COVID-19 Resources

PPP Loan Forgiveness Application Update

Written by Adam West, CPA and Van Trefethen, CPA on May 20, 2020

Editor’s Note: It has been reported the House plans to vote on the Paycheck Protection Program Flexibility Act in the coming days that would extend the eight-week covered period to as many as 24 weeks and make other changes to the Paycheck Protection Program (PPP). We recommend all borrowers, especially those at the end of their eight-week period, closely monitor these legislative developments.

Click here for an update released on May 13, 2020 regarding the borrowers’ good-faith certification requirements.


On May 15, 2020, the SBA released the Loan Forgiveness Application. The release of the Forgiveness Application answers several of the questions borrowers have around loan forgiveness, but not all. We expect the SBA to release additional loan forgiveness guidance soon that will hopefully address the remaining unresolved issues. However, the Forgiveness Application contains much welcomed guidance on several key issues.

Issues Clarified with the Guidance

Alternative Payroll Covered Period

The SBA provided a new “Alternative Payroll Covered Period” for borrowers using a bi-weekly (or more frequent) payroll period. The new Alternative Payroll Covered Period allows eligible borrowers to align the eight-week period with their own payroll period. The application provides the following example:

“For example, if the borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20.”

“Costs Incurred and Payments Made”

Clarification was provided about whether expenses are on the cash or accrual basis, as there was ambiguity with the CARES Act’s reference to “costs incurred and payments made during the covered period.” The Forgiveness Application allows for both expenses paid or incurred in the covered period.

The Forgiveness Application provides that “Payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period).”

For non-payroll costs, the Forgiveness Application states “an eligible non-payroll cost must be 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.”

The fact that borrowers are allowed to count expenses paid or incurred in the Covered Period provides borrowers with flexibility.

Prepayment of Expenses

The Forgiveness Application clarifies that prepayments of mortgage interest payments are not eligible for forgiveness. Until the SBA releases additional guidance, borrowers should be cautious about accelerating other payments to increase loan forgiveness that are outside of the normal course of business.

Rent on Real or Personal Property

The SBA clarified in the Forgiveness Application that rent on either real OR personal property would be eligible for forgiveness. This allows borrowers to include leases on equipment or vehicles in their Forgiveness Application. One common question surrounds capital leases. There is no indication the SBA would refer to GAAP or tax rules regarding a capital lease. Therefore, the lease payments should be includible.

Full-Time Equivalent (FTE) Employees

In the Forgiveness Application, the SBA clarified how to calculate FTE employees. In its clarification, the SBA stated 40 hours would equal a full-time equivalent employee. All employees working less than 40 hours will be considered part-time. Average FTE is calculated employee-by-employee, on a weekly basis during the Covered Period (or Alternative Payroll Covered Period).  Each employee’s hours are divided by 40, then rounded to the nearest tenth.

Alternatively, borrowers may elect to use a simplified method whereby each employee who works 40 hours or more is considered one FTE, and any employee working fewer than 40 hours is considered one-half of an FTE.

FTE Reduction Exception

The SBA clarified that a borrower can include in its FTE test “any positions for which the borrower made a good-faith, written offer to rehire an employee during the covered period” which was rejected by the employee. Employers are also not penalized for employees who, during the covered period, were fired for cause, resigned from their positions voluntarily, or asked for and were granted a reduced schedule, and the position was not filled by the borrower. See more detail below under Step 4.

$100,000 Annualized Wage Limit Applied Over the Whole Covered Period (or Alternative Payroll Covered Period), Not Weekly

The SBA clarified that the borrower is limited to $15,385 in cash compensation for each employee. This equals a $100,000 annualized salary over eight-weeks of the year. This is a borrower-friendly rule instead of requiring the limit to be performed by pay period. In addition, the SBA clarified that an owner-employee or self-employed individual/general partner may not exceed eight weeks’ worth of 2019 cash compensation, capped at $15,385.

Applying Loan Forgiveness Guidance

Determining the amount of loan forgiveness can be viewed as a four-part test.

1. Expenses

First, borrowers must use PPP loan proceeds for eligible expenses including payroll costs [1], mortgage interest, rent and utilities payments [2] over the Covered Period (or Alternative Payroll Covered Period if elected by borrower) after receiving the loan. Payroll Costs must make up 75% of the loan forgiveness.  Recently, the SBA Inspector General addressed this requirement in a report, since the mandate was not a part of the CARES Act. According to the Inspector General, “SBA’s requirements could result in an unintended burden to the borrowers… It may be important to consider that many small businesses have more operational expenses than employee expenses.” Several new pieces of legislation have already been introduced that address this issue. Therefore, it is prudent for borrowers to document all their expenses during the Covered Period, as additional items may qualify.

2. Salary/Hourly Wage Reduction

Second, if a borrower decreases an employee’s salary/hourly wage rate by more than 25%, then a portion of the loan may not be forgiven. Under the test to determine if there has been a 25% reduction in salary/hourly wage rate, borrowers are required to compare the average salary or hourly wage of an employee during the Covered Period (or Alternative Payroll Covered Period) to the average annual salary or hourly wage rate between January 1, 2020 and March 31, 2020. If the employee’s average pay rate during the Covered Period (or Alternative Payroll Covered Period) is reduced below 75% of the pay rate during the first quarter, the excess reduction reduces the borrower’s loan forgiveness.

For hourly employees, the excess reduction in average pay rate is multiplied by the employee’s average weekly hours during the first quarter to calculate the reduction in loan forgiveness.

Importantly, employees who, during any pay period in 2019, earned more than an annualized pay rate of $100,000 are exempt from this test. Also, if the employer decreases an employee’s pay rate during the period February 15, 2020 to April 26, 2020, but has subsequently increased the average pay rate on June 30, 2020, the employer meets the safe harbor and forgiveness is not reduced related to that employee.

3. Headcount

Third, borrowers must maintain headcount, as loan forgiveness will be reduced if a business decreases its FTE employee headcount. This is determined by dividing the average FTE employee headcount during the Covered Period (or the Alternative Payroll Covered Period) by the headcount during one of the following periods, at the election of the borrower:

  • Period from February 15, 2019 to June 30, 2019
  • Period from January 1, 2020 to February 29, 2020

In addition to the two periods above, a seasonal employer may also use any consecutive 12-week period between May 1, 2019 and September 15, 2019.

The result is multiplied by the loan proceeds spent on qualified expenses to determine the amount that is eligible for forgiveness.

4. FTE Reduction Safe Harbor

The final and fourth part of the loan forgiveness calculation is the FTE Reduction Safe Harbor. If a borrower has a reduction in headcount between February 15, 2020 and April 26, 2020, and on June 30, 2020, the borrower’s FTEs have been increased at least to the borrower’s FTE headcount on February15, 2020, the borrower meets the safe harbor and the forgiveness amount is not reduced by the two tests above.

It is worth noting that to be eligible for this safe harbor test, the borrower must have had a reduction in FTEs between February 15, 2020 and April 26, 2020. As we originally thought, this provision is an all-or-nothing test. In other words, either the borrower restores ALL of its FTE employee headcount and wages by June 30, 2020, or it will not eliminate any proportionate reduction calculated in steps two and three.

Best Practices for Managing Loan Proceeds

Loan proceeds used for an unauthorized purpose are not eligible for loan forgiveness. Under the CARES Act, a borrower that knowingly uses the funds for an unauthorized purpose may be subject to additional liability, such as charges for fraud. To help with compliance, we recommend that borrowers set up a separate bank account for the loan proceeds so that the funds are not comingled with other accounts. Maintaining a separate bank account will also aid in the recordkeeping process when applying for loan forgiveness.

Putting it All Together

Step One – Loan Proceeds Spent on Qualified Expenses (No more than 25% of loan forgiveness can be Non-Payroll Costs) = Amount Eligible for Loan Forgiveness

Warren Averett PPP loan forgiveness chart qualified expenses

Step Two – Full-Time Equivalent Employee Reduction Test

Warren Averett PPP loan forgiveness chart full time equivalent employees

Step Three- Salary/Hourly Wage Reduction Calculation

Warren Averett PPP loan forgiveness chart salary reduction

Step Four – FTE Reduction Safe Harbor

Warren Averett PPP loan forgiveness chart restoration test

Managing Documentation for Loan Forgiveness

After the Covered Period following the loan origination date, borrowers must submit loan forgiveness documentation to the lender. To ensure proper documentation for loan forgiveness, it is extremely important that borrowers maintain adequate substantiation for all eligible expenses as the funds are being spent. According to the CARES Act, borrowers must provide documentation to verify the use of funds on eligible expenses. According to the application, these can be broken down into three categories.

  • Payroll Costs – Borrowers must provide documentation to verify the eligible cash and non-cash compensation payments made during the Covered Period or the Alternative Payroll Covered Period consisting of each of the following:
    • “Bank account statements or third-party payroll service provider reports verifying the amount of cash compensation paid to employees”
  • Full-Time Equivalents – Documentation of one of the following (at the option of the borrower)
    • “Average number of FTE employees on payroll per month employed by the borrower between February 15, 2019 and June 30, 2019;
    • Average number of FTE employees on payroll per month employed by the borrower between January 1, 2020 and February 29, 2020; or
    • In the case of a seasonal employer, the average number of FTE employees on payroll per month employed by the borrower between February 15, 2019 and June 30, 2019; between January 1, 2020 and February 29, 2020; or any consecutive 12-week period between May 1, 2019 and September 15, 2019.”

This documentation may include payroll tax filings reported to the IRS (Form 941) and state income, payroll and unemployment insurance filings. This documentation may cover periods longer than the specific time period. We recommend tracking your FTE employee calculation each pay period.

  • Non-payroll Costs – Documentation verifying the obligations/services were in existence prior to February 15, 2020, along with documentation on the eligible payments made during the covered period.
    • “Business mortgage interest payments: Copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments from the covered period; or lender account statements from February 2020 and the months of the Covered Period through one month after the end of the Covered Period verifying interest amounts and eligible payments.
    • Business rent or lease payments: Copy of current lease agreement and receipts or cancelled checks verifying eligible payments from the Covered Period or lessor account statements from February 2020 and from the Covered Period through one month after the end of the Covered Period verifying eligible payments.
    • Business utility payments: Copy of invoices from February 2020 and those paid during the Covered Period and receipts, cancelled checks, or account statements verifying those eligible payments.”

In addition, according to the SBA, borrowers must also maintain the following documentation but are not required to submit it with their application.

  • “Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 1, including the “Salary/Hourly Wage Reduction” calculation, if necessary.
  • Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 2; specifically, that each listed employee received during any single pay period in 2019 compensation at an annualized rate of more than $100,000.
  • Documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule, if applicable.
  • Documentation supporting the PPP Schedule A Worksheet “FTE Reduction Safe Harbor”, if applicable.”

Furthermore, borrowers must provide certification that the documentation presented for loan forgiveness is true and correct and the amount for which forgiveness is requested was used for eligible expenses. In its loan forgiveness application instructions, the SBA stated borrowers should retain all documentation for six years after the loan is forgiven or repaid. To assist in documentation, we have put together a tracking document for borrowers.

Connect with an Advisor

Should you have questions about documentation requirements or how to navigate the PPP loan forgiveness process, please contact your Warren Averett advisor or have a member of our team reach out to you.

[1] Payroll costs include: salary, wages, commissions or similar compensation; cash tips or the equivalent; vacation, parental, family, medical or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wage, commissions, income or net earnings from self-employment or similar compensation.

The Act expressly excludes the following from payroll costs:

  1. Any compensation of an employee whose principal place of residence is outside of the United States;
  2. The compensation of an individual employee in excess of an annual salary of $100,000, prorated as necessary;
  3. Employer’s share of federal unemployment taxes, FICA (Federal Insurance Contributions Act) and Railroad Retirement Act taxes; and
  4. Qualified sick and family leave wages for which a credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (Public Law 116–127).

[2] Includes: any debt incurred during ordinary course of business before February 15, 2020 (mortgage on real or personal property), utilities in place before February 15, 2020 and leases in force before February 15, 2020.

This article reflects our views at the time this article was written and should be used as reference only. We recommend that you talk to your Warren Averett advisor, or another business advisor, for the most current information or for guidance specific to your organization.

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