent memorandums and other information discussing various aspects of Coronavirus can be found here.

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