SBA Releases PPP Loan Forgiveness Application

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On May 15, the SBA and Department of Treasury released the much anticipated PPP loan forgiveness application and related instructions (the Application). The Application provides significant clarity and borrower flexibility but continues to leave some questions unanswered.

Clarification of the “Incurred and Paid” Language

The statutory language of the CARES Act created some concerns that the forgivable costs (defined here) must be both “incurred and paid” during the 8-week covered period (defined here) to be eligible for forgiveness.  

However, the Application appears to provide greater flexibility by allowing costs that were incurred before the covered period but paid during the covered period to be eligible for forgiveness. Furthermore, costs incurred during the covered period but paid during the next natural billing cycle or payroll cycle are also eligible. Effectively, the borrower can treat forgivable costs on a cash-basis at the beginning of the covered period and on the accrual basis at the end of the covered period to obtain optimal results without excessive administrative burdens. 

Payroll Costs, Covered Period, and Related Matters

Alternative Payroll Covered Period

The Application introduces a new concept termed the Alternative Payroll Covered Period. The Alternative Payroll Covered Period is the eight-week period that begins on the first day of the borrower’s first payroll period following their PPP loan disbursement date. For example, suppose the borrower typically runs a bi-weekly payroll and they received their PPP loan disbursement on Monday, April 20, and the first day of their first pay period following their PPP loan disbursement starts on Sunday, April 26. The first day of the Alternative Payroll Covered Period is Sunday, April 26, and the last day of the Alternative Payroll Covered Period is Saturday, June 20.

The Alternative Payroll Covered Period is only available if the borrower customarily runs payroll on a weekly or bi-weekly basis. If a borrower elects to use the Alternative Payroll Covered Period, it must be used to determine payroll costs eligible for loan forgiveness. However, the standard eight-week covered period that commences on the loan disbursement date must continue to be used for non-payroll costs.  

Pro Tip! While the Alternative Payroll Covered Period provides administrative convenience, it may be more advantageous to use the standard covered period to capture additional forgivable payroll days incurred before the covered period begins.  Alternatively, it may be more advantageous to use the Alternative Payroll Covered Period if payroll costs are increasing during the covered period. 

Cash Basis Front-End and Accrual Basis Back-End

The Application clarifies that payroll costs paid during the covered period are eligible for forgiveness. For example, suppose you received your PPP loan disbursement on April 20 and you typically run payroll once per month, say April 30 for example. The entire April 30 payroll run should be eligible for forgiveness even though it includes compensation earned from April 1 through April 19 (days outside the covered period).

The Application also helps clarify that Paid Time Off (PTO) accrued before the covered period and paid during the covered period should be eligible for forgiveness. Moreover, while the application is silent with respect to payroll bonuses, there is nothing expressly prohibiting payroll bonuses as a component of forgivable payroll costs. We need further clarification on this matter, but it seems like bonuses are forgivable costs.

Cash Compensation vs Non-Cash Compensation

Cash compensation (such as wages, salaries, commissions, and PTO) and certain non-cash fringe benefit items (such employer-paid health insurance and 401k) are all forgivable payroll costs, but the Application calls out a distinction between these two items. In particular, the non-cash fringe benefit items are seemingly not forgivable for self-employed individuals and partners. However, non-cash fringe benefits may be deductible for corporate owner-employees. It also appears that employer-paid fringe benefits are limited to amounts “paid” during the covered period. Further guidance is needed to clarify these points, please stand-by.

Compensation Limits

The Application expressly limits forgivable compensation for all employees, owner-employees, self-employed individuals, and partners to $15,385 for the eight-week covered period, which corresponds to $100,000 of compensation on an annualized basis. Furthermore, the Application limits compensation for owner-employees, self-employed individuals, and partners to the lesser of amounts paid during the covered period or the eight-week equivalent of their applicable compensation in 2019, whichever is lower. We are unsure as to how spouses of owners-employees, self-employed individuals, and partners will be treated. If they are deemed owners (through attribution), their forgivable compensation may also be subject to the 2019 limitation.

Non-Payroll Costs

Payment Timing

Forgivable non-payroll costs such as mortgage interest, rents, and utilities (defined here) are eligible for similar treatment to payroll cost in terms of payment timing. In general, cash basis on the front-end of the covered period and accrual basis on the back-end provided the amounts incurred are paid on or before the next regular billing date. For example, suppose you received your PPP loan disbursement on April 20 and you pay your April utility bills on May 10. Payment of the April utility bills on May 10 should be eligible for complete forgiveness (even though the bills include days 1-19 of April). Moreover, suppose, for example, you pay rent as scheduled on July 1 (for June). The first 14 days of June are included in the covered period and should be eligible for forgiveness provided rent is paid as scheduled on July 1 (even though paid after the covered period). While mortgage interest is limited from pre-payment under the statute, there is seemingly nothing expressly limiting prepayment of rents and utilities. We need further clarification to determine if pre-payments of rents and utilities are forgivable.

The 75/25 Rule (Also Known As the Overall Expenditure Test)

The Application clarifies that overall forgiveness is limited to payroll costs divided by 75%. For example, suppose you received a PPP loan in the amount of $100,000. However, you only spent $60,000 on payroll costs, the 75/25 rule limits forgiveness to a maximum of $80,000 ($60,000 / 75%). This implies the maximum amount of loan forgiveness available for non-payroll costs is $20,000, or 25% of the combined total. Note the borrower does not need to spend $75,000 in payroll costs (i.e. 75% of $100,000) to be eligible for forgiveness. The 75/25 rule essentially just regulates how much non-payroll cost can be eligible in addition to the payroll cost.

Full-Time Equivalent (FTE) Employees Explained

The Application defines FTEs as those employees working 40 hours per week. Employees working more than 40 hours per week are capped at 1.0 FTE. Employees working less than 40 hours per week simply divide their hours by 40 and rounded to the nearest 1/10th. For example, suppose Bob works 32 hours per week, then his FTE equivalent is .80. The borrower can elect to treat all employees working less than 40 hours as .50 FTEs. 

Pro Tip! While the .50 FTE simplifies the calculations for part-time employees, it may be more advantageous to do the actual calculations in some situations.

FTE Reductions Reduces Forgiveness

As mentioned in our previous article (here), borrowers have the option of comparing FTEs during the covered period to FTEs in one of two lookback periods. However, a reduction of FTEs reduces forgiveness by a forgiveness haircut. For example, suppose the borrower has $50,000 of costs tentatively eligible for forgiveness. Now suppose that during the optimal lookback period, the borrower had 15.6 FTEs, but during the covered period the borrower only had 12.2 FTEs. The haircut is calculated as follows: the quotient of 12.2/15.6 multiplied by $50,000 of forgivable costs. In this example, the borrower would be limited to $39,103 of forgiveness, unless the borrower is eligible for and can utilize the FTE safe-harbor (defined below).

Wage Reductions Reduce Forgiveness 

The Application clarifies that the wage reductions (as defined in our previous article here) for salaried employees are calculated on an annualized basis. For example, suppose Susan received $1,250 per week salary in January through March of 2020 (annualized at $65,000). Now suppose her salary during the covered period is $1,000 per week. Her annualized compensation during the covered period is $52,000 which is greater than $48,750 (75% of $65,000), thus no reduction in forgiveness. Alternatively, suppose her salary was reduced to $800 per week during the covered period, and her annualized compensation is now $41,600. Since $41,600 is less than $48,750 forgiveness is reduced. In this case, forgiveness is reduced by $1,100 [($48,750 – $41,600) / 52 x 8]. In this last example, the borrower would have reduced forgiveness unless the Wage Reduction safe-harbor (defined below) is satisfied. Slightly different mechanics apply for determining the wage reduction adjustment for hourly employees.  

FTE and Wage Reduction Safe-Harbor Eligibility

The application clarifies that both the FTE and Wage Reduction safe-harbors have strict eligibility requirements. In particular, to be eligible for the respective safe-harbors you need to have a reduction in either FTEs or Wages during the period of February 15 to April 26.

FTE Safe-Harbor

The FTE safe-harbor requires restoring FTEs as of June 30 to at least the number of FTEs that existed on February 15. For example, suppose the borrower had 16 FTEs on February 15 and FTEs declined to 12 by April 26.  The borrower is eligible for the FTE safe-harbor based on declining FTEs. The borrower may utilize the safe-harbor if they restore their FTEs to 16 by June 30. If the safe-harbor is utilized and FTEs are restored, the borrower will be deemed to satisfy all FTE requirements and forgiveness will not be reduced under the FTE Reduction Test. 

Wage Reduction Safe-Harbor

The Application clarifies that Wage Reduction test is calculated on an employee-by-employee basis. If the borrower is eligible for safe-harbor and then utilizes the safe-harbor by restoring wages and/or salaries by June 30, then forgiveness will not be reduced on an employee–by-employee basis. For example, suppose the borrower restores Susan’s salary to $1,250 (from our example above) before June 30. Forgiveness would not be reduced by $1,100 in this example. 

Pro-Tip! While the FTE Test and Wage Reduction Test can be mitigated using June 30 safe-harbors, the 75/25 test (also called the Overall Expenditure Test) cannot be mitigated by June 30 safe-harbors. The borrower must still spend funds during the covered period to be eligible for forgiveness. To use an extreme example, suppose the borrower received their PPP loan disbursement on April 20 but did not spend any of the proceeds during the covered period ending June 14. Now suppose the borrower restores FTEs and Wages to historical levels before June 30. The 75/25 rule would limit forgiveness to zero in this example (because nothing was spent during the covered period).

The Application is complicated and interpretations of the rules are changing daily. We anticipate that the SBA and Treasury will issue additional supporting regulations in the days to come. If you have questions about loan forgiveness or the Application please contact John Mlynczyk, Terry Niegel, or Don Lance from our office by calling 541-687-1170.


The information and tips noted above are intended as general guidelines only. The provisions within the CARES Act are complicated with many questions still unanswered. Every client situation is unique and ideas expressed in this article should not be considered a substitute for professional advice. Opinions expressed in this article are subject to change as interpretations are clarified and additional guidance is issued. Please call our office if you have questions regarding the CARES Act or any other recent legislation.