Updated: U.S. Department of Treasury and Small Business Administration Release Loan Forgiveness Applications and Instructions for Paycheck Protection Program

August 27, 2020
August 27, 2020 Update. On August 24, 2020, the Small Business Administration (“SBA”), in consultation with the U.S. Department of the Treasury (“Treasury”), published the Interim Final Rule on Treatment of Owners and Forgiveness of Certain Nonpayroll Costs, which addresses: (1) the ownership percentage that triggers the applicability of owner compensation rules for forgiveness purposes, and (2) limitations on the eligibility of certain nonpayroll costs for forgiveness. Specifically, the rule discusses the eligibility for forgiveness of nonpayroll costs attributable to a tenant (or sub-tenant), household expenses of home-based businesses, and rent and mortgage interest payments made to related parties. This interim final rule supplements the interim final rules previously posted by the SBA and discussed below. This guidance has been incorporated into this updated post.
 
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August 7, 2020 Update. On August 4, 2020, the SBA, in consultation with the Treasury, published responses to questions frequently asked by Borrowers (as defined below) and lenders (the “August 4 FAQs”) concerning forgiveness of loans made under the Paycheck Protection Program (“PPP”) created by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and amended by the Paycheck Protection Program Flexibility Act (the “Flexibility Act”). The below post has been updated to reflect this guidance. The last date on which a PPP Loan (as defined below) application may be approved is August 8, 2020.
 
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July 7, 2020 Update. On July 4, 2020, President Trump signed a bill extending the application period for loans under the PPP created by the CARES Act for five weeks, from June 30, 2020 until August 8, 2020. According to the SBA PPP Report, as of June 30, 2020, nearly $132 billion of the $659 billion in funds set aside for PPP remains available for businesses seeking subsidies for payroll and other eligible expenses. This amendment has been incorporated into this updated post.
 
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June 30, 2020 Update. On June 26, 2020, the Small Business Administration (the “SBA”), in consultation with the “Treasury, published the Interim Final Rule on Revisions to Loan Forgiveness Interim Final Rule and SBA Loan Review Procedures Interim Final Rule (the “Revised Forgiveness Rule”) which addresses, in part, the effect of an employee’s rejection of the Borrower’s good faith, written offer to rehire the employee or restore his or her hours. In the Revised Forgiveness Rule, the SBA and the Treasury determined that the new statutory safe harbor regarding individuals who refuse an offer to be rehired supersedes the previous exemption in the Interim Final Rule on Loan Forgiveness on this particular issue. However, the exemption in the Interim Final Rule on Loan Forgiveness remains regarding individuals who refuse an offer to restore their hours. This guidance has been incorporated into this updated post.

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June 18, 2020 Update. On June 16, 2020, the SBA, in consultation with the Treasury, issued a Revised Paycheck Protection Program Loan Forgiveness Application (the “Full Application”), which implements the amendments contained in the Flexibility Act. The corresponding Full Application Instructions are available here. In addition to revising the full application, the SBA released the new EZ Paycheck Protection Program Loan Forgiveness Application (the “EZ Application,” and, together with the Full Application, the “Applications”), which requires fewer calculations and less documentation if a business that receives PPP Loans (a “Borrower”) falls into one of the following categories: (1) the Borrower has no employees and is self-employed or an independent contractor; (2) the Borrower did not reduce the salaries or wages of any of its employees by more than 25% and did not reduce the number or hours of its employees; or (3) the Borrower experienced reductions in business activity as a result of health directives related to COVID-19 and did not reduce the salaries or wages of any of its employees by more than 25%. The corresponding EZ Application Instructions are available here.

The changes to the Applications and corresponding instructions have been incorporated into this updated post.
 
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June 8, 2020 Update. On June 5, 2020, President Trump signed into law the Flexibility Act, which amends certain provisions of the PPP created by the CARES Act, and makes it easier for Borrowers to achieve full PPP Loan forgiveness. The Flexibility Act: (1) extends the covered period for loan forgiveness to 24 weeks (but not later than December 31, 2020), and gives Borrowers that received a PPP Loan prior to the date of enactment (June 5, 2020) the option to use the original 8-week covered period; (2) reduces the amount of the PPP Loan that must be used on eligible payroll expenses to qualify for forgiveness from 75% to 60%; (3) creates new exceptions that would allow Borrowers to qualify for full loan forgiveness if they are unable to restore their workforce levels to pre-pandemic levels because the Borrower cannot find qualified employees; (4) changes the loan repayment period for loans originated after the enactment of the Flexibility Act (June 5, 2020) from two to five years (and expressly allows Borrowers and lenders to mutually agree to modify the maturity date of existing loans accordingly); and (5) extends the deferral period for payment of principal, interest, and fees on PPP Loans from six months until the date on which the amount of forgiveness determined under the CARES Act is remitted to the lender (or, if the Borrower does not apply for loan forgiveness, 10 months after the end of the Borrower’s loan forgiveness covered period). On June 8, 2020, Treasury Secretary Steven Mnuchin and SBA Administrator Jovita Carranca issued a joint statement clarifying that, under the PPP Flexibility Act, Borrowers “will continue to be eligible for partial loan forgiveness, subject to at least 60 percent of the loan forgiveness amount having been used for payroll costs” where the Borrower “use[s] less than 60 percent of the loan amount for payroll costs during the forgiveness covered period.”

A detailed explanation of the amendments is available in our memorandum to clients, Key Changes Enacted in the Paycheck Protection Program Flexibility Act of 2020.
 
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May 28, 2020 Update. On May 22, 2020, the SBA, in consultation with the 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 PPP is an unprecedented forgivable loan program, created by 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 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.
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On May 15, 2020, the SBA, in consultation with the Treasury, released the Paycheck Protection Program Loan Forgiveness Application, which was revised on June 16, 2020. On June 17, 2020, the EZ Paycheck Protection Program Loan Forgiveness Application, as well as corresponding step-by-step instructions for Borrowers seeking forgiveness of some or all of their PPP Loans, were released. Among other things, the Applications and instructions provide: (1) additional information regarding the expenses eligible for forgiveness; and (2) instructions for calculating the loan forgiveness amount.

I. Qualifying Expenses

The CARES Act provides that Borrowers are eligible for forgiveness of PPP Loans for amounts spent on qualifying expenses during the Covered Period. The Covered Period for Borrowers whose loans were disbursed on or after June 5, 2020 is 24 weeks from loan disbursement or December 31, 2020, whichever comes first. Borrowers whose loan proceeds were disbursed prior to June 5, 2020 will have the option to choose between an 8-week period and 24-week 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 the Treasury, provides further guidance regarding Payroll Costs in the Interim Final Rule on Paycheck Protection Program, 85 Fed. Reg. 20811, and Frequently Asked Question documents regarding PPP Loans, which are available here and here. Payroll Costs must comprise at least 60 percent of the loan forgiveness amount.
     
    • Alternative Payroll Covered Period. “For administrative convenience,” the Applications allow Borrowers with a biweekly or more frequent payroll schedule to calculate Payroll Costs using the 24-week (168-day) period or, for loans received before June 5, 2020 at the election of the borrower, the 8-week (56-day) period that 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 Applications reference “the Covered Period or the Alternative Payroll Covered Period.” However, Borrowers must apply the Covered Period (not the Alternative Payroll Covered Period) wherever the Applications reference “the Covered Period” only. In no event may the Alternative Covered Period extend beyond December 31, 2020.
       
    • Incurred or Paid. In the August 4 FAQs, the SBA made clear that Payroll Costs are generally eligible for forgiveness if (1) the Payroll Costs were incurred during the Covered Period or the Alternative Covered Period and paid after the Covered Period or Alternative Covered Period, so long as the payroll costs are paid on or before the next regular payroll date after the Covered Period or Alternative Payroll Covered Period; or (2) the Payroll Costs were incurred before the Covered Period but paid during the Covered Period.
       
      • Example. A Borrower received its loan before June 5, 2020 and elects to use a 24-week Covered Period. The Borrower’s Covered Period runs from Monday, April 20 through Sunday, October 4. The Borrower has a biweekly payroll cycle, with a pay period ending on Sunday, October 4. However, the Borrower will not make the corresponding payroll payment until the next regular payroll date of Friday, October 9. Under these circumstances, the Borrower incurred payroll costs during the Covered Period and may seek loan forgiveness for the payroll costs paid on October 9 because the cost was incurred during the Covered Period and payment was made on the first regular payroll date after the Covered Period.
         
      • Example. A Borrower received its loan before June 5, 2020 and elects to use a 24-week Covered Period. The Borrower’s Covered Period runs from Monday, April 20 through Sunday, October 4. The Borrower has a biweekly payroll cycle, with a payroll cycle ending on Saturday, April 18. The Borrower will not make the corresponding payroll payment until Friday, April 24. While these payroll costs were not incurred during the Covered Period, they were paid during the Covered Period and are therefore eligible for loan forgiveness.
         
    • Eligible Payroll Costs. Eligible payroll costs consist of compensation to U.S. employees, including: (1) gross salaries and gross wages, including hazard pay; (2) lost tips, lost commissions, bonuses, or other forms of incentive pay; (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 8- or 24-week Covered Period. For Borrowers using a 24-week Covered Period, Payroll Costs that are eligible for forgiveness are capped at $46,154 per employee. For Borrowers using a 8-week Covered Period, Payroll Costs that are eligible for forgiveness are capped at $15,385 per employee. The Payroll Costs that are eligible for forgiveness are lower for owners (owner-employees, self-employed individuals, and general partners). Specifically, for Borrowers using a 24-week Covered Period, Payroll Costs that are eligible for forgiveness are capped at either $20,833 for each individual owner or the 2.5-month equivalent of their applicable compensation in 2019, whichever is lower. For Borrowers using an 8-week Covered Period, Payroll Costs that are eligible for forgiveness are capped at either $15,385 for each individual owner or the 8-week equivalent of their applicable compensation in 2019, whichever is lower.
       
    • Group Health Care Benefits. Employer expenses for employee group health care benefits that are paid or incurred by the Borrower during the Covered Period or the Alternative Payroll Covered Period are eligible Payroll Costs and eligible for loan forgiveness as long as the premiums are paid during the Covered Period or Alternative Covered Period or by the next premium due date after the end of the Covered Period or Alternative Covered Period.
       
      • Expenses for group health care benefits paid by employees (or beneficiaries of the plan), such as the employee share of their health care premium, are not eligible Payroll Costs.
         
      • Expenses for group health benefits and employer contributions for retirement benefits that are accelerated from periods outside the Covered Period or Alternative Payroll Covered Period are not eligible for forgiveness.
         
    • Owner Compensation. The amount of compensation of business owners who also work at their business that is eligible for forgiveness depends on the business type and whether the Borrower is using an 8-week or 24-week Covered Period. In addition to the specific caps described below, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at $20,833 per individual in total across all businesses in which he or she has an ownership stake. For Borrowers that received a PPP Loan before June 5, 2020 and elect to use an 8-week Covered Period, the cap is $15,385. If the owner’s total compensation across businesses that receive a PPP Loan exceeds the cap, owners can choose how to allocate the capped amount across different businesses.
       
      • C Corporations. An owner-employee of a C-corporation, defined as an owner who is also an employee (including where the owner is the only employee), is eligible for loan forgiveness up to the amount of 2.5/12 (or 20.83%) of his or her 2019 employee cash compensation, with cash compensation defined as it is for all other employees. Borrowers are also eligible for loan forgiveness for payments for employer state and local taxes paid by the Borrowers and assessed on their compensation, for the amount paid by the Borrower for employer contributions for their employee health insurance, and for employer retirement contributions to their employee retirement plans capped at the amount of 2.5/12 of the 2019 employer retirement contribution. Payments other than for cash compensation should be included on lines 6–8 of PPP Schedule A of the loan forgiveness application (SBA Form 3508 or lender equivalent), for Borrowers using that form, and do not count toward the $20,833 cap per individual.
         
      • S Corporations. The employee cash compensation of an S-corporation owner-employee, defined as an owner who is also an employee, is eligible for loan forgiveness up to the amount of 2.5/12 (or 20.83%) of their 2019 employee cash compensation, with cash compensation defined as it is for all other employees. Borrowers are also eligible for loan forgiveness for payments for employer state and local taxes paid by the Borrowers and assessed on their compensation, and for employer retirement contributions to their employee retirement plans capped at the amount of 2.5/12 of their 2019 employer retirement contribution. Employer contributions for health insurance are not eligible for additional forgiveness for S-corporation employees with at least a 2% stake in the business, including for employees who are family members of an at least 2% owner under the family attribution rules of 26 U.S.C. § 318, because those contributions are included in cash compensation. The eligible non-cash compensation payments should be included on lines 7 and 8 of PPP Schedule A of the Loan Forgiveness Application (SBA Form 3508), for Borrowers using that form, and do not count toward the $20,833 cap per individual.
         
      • Owner-Employee with No Meaningful Control. Owner-employees with less than a 5 percent ownership stake in a C- or S-Corporation are exempt from the above owner-employee compensation rules.  This exemption is intended to cover owner-employees who have no meaningful ability to influence decisions over how loan proceeds are allocated.
         
      • Self-Employed Schedule C (or Schedule F) Filers. The compensation of self-employed Schedule C (or Schedule F) individuals, including sole proprietors, self-employed individuals, and independent contractors, that is eligible for loan forgiveness is limited to 2.5/12 of 2019 net profit as reported on IRS Form 1040 Schedule C line 31 (or 2.5/12 of 2019 net farm profit, as reported on IRS Form 1040 Schedule F line 34) (or for new businesses, the estimated 2020 Schedule C (or Schedule F) referenced in question 10 of “Paycheck Protection Program: How to Calculate Maximum Loan Amounts – By Business Type”). Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness; health insurance and retirement expenses are paid out of their net self-employment income. If the Borrower did not submit its 2019 IRS Form 1040 Schedule C (or Schedule F) to the Lender when the Borrower initially applied for the loan, it must be included with the Borrower’s forgiveness application.
         
      • General Partners. The compensation of general partners that is eligible for loan forgiveness is limited to 2.5/12 of their 2019 net earnings from self-employment that is subject to self-employment tax, which is computed from 2019 IRS Form 1065 Schedule K-1 box 14a (reduced by box 12 section 179 expense deduction, unreimbursed partnership expenses deducted on their IRS Form 1040 Schedule SE, and depletion claimed on oil and gas properties) multiplied by 0.9235. Compensation is only eligible for loan forgiveness if the payments to partners are made during the Covered Period or Alternative Payroll Covered Period. Separate payments for health insurance, retirement, or state or local taxes are not eligible for additional loan forgiveness. If the partnership did not submit its 2019 IRS Form 1065 K-1s when initially applying for the loan, it must be included with the partnership’s forgiveness application.
         
      • LLC Owners. LLC owners must follow the instructions that apply to how their business was organized for tax filing purposes for tax year 2019, or if a new business, the expected tax filing situation for 2020.
         
    • 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. 
       
    • Partial Pay Periods. A Borrower that pays Payroll Costs twice a month or less frequently will need to calculate payroll costs for partial pay periods; however, in no event may the Covered Period or Alternative Covered Period for any Borrower end later than December 31, 2020.
       
      • Example. A Borrower uses a biweekly payroll cycle. The Borrower’s 24-week Covered Period begins on Monday, June 1 and ends on Sunday, November 15. The first day of the Borrower’s first payroll cycle that starts in the Covered Period is June 7. The Borrower may elect an Alternative Covered Period that starts on June 7 and ends on November 21 (167 days later). Payroll costs incurred (i.e., the pay was earned on that day) during this Alternative Covered Period are eligible for loan forgiveness if the last payment is made on or before the first regular payroll date after November 21.
         
  • 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. The Alternative Payroll Covered Period does not apply to Non-Payroll Costs. No more than 40 percent of the loan forgiveness amount may consist of Non-Payroll Costs. However, the Applications provide 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. 
       
      • Refinanced Mortgage Obligations. If a mortgage loan on real or personal property that existed prior to February 15, 2020 is refinanced on or after February 15, 2020, the interest payments on the refinanced mortgage loan during the Covered Period are eligible for loan forgiveness.
         
      • Mortgage Interest Payments to a Related Party. Mortgage interest payments to a related party are not eligible for forgiveness. For purposes of determining whether parties are related, any common ownership between the Borrower and the property owner will suffice.
         
    • 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.”
       
      • Recently Renewed Leases. If a lease that existed prior to February 15, 2020 expires on or after February 15, 2020 and is renewed, the lease payments made pursuant to the renewed lease during the Covered Period are eligible for loan forgiveness.
         
        • Example. A Borrower entered into a five-year lease for its retail space in March 2015. The lease was renewed in March 2020. For purposes of determining the forgiveness, the March 2020 renewed lease is deemed to be an extension of the original lease, which was in force before February 15, 2020. As a result, the lease payments made under the renewed lease during the Covered Period are eligible for loan forgiveness.
           
      • Rent or Lease Payments to a Related Party. Rent payments to a related party (i.e., any common ownership between the Borrower and property owner) are eligible for loan forgiveness if (1) the amount of loan forgiveness requested for rent or lease payments to the related party is no more than the amount of mortgage interest owed on the property during the Covered Period that is attributable to the space being rented by the Borrower, and (2) the lease and the mortgage were entered into prior to February 15, 2020. The Borrower must provide its lender with mortgage interest documentation to substantiate these payments.
         
    • 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.
       
      • Electricity Supply Charges. The entire electricity bill payment is eligible for loan forgiveness (even if charges are invoiced separately), including supply charges, distribution charges, and other charges such as gross receipts taxes.
         
    • Interest on Unsecured Credit. Interest accrued on unsecured credit is not eligible for loan forgiveness because the loan is not secured by real or personal property. Although interest on unsecured credit incurred before February 15, 2020 is a permissible use of PPP Loan proceeds, the expense is not eligible for forgiveness.
       
    • Incurred or Paid. In the August 4 FAQs, the SBA made clear that Non-Payroll Costs are eligible for forgiveness if (1) the Non-Payroll Costs were incurred prior to the Covered Period and paid during the Covered Period; or (2) were incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.
       
      • Example. A borrower’s 24-week Covered Period runs from April 20 through October 4. On May 4, the borrower receives its electricity bill for April. The borrower pays its April electricity bill on May 8. Although a portion of the electricity costs were incurred before the Covered Period, these electricity costs are eligible for loan forgiveness because they were paid during the Covered Period.
         
      • Example. A borrower’s 24-week Covered Period runs from April 20 through October 4. On October 6, the borrower receives its electricity bill for September. The borrower pays its September electricity bill on October 16. These electricity costs are eligible for loan forgiveness because they were incurred during the Covered Period and paid on or before the next regular billing date (November 6).
         
    • Non-Payroll Household Expenses and Expenses Attributable to a Tenant. Amounts attributable to the business operation of a tenant (or sub-tenant) of the Borrower, or household expenses in the case of a home-based business, are not eligible for loan forgiveness.
       
      • Example 1. A Borrower rents an office building for $10,000 per month and sub-leases out a portion of the space to other businesses for $2,500 per month. Only $7,500 per month of the building rent is eligible for loan forgiveness.
         
      • Example 2. A Borrower has a mortgage on an office building it operates out of, and it leases out a portion of the space to other businesses. The portion of mortgage interest that is eligible for loan forgiveness is limited to the percent share of the fair market value of the space that is not leased out to other businesses. As an illustration, if the leased space represents 25% of the fair market value of the office building, then the Borrower may only claim forgiveness on 75% of the mortgage interest.
         
      • Example 3. A Borrower shares a rented space with another business. When determining the amount that is eligible for loan forgiveness, the Borrower must prorate rent and utility payments in the same manner as on the Borrower’s 2019 tax filings, or if a new business, the Borrower’s expected 2020 tax filings.
         
      • Example 4. A Borrower works out of his or her home. When determining the amount of nonpayroll costs that are eligible for loan forgiveness, the Borrower may include only the share of covered expenses that were deductible on the Borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020 tax filings.

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 amended, incentivizes Borrowers to retain employees at full hours and pay during the applicable 8- or 24-week period 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.

A Borrower may want to consider using the EZ Application, and thereby avoid the use of the Reduction Formulas (defined below) contained in the Full Application, if the Borrower: (1) is self-employed or an independent contractor, and has no employees; (2) did not reduce the salaries or wages of any of its employees by more than 25% and did not reduce the number or hours of its employees; or (3) experienced reductions in business activity as a result of health directives related to COVID-19 and did not reduce the salaries or wages of any of its employees by more than 25%. For purposes of determining whether any employee’s salary or wage was reduced by more than 25%, the Borrower should not consider any employees that received, during any single period during 2019, salary or wages at an annualized rate of pay of more than $100,000. For purposes of determining whether the Borrower reduced the number or hours of their employees, the Borrower should not consider employees that fall within the exceptions to the workforce reduction formula set forth below.

In practice, the Full 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 0.6, such that Payroll Costs consist of no less than 60 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”). In calculating the Potential Forgiveness Amount, Borrowers should only take into account decreases in salaries or wages, not other forms of compensation. 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 8- or 24-week period (that is, divide by 52 and multiply by 8 or 24, depending on the applicable period) to determine the reduction to the Potential Forgiveness amount.
       
      • Example. An employee was paid an average annual salary of $90,000 during the 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 for an 8-week Covered Period and $3,461.52 for a 24-week Covered Period.
         
        $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

        If using an 8-week period: $144.23 Average Weekly Salary Difference × 8 Weeks In Covered Period = $1,153.85 Salary Difference Prorated For Covered Period
         
        or

        If using a 24-week period: $144.23 Average Weekly Salary Difference × 24 Weeks In Covered Period = $3,461.52 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 either 8 or 24 weeks, depending on the applicable Covered Period or Alternative Payroll Covered Period to determine the reduction to the Potential Forgiveness amount. 
     
    • 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 for an 8-week Covered Period and $3,600 for a 24-week Covered Period.
       
      $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

      If using an 8-week period: $150 Average Weekly Wage Difference × 8 Weeks In Covered Period = $1,200 Wage Difference For Covered Period

      or

      If using a 24-week period: $150 Average Weekly Wage Difference × 24 Weeks In Covered Period = $3,600 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. If, in the hourly wage example above, 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 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, either of the preceding periods, or “a consecutive 12-week period between May 1, 2019 and September 15, 2019.” If a seasonal employer elects to use a 12-week period between May 1, 2019 and September 15, 2019 to calculate its maximum PPP Loan amount, it must use the same 12-week period as the reference period for calculation of any reduction in the amount of loan forgiveness. 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 (or the Alternative Payroll 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
         
        * * *
         
        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

        * * *
         
        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

        * * *
         
        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

      * * *
       
      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

      * * *
       
      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

      * * *
       
      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 restore an employee’s 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.
     
    • Recordkeeping. Borrowers should maintain the following documents to show compliance with this exemption: the written offer to rehire an individual;
      • a written record of the offer’s rejection; and
      • a written record of efforts to hire a similarly qualified individual.
         
    • Employees Who Exceed the Salary Cap. The FTE Reduction Exceptions apply to all employees, not just those who would be listed in Table 1 of the Loan Forgiveness Application (SBA Form 3508 or lender equivalent). Thus, Borrowers should include employees who made more than $100,000 in the FTE Reduction Exception line in Table 1 of the PPP Schedule A Worksheet.
       
  • Safe harbor. The Flexibility Act also provides that the amount of loan forgiveness “shall be determined without regard to a proportional reduction in the number of full-time equivalent employees if an eligible recipient, in good faith” is able to document (1) “an inability to rehire individuals who were employees of the eligible recipient on February 15, 2020,” and (2) “an inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020”; or (3) “an inability to return to the same level of business activity as such business was operating at before February 15, 2020, due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration during the period beginning on March 1, 2020, and ending December 31, 2020, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.”

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 Full 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 60 percent, or $1 million; 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

    * * *
     
    Choose Lowest Forgiveness Amount

    $1 Million PPP Loan Principal Amount

    $600,000 Payroll Costs ÷ 0.60 Requirement = $1 Million Forgiveness Amount Applying 60% 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 Full 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 the earlier of December 31, 2020 and the date the Full Application is submitted 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 December 31, 2020 or the date the Full Application is submitted (whichever is earlier) 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 December 31, 2020. A Borrower is not entitled to the safe harbor if it only partially reverses any layoffs or hours reductions.
       
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