May 18, 2020

SBA Releases Loan Forgiveness Application and Instructions

As a reminder, the PPP was enacted as part of the CARES Act allowing eligible Borrowers to receive forgivable loans if at least 75% of the loan was spent on payroll costs and no more than 25% on non-payroll costs i.e. (utilities, rent, interest on mortgage obligations) during the 8 weeks commencing with the loan origination date.  The following are some of the key takeaways from the Application:

Borrowers Spending Less than 75% of PPP Proceeds on Payroll Costs Are Eligible for Partial Loan Forgiveness

Prior to the release of the Application, some commentators interpreted the 75% payroll costs requirement as an all-or-nothing test, meaning if a Borrower did not spend at least 75% of its PPP loan on payroll costs then none of the loan would be forgiven.

The Application clarifies that if a Borrower spends less than 75% of its PPP proceeds on payroll costs, then the Borrower is eligible for partial loan forgiveness and at least 75% of the loan forgiveness amount must be attributable to payroll costs.  For example, if a Borrower’s PPP loan amount is $1,000,000 and $500,000 is spent on payroll costs and $500,000 on non-payroll costs, then the maximum amount eligible for forgiveness is $666,667 ($500,000/.75).  In this example, $500,000 (75%) of the forgiveness amount would be attributable to payroll costs and $166,667 (25%) would be attributable to non-payroll costs.

Eligible Costs Include Costs Paid OR Incurred During Covered Period

The language in the CARES Act suggests that costs eligible for forgiveness must be both paid and incurred during the 8-week covered period (the “Covered Period”) in order to qualify for forgiveness.  This caused many Borrowers to consider accelerating payroll to employees for payroll costs to be both incurred and paid during the Covered Period.

The Application clarifies that costs (payroll and non-payroll) eligible for forgiveness include costs that are paid “or” incurred during the Covered Period.  The Application further clarifies that payroll costs are considered paid on the date that the paychecks are distributed, or the Borrower originates an ACH credit transaction and payroll costs are considered incurred on the day that the employee’s pay is earned.

For example, payroll costs paid during the Covered Period will qualify for forgiveness even if those costs are attributable to work performed by employees prior to the Covered Period and payroll costs incurred during the Covered Period are eligible for forgiveness if paid to the employees on or before the next regular payroll date.

This methodology similarly applies to non-payroll costs.  Non-payroll costs (i.e. mortgage interest, rent and utilities), are eligible for loan forgiveness if paid during the Covered Period or 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.

Borrowers May Elect Alternative Payroll Covered Period

The Application permits Borrowers with biweekly (or more frequent) payroll schedules to elect to calculate eligible payroll costs using the 8-week period beginning on the first day of their first pay period following their PPP Loan Disbursement Date (the “Alternative Payroll Covered Period”).

This alternative period would also be used when applying the FTE and Salary/Wages reduction tests.

FTE Defined as 40 or More Hours

The CARES Act provides that a Borrower’s loan forgiveness amount is subject to  reduction if its average monthly full-time equivalent employees (“FTE”s) during the covered period is less than the average monthly FTEs during either: (a) the period from February 15, 2019 to June 30, 2019 or (b) the period from January 1, 2020 to February 29, 2020, (whichever period the Borrower elects to use).  However, the CARES Act did not define an FTE.

The forgiveness application provides that an employee working an average of 40 hours or more per week is equal to 1.0 FTE (which is the maximum for each employee).  For employees working less than 40 hours, an FTE is calculated by dividing the average number of hours paid to such employee per week divided by 40 (rounded to the nearest tenth).  Borrowers may simplify their FTE calculations by counting all employees working under 40 hours per week as 0.5 FTE.

FTE Reduction Exceptions

The Application indicates that reductions in FTEs resulting from any of the following, will not result in a reduction in the loan forgiveness amount: 1) any positions for which the Borrower made a good-faith written offer to rehire an employee during the Covered Period or Alternative Covered Period which was rejected by the employee, 2) any employees who during the Covered Period or Alternative Covered Period (a) were fired for cause (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours.

Although the Loan Forgiveness Application has provided Borrowers with much needed guidance, we anticipate additional loan forgiveness guidance will soon be released in the form of an Interim Final Rule and/or FAQs.

Please contact a Kerr Russell attorney today for more information about the Paycheck Protection Loan Program and Loan Forgiveness Application.

Close Up of James R. Cambridge of Kerr RussellJames Cambridge has more than 30 years of experience in the areas of business law, finance, and real estate. Jim is co-chairperson of the firm’s Business and Corporate Practice Group and a member of the firm’s Executive Committee. He serves as counsel for a number of businesses and handles a variety of matters such as business formations, contracts, employment, lending relationships, restructurings, real estate, buying and selling businesses and resolving troubled business situations. He is experienced in advising closely-held businesses, as well as in advising US and foreign-based companies in establishing operations in both the US and abroad.

John D. GattiImage of John Gatti, Tax attorney of Kerr Russell is a Certified Public Accountant as well as an attorney. He concentrates his practice in the areas of taxation, mergers and acquisitions, business law, real estate law, and estate planning. John also serves as the firm’s administrative partner and chairs the firm’s Taxation Practice Group. He has considerable experience representing professional services firms. These include accounting, engineering, and architectural firms, as well as insurance agencies, in purchase and sale transactions.


Headshot of Cody Attisha of Kerr RusellCody Attisha focuses on taxation law, corporate law, mergers and acquisitions, finance, and estate and trust planning. He also helps clients with entity formation, including evaluating, choosing, and implementing the right partnership, corporate, or non-profit structure.



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