ComplianceMay 22, 2020

PPP loan forgiveness & application: Key takeaways


The Paycheck Protection Program (PPP), which was enacted as part of the CARES Act (“Act”; Pub. L. No. 116-136), authorizes small businesses to apply for loans guaranteed by the Small Business Administration (“SBA”).  Under Section 1106 of the Act, PPP loans can be forgiven, either in whole or part, under certain conditions. 

This article highlights key takeaways concerning PPP loan forgiveness and the borrower forgiveness application published May 15, 2020 (OMB Control Number 3245-0407).  It is intended as a non-exhaustive overview.  The SBA has released guidance for implementing the PPP as well as a series of Frequently Asked Questions with answers, which is being actively updated (“SBA PPP FAQ”).  Additional guidance concerning PPP loan forgiveness is expected and new legislation may also impact current regulatory guidance.  Accordingly, readers are cautioned that the conclusions set forth herein may change.  Lenders should always consult with their own legal advisor and check for new or updated guidance.

The Borrower Loan Forgiveness Application: Organization  

The PPP loan forgiveness application is complex and at times somewhat confusing—however, this complexity is not surprising given the detailed requirements that must be satisfied by a borrower in order to obtain loan forgiveness that are set forth in the Act and associated guidance.  For example, in order to complete Line 1 (“payroll costs”) of the PPP Loan Forgiveness Calculation Form, it is necessary to go to PPP Schedule A, which further directs the borrower to start with Table 1 of the PPP Schedule A Worksheet.  

The forgiveness application consists of four components, each with associated instructions:

1) PPP Loan Forgiveness Calculation Form;

2) PPP Schedule A;

3) PPP Schedule A Worksheet (submission optional); and

4) PPP Borrower Demographic Information Form (submission optional).

The borrower must complete and submit to the lender either a physical or electronic application.  Lenders then submit the application to the SBA.

Number of Employees 

The application requires the borrower to determine two totals of employees: the number of employees at the time of the PPP loan application, and the number of employees at the time of the PPP forgiveness application.  Neither of these amounts are specifically required under the law (although the number of employees at the time of the PPP loan forgiveness application would be relevant if such application was contemporaneous with the covered period because of the forgiveness reduction calculation linked to number of employees).  

This information could be useful, however, in demonstrating the value of the program because it should be expected that more employees would be working for small businesses that have accepted PPP loans at the time of forgiveness than at the time of application.

Covered Period 

In general, pursuant to the Interim Final Rule published by the SBA (“Interim Final Rule,” RIN 3245-AH34, 85 Fed. Reg. 73, April 15, 2020), for a loan to be fully forgiven, at least 75 percent of loan proceeds must be spent on “payroll costs” during the eight-week “covered period” following the lender’s disbursement of the loan proceeds.  

The application uses an eight-week covered period starting at the day of first loan disbursement.  These two provisions, (the eight-week covered period and the requirement that at least 75 percent of the amount forgiven must have been payroll costs), have been subject to significant criticism.  The criticism is rooted in concerns that state work restrictions and economic conditions make this requirement difficult to meet. There are also concerns that this requirement may result in more payroll expenditures than are otherwise needed (in order to increase the amount of mortgage interest, rent and utilities that can be forgiven).

The forgiveness application permits a borrower to elect an “alternative payroll covered period” if it uses a bi-weekly (or more frequent) pay period.  That alternative covered period would be based on first start date of pay period beginning after disbursement date and ending eight weeks (56 days) later.  Providing for an alternative payroll covered period is helpful for borrowers.

Employee and Payroll Costs 

As noted, the amount of loan forgiveness is generally based on the amount spent by the PPP loan borrower during the covered period for qualifying costs relating to payroll, interest expense, rent and utilities for the small business.

As described in our previous article, PPP Loan Forgiveness: Key Lender Considerations (May 4, 2020), the Act describes costs eligible for forgiveness as limited to the sum of specified “costs incurred and payments made during” the covered period (emphasis added).  However, the law is not explicit regarding whether the “and” in this clause requires both conditions (accrual and payment) to be met with respect to a specific cost during the covered period.  The loan forgiveness application provides some clarity on this issue, as described below:

  • 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 each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the covered period.

The forgiveness application instructions also provide important clarity regarding nonpayroll costs for forgiveness purposes:

  • The definition of covered mortgage obligations for which interest expense can qualify as a nonpayroll cost) includes obligations on both real and personal property, which is broader than merely real estate financings.
  • Consistent with the law, the form provides that covered utility payments only include certain costs: electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
  • Nonpayroll costs 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.
  • Eligible nonpayroll costs cannot exceed 25 percent of the total forgiveness amount. This is linked to the criticized requirement that at least 75 percent of the amount forgiven must be qualifying payroll costs.
  • Borrowers should count nonpayroll costs that were both paid and incurred only once.

Consistent with prior guidance, borrowers should remember that they cannot obtain forgiveness for amounts paid to independent contractors.  The application also notes that a borrower has discretion to apply for forgiveness of less than the amount possible.

Forgiveness Amount Reductions and the Safe Harbor 

In determining the amount eligible for forgiveness in connection with a PPP loan, a borrower must make two separate calculations that can potentially reduce the amount of forgiveness: a salary/wage reduction calculation and a full-time equivalency reduction calculation.  These calculations are complex and require specific information regarding employees during the covered period.

There are also safe harbors such that these reductions are not applicable provided that the small business restores its full-time employees and applicable wages by June 30, 2020.  Additional calculations are required.

The loan forgiveness application includes a defined “FTE Reduction Safe Harbor” such that  “the Borrower is exempt from the reduction in loan forgiveness based on FTE employees described above if both of the following conditions are met: (1) the Borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and (2) the Borrower then restored its FTE employee levels by not later than June 30, 2020 to its FTE employee levels in the Borrower’s pay period that included February 15, 2020.”

In addition, Answer 40 for the SBA PPP FAQ (as of the publication date) provides that the SBA and Treasury “intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation.”  In order to qualify for this exception, the SBA PPP FAQ provides that “the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower.”  The borrower will need additional documentation to take advantage of this favorable guidance.

These calculations are more fully described in the law but are complex.  Moreover, wage and employment information for each employee during the covered period (and through June 30, 2020) is needed to compute them.

These calculations make employee level information (including the average amount of time work per employee per week) essential for purposes of computing the amount of forgiveness allowed.  They also add to the complexity of the form.

Loans Above $2 Million 

Importantly, the application includes a check box that must be marked if the original principal amount of the PPP loan was $2 million or more.  This will be used for forgiveness application tracking for audit purposes due to guidance previously issued by the SBA that these loans will be subject to heightened scrutiny, including a full loan file review. 

The application also states that the “SBA may direct a lender to disapprove the borrower’s loan forgiveness application if SBA determines that the borrower was ineligible for the PPP loan.”   Note that even if a portion of a PPP loan is not forgiven, the lender may still exercise its loan guaranty from the SBA for the portion of the loan that remains outstanding provided the related requirements are met.

Documentation and Borrower Certifications Required 

As described below, a borrower must make a series of certifications regarding the accuracy of the loan forgiveness application and supporting documentation in connection with completing the forgiveness application.  Borrowers must certify that the:

  • Dollar amount for which forgiveness is requested was used to pay costs that are eligible for forgiveness;
  • Accuracy of all applicable reductions due to decreases in the number of employee and compensation reductions;
  • Forgiveness amount does not include nonpayroll costs in excess of 25 percent of the amount requested; and
  • Forgiveness amount does not exceed eight weeks’ worth of 2019 compensation for any owner-employee or self-employed individual/general partner, capped at $15,385 per individual. Note that this limitation does not account for owner’s health or other benefits that may be comparable to employee benefits that could be forgivable as payroll costs.

A borrower must also certify that it has provided all required documentation to the lender and that if “the funds were knowingly used for unauthorized purposes, the federal government may pursue recovery of loan amounts and/or civil or criminal fraud charges.”  And, the borrower must make a “penalties of perjury” type certification and acknowledge that “knowingly making a false statement to obtain forgiveness of an SBA-guaranteed loan is punishable under the law.”

Borrower must certify that tax documents are consistent with those provided to the IRS and state tax authorities and workforce agencies and consent to “tax sharing” of documents by SBA with SBA’s authorized representatives.

Finally, the borrower must certify that it understands, acknowledges, and agrees “that SBA may request additional information for the purposes of evaluating the Borrower’s eligibility for the PPP loan and for loan forgiveness, and that the Borrower’s failure to provide information requested by SBA may result in a determination that the Borrower was ineligible for the PPP loan or a denial of the Borrower’s loan forgiveness application.”

Complex Worksheet Calculations 

While not part of a submitted application, the PPP Schedule A Worksheet includes instructions for the purposes of calculating the employee and compensation adjustments.

For employee hours, the instructions provide that for each employee, the calculation is based on the average number of hours paid per week, divided by 40, with the total rounded to the nearest tenth, and with the maximum average full-time equivalency for each employee capped at 1.0.  The instructions do provide for a “simplified method” that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer than 40 hours.  Borrowers completing the application and performing the calculations may be confused by this level of detail, and they may be forced to seek professional guidance to assist with the calculations, resulting in an unnecessary additional expenditure.

With respect to wages, the borrower is instructed that the “total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the Covered Period; therefore, do not enter more than $15,385 in Table 1 or Table 2 for any individual employee.”

As stated, the PPP Schedule A Worksheet is not required to be included with an application, however, the form lists documents (see below) that the borrower must maintain and be able to produce for six years after the date the loan is forgiven or repaid in full. 

  • PPP Schedule A Worksheet or its equivalent;
  • Documentation supporting the calculation of employee hours and wages 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;
  • Documentation supporting the PPP Schedule A Worksheet “FTE Reduction Safe Harbor;” and
  • All records relating to the borrower’s PPP loan application, loan forgiveness application, and documentation “demonstrating the Borrower’s material compliance with PPP requirements.”

Tax Considerations 

The forgiveness application does not include explicit references to the Families First Coronavirus Response Act qualified sick leave and qualified family leave tax credits.  However, amounts for which these credits are obtained do not qualify as payroll costs under the CARES Act and, therefore, are not eligible for PPP loan forgiveness pursuant to the law.  And the application does not explicitly reference the 2019 tax return documentation specified in Interim Final Rule-Nondiscrimination and Additional Eligibility Criteria (RIN 3245-AH36, 85 Fed. Reg. 76, April 20, 2020) needed to determine the net profit for sole proprietors that the rule specifies must be submitted by a self-employed borrower when requesting PPP loan forgiveness.

Although consistent with longstanding law, because forgiven expenses do not give rise to taxable income for forgiveness of indebtedness, they are not deductible for federal income tax purposes (and there may be similar limitations for state tax purposes).  See IRS Notice 2020-32.  Many commentators are disappointed in this outcome and there are bills proposing to eliminate that restriction.

No Exceptions for Missing Documents or Process to Correct Applications 

The law does not provide any exceptions for required documentation such as a de minimis rule that might be relevant if any necessary documentation is missing.

The rules also do not contemplate amendments or corrected forgiveness applications; for example, corrections for mistakes or changes to calculations of the amount eligible for forgiveness after June 30, 2020.  Due to the complexity of the rules and the application itself, a process to correct loan forgiveness applications would be useful.

No Verification by Lender Required 

It is important for lenders to remember that the Interim Final Rule explicitly provides that “[t]he lender does not need to conduct any verification if the borrower submits documentation supporting its request for loan forgiveness and attests that it has accurately verified the payments for eligible costs.”  Section 1106(h) of the CARES Act also includes a “hold harmless” clause intended to protect the lender from enforcement actions by the SBA related to loan forgiveness if the required documentation and attestation have been received by the lender from the borrower in connection with PPP loan forgiveness.  Although this guidance is intended to provide lenders relief, it should be noted that this provision by its terms does not apply to the subsequent scrutiny of lenders by prudential regulators in other contexts.


There are a number of aspects of the rules for PPP loan forgiveness and the related forgiveness application that are or will be subject to criticism from borrowers, lenders, and more.  Additional criticisms are already being identified and more seem likely.  The rules as enacted in the law and as promulgated in the related interim final rules are complex and there are aspects that are disliked.  Some of the aspects of the newly released forgiveness application that have been criticized are largely attributable to the application’s implementation of the existing law and rules.  In certain respects, the form provides some helpful clarifications.  Additional guidance relating to PPP loan forgiveness is still desperately needed.  And hopefully certain aspects of the forgiveness rules that have been highly criticized will be favorably revised.  Nevertheless, both borrowers and lenders must quickly do their best to understand the forgiveness application so that it can be completed and submitted by the borrower and in turn reviewed and submitted by the lender.

Wolters Kluwer continues to closely monitor for developments on regulatory guidance as it works with lenders to help them navigate the evolving regulatory landscape. Wolters Kluwer offers a variety of software products and services to assist lenders, including its Paycheck Protection Program Supported by TSoftPlus™ which helps lenders process PPP loan applications and its affiliated TSoftPlus™ PPP Forgiveness Module which helps lenders process PPP loan forgiveness applications.


DISCLAIMER: The information and views set forth in this Wolters Kluwer Financial Services’ communication are general in nature and are not intended as legal or professional advice. Although based on the law and information available as of the date of publication, general assumptions have been made by Wolters Kluwer Financial Services that may not take into account potentially important considerations to specific businesses. Therefore, the views and information presented in this Wolters Kluwer Financial Services’ communication may not be appropriate for you. Readers must also independently analyze and consider the consequences of subsequent developments and/or other events. Readers must always make their own determinations in light of their specific circumstances.

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