PPP Loan Forgiveness: An Overview

April 24, 2020

By: Rod Kubat

On April 16, 2020, the Small Business Administration (“SBA”) announced that the $354 billion Paycheck Protection Program (“PPP”) loan funds had been committed and SBA was not taking further applications. As of April 16, 2020, approximately $342 billion had been approved and committed for funding. Congress passed on April 23, 2020 and the President signed on April 24, 2020, the Paycheck Protection Program and Healthcare Enhancement Act that will add approximately $310 billion to the PPP. For PPP Loan recipients, expending proceeds in order to maximize loan forgiveness under Section 1106 of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) now becomes the next legal hurdle. This article reviews the CARES Act’s standards for loan forgiveness.


General Standards for Loan Forgiveness


PPP Loan proceeds are to be used for payroll costs (as described in 1102(a)(2) of the CARES Act), interest on mortgage obligations incurred prior to February 15, 2020 (“Covered Mortgage Interest”), rent under lease agreements in force prior to February 15, 2020 (“Covered Rent Obligations”); and utility payments, for which service began prior to February 15, 2020 (“Covered Utilities Obligations”) (collectively, “Forgiveness Eligible Costs”). Borrowers are entitled to loan forgiveness only for the principal amount of the loan used to pay Forgiveness Eligible Costs. However, the SBA has determined that in order to receive loan forgiveness, borrowers must use at least 75% of the PPP Loan proceeds for payroll costs. Forgiveness Eligible Costs are determined for the Covered Period, which is the 8-week period that begins on the date the Borrower receives the PPP Loan proceeds. The maximum loan amount that can be forgiven is the original principal amount. Any amount not forgiven must be repaid according to the Note terms over a two-year period, including interest at the rate of 1.00% per annum until that amount is repaid in full. Borrowers have a 6-month payment deferral, but interest continues to accrue.


In addition, borrowers must meet the following tests or fall within the Rehire-Wage Restoration Exemption discussed below in order to avoid a reduction in the loan forgiveness amount:



  • FTE Test: The average number of full-time equivalent employees (“FTEs”) per month employed by the eligible recipient during the Covered Period must equal or exceed the average number of FTEs per month for either of the following periods (each a “FTE Comparison Period”), as selected by borrowers:


    1. the period beginning on February 15, 2019 and ending on June 30, 2019;
    2. the period beginning on January 1, 2020 and ending on February 29, 2020; or
    3. in the case of borrowers who are seasonal employers, the average number of full-time equivalent employees per month employed by the borrower during the period beginning on February 15, 2019 and ending on June 30, 2019.


The SBA has not yet issued guidance about how to calculate FTEs for loan forgiveness purposes. In the absence of such guidance, a sensible approach is to calculate FTEs using the methodology used to calculate FTEs for purposes of the Affordable Care Act found here.


The average number of FTEs is determined by calculating the average number of FTEs for each pay period falling within a month during the Covered Period and the selected FTE Comparison Period. To the extent borrowers fail this test, the amount of loan forgiveness is reduced in accordance with the following formula:


Loan Forgiveness = Forgiveness Eligible Costs X [Avg FTEs/pay period/month during the Covered Period ÷ Avg FTEs/month during the Comparison Period]


For example, assume Employer’s average FTEs for the Covered Period is 7 and Employer’s Forgiveness Eligible Costs are $100,000. During both of the Comparison Periods, Employer’s average FTEs was 10. Employer’s loan forgiveness amount is $70,000, i.e., 70% of the Forgiveness Eligible Costs (7/10 x Forgiveness Eligible Costs).


  • Wage Reduction Test: Total salary and wages paid during the Covered Period to each employee who, during 2019, did not receive wages and salary at an annual rate more than $100,000 per year, cannot be reduced during the Covered Period by more than 25% of the total salary and wages paid to each of those employees during the most recent full quarter before the Covered Period began. The test applies on an individual employee basis, which requires examination of the wages and salary of each employee. In the case of borrowers who employ tipped employees, additional wages paid to those employees are eligible for forgiveness. To the extent borrowers fail this test, the amount of loan forgiveness is reduced.


For example, assume Employer paid employees making less than $100,000 in the quarter ending March 31, 2020 total wages and salary of $400,000. During the Covered Period, which began on April 20, 2020 and ends on June 15, 2020, the Employer had in effect an across the board reduction in wages for those employees of 10% so that Employer paid those employees total wages and salary of $360,000. In this situation, there would be no reduction in loan forgiveness. However, if during the Covered Period the Employer’s across the board wage reduction was 40% so that the Employer paid those employees total wages and salary of $240,000, the loan forgiveness amount would be reduced by $60,000 ($160,000 minus $100,000 (25% x $400,000) = $60,000).


  • Rehire-Wage Restoration Exemption: When applying the FTE Test, Borrowers are entitled to exclude FTEs terminated during the period of February 15, 2020 and April 26, 2020 (30-days after the CARES Act was passed) who are rehired before June 30, 2020. Similarly, borrowers are entitled to exclude from the Wage Reduction Test, wage reductions made during the period of February 15, 2020 and April 26, 2020, if the wage reductions are restored before June 30, 2020. It is unclear at this time whether or not rehiring previously terminated FTEs by June 30, 2020 eliminates the FTE Test entirely or if it still must be applied. Whether wage restoration by June 30, 2020 eliminates the Wage Test completely is also unclear. It is possible that rehiring the terminated FTEs and restoring the wage reductions in and of themselves result in no reduction in the loan forgiveness amount. However, it is also possible that the FTE Test and Wage Reduction Test must still be applied, excluding only the rehired employees and the restored wage reductions. What is clear is that if a borrower’s failure to meet the FTE Test, the Wage Reduction Test or both is due solely to termination of FTEs and/or a wage reduction that occurred during the period of February 15, 2020 and April 26, 2020, the borrower would suffer no reduction in the loan forgiveness amount if before June 30, 2020, the borrower rehires the terminated employees, or restores those wage reductions or both. Caution: The SBA has not yet issued guidance on applying this exemption. That guidance is expected to bring clarity to how this exemption affects a variety of situations other than the example here.


  • Records: Ultimately, borrowers bear the burden of proving they have met the requirements for loan forgiveness by providing records supporting borrowers’ requests. Those records must be submitted to the lender and include: documentation verifying the number of full-time equivalent employees on payroll and pay rates for the periods; payroll tax filings reported to the Internal Revenue Service; State and local payroll, and unemployment insurance filings; and documentation, including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on Covered Mortgage Obligations, Covered Rent Obligations, and/or Covered Utility Payments. Borrowers also have to provide a certification from one of its authorized representatives that: (A) the documentation presented is true and correct; and (B) the amount for which forgiveness is requested was used to retain employees, make interest payments on a Covered Mortgage Obligation, make payments on Covered Rent Obligations, or make Covered Utilities Obligations payments. The SBA may require other documentation as it determines necessary. Loan forgiveness will not be granted without this documentation.


  • FFCRA Exclusion and Employment Tax Deferral: It is important to be mindful of the interaction between the PPP and other business relief provisions under the Families First Coronavirus Response Act (the “FFCRA”) and the Cares Act. When calculating payroll costs for any purpose under the PPP, including loan forgiveness, qualified sick and family leave wages for which a borrower receives a credit under Section 7001 and/or Section 7003 of the FFCRA may not be included in such calculation. Additionally, once a borrower receives a decision from its lender that its PPP Loan is forgiven, the borrower becomes ineligible to defer the deposit and payment of employment taxes due after that date as permitted under Section 2302 of the CARES Act. However, any employment taxes the borrower deferred through such date continues to be deferred and will be due on the applicable dates as described in Section 2302 of the CARES Act.



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