Expertise Beyond the Numbers

The PPP Forgiveness Journey Continues – Where Might It Lead?

Updated 7/2/2020 at 9:05am ET

UPDATE 7/2: Congress has voted to extend the deadline to apply for forgivable Paycheck Protection Program loans. Businesses now have until Aug. 8 to apply for the aid. President Trump is expected to sign the bill.


On Friday, May 22, the Small Business Administration (SBA) published two interim final rule documents – the 13th and 14th such documents since Paycheck Protection Program (PPP) loans were enacted as part of the CARES Act on March 27. This most recent guidance is intended to “help PPP borrowers prepare and submit loan forgiveness…, help PPP lenders who will be making the loan forgiveness decisions, [and] inform borrowers and lenders of SBA’s process for reviewing PPP loan applications and forgiveness applications”.

While borrowers and lenders continue to navigate this maze and question whether the exit will lead to full, or even partial, loan forgiveness, government agencies and Congress itself, continues to construct additional twists and turns. As we write, it appears that there is bipartisan support for additional legislation that could substantially lengthen the “covered period” for loan forgiveness and relax the definition of “qualified expenses”.

In this update, we will address the most recent guidance available. It is not our intent to provide a comprehensive outline of the entire PPP program. For a complete understanding of the steps that have brought us to this point, see our previous posts as follows:

SC&H’s Key Takeaways

  • Borrowers may be able to have more than 8 weeks of payroll and nonpayroll costs included in their forgiveness calculation utilizing the paid and incurred definitions provided by Treasury
  • Owner-employees face a newly established limitation on their includable compensation
  • Safe harbors are in place to allow borrowers to avoid a reduction in FTE employee counts due to actions taken by the employees
  • Hazard pay and bonuses will be allowable payroll costs in paid or incurred during the covered period

PPP Forgiveness Guidance

Because the first PPP loans were funded during the week of April 6, the first forgiveness applications can be filed in early June. However, with questions remaining about specifics of the forgiveness calculations, some borrowers face difficulty in determining what actions they may take to maximize their opportunity for loan forgiveness.

As we know, the forgiveness calculation is based on certain expenses paid or incurred during an 8-week period. Importantly, forgiveness will be reduced to the extent that the borrower has reduced headcount or employee compensation levels beyond certain thresholds. Below, we will tackle the guidance regarding the identification of the “covered period”, what items are “qualified expenses”, and definition of “paid or incurred”. After that, we will tackle the topics of forgiveness reductions based on declining headcount and compensation levels.

Covered Period

Let’s start with identification of the 8-week period – referred to as the “covered period”. The general rule is that this period begins with the date of initial funding of the PPP loan (the date in which the business first received loan proceeds from their bank). So, for example, if you received funding on April 21, your covered period runs from April 21 through, and including, June 15.

However, to allow businesses to match their payroll period more closely with their covered period, an “alternate payroll covered period is available”, at the election of the borrower. If the borrower has a normal payroll cycle that runs biweekly, or more frequently, the borrower may use, for payroll expenses only, the 56-day period beginning with the first day of the payroll period beginning after the date of initial PPP funding.

A couple of key points here:

  • If your normal payroll cycle is less frequent than biweekly, the alternate covered period election is not available to you.
  • If you elect to use the alternate covered period for payroll expenses, you still must use the traditional covered period for determining other qualified expenses.

By way of example, let’s assume that your PPP loan was initially funded on April 21, that you run a biweekly payroll cycle, and that your next pay cycle following April 21 covers the period from April 25 through May 8. In this situation, your covered period is April 21 through June 15, and this period will be used for determining qualified expenses other than payroll expenses. For payroll expenses, you have the choice to use that same covered period or the alternate covered period of April 25 through June 19.

Qualified Expenses

From previous guidance, we know that PPP loans must be used for, and the forgiveness calculations are based on, limited categories of expenses. We address each of these categories in turn:

  • Payroll Costs – Included in payroll costs are cash compensation to employees (gross pay), as well as employer contributions to retirement plans and healthcare costs for the benefit of employees. Also included in the definition of payroll costs are employer state and local taxes paid by the borrower that are assessed on employee compensation (e.g. state unemployment taxes).

Includible in cash compensation are salaries, wages, commissions, tips (including employer good faith estimate of past tips), and payments for vacation, parental, family, medical or sick leave. Recent guidance confirms that payments to furloughed employees, bonuses and hazard pay are includible in the calculation.

In determining payroll costs, the maximum qualified cost for each individual employee is $15,385 (representing 8/52 of the annual compensation limit of $100,000). It is important to note that this limit applies only to the compensation component of payroll costs. Thus, any employer contributions to retirement plans, employer payments of health insurance premiums, and employer-paid state and local taxes paid based on this employee’s compensation is a qualified expense on top of the $15,385 limit.

For self-employed individuals (schedule C filers and general partners in a partnership), payroll costs are defined to equal 8/52 of their 2019 Schedule C profit on their filed, or to be filed, 2019 form 1040, limited to $15,385. Period. End of story. For these taxpayers, retirement plan contributions and healthcare costs are not qualified expenses, except for those attributable to nonowner employees of the business.

Importantly, the most recent guidance appears to add a new limitation on compensation for “employee-owners”, which presumably include S corporation and C corporation owners who receive W-2 compensation. For these individuals, the includible compensation expense is limited to the lesser of a) 8/52 of 2019 compensation, b) compensation paid or incurred during the covered period, or c) $15,385. This limitation applies across all businesses, which implies owners of multiple businesses with PPP loans face an overall cap as outlined above. For employee-owners, it appears that employer retirement contributions and health insurance premium payments are includible, in addition to their payroll, after applying the limitation above. The addition of this new limitation raises a concern for newer businesses, whose owners may have taken little or no compensation in 2019.

With respect to retirement plan contributions, we are still looking for guidance regarding the breadth of plans and contributions that can be included. Clearly, employer contributions to 401(k), pension and profit-sharing plans should count. It seems likely that ESOP contributions would be includible, as a form of profit-sharing plan. But, what about nonqualified retirement plans?  Also, left unsaid, is whether retirement plan contributions must be deposited during the covered period, or if accrued contributions are allowable. Let’s hope for more clarity here soon.

  • Business Mortgage Interest Payments – to be includible in this category, the interest payments must be made on a business mortgage on real or personal property that was in place before February 15, 2020. Any prepayments of mortgage interest are excluded from the calculation, and no principal payments are includible.
  • Business Rent or Lease Payments – qualified expenses include payments on business rent obligations on real or personal property under a lease agreement that was in place before February 15, 2020. It remains unclear whether any prepayments of rent or lease payments are includible. Related party leases appear to be allowable, but we are watching for any additional guidance.
  • Business Utility Payments – utilities, including payments for the distribution of electricity, gas, water, transportation, telephone, or internet access are qualified expenses, to the extent that service began before February 15, 2020. It remains unclear whether any prepayments of utility expenses are includible. We are hopeful for some additional guidance as to what qualifies in this category, particularly with respect to transportation costs.

In determining the amount of loan forgiveness, payroll costs must represent at least 75% of the amount forgiven.

Paid or Incurred

The CARES Act language indicated that forgiveness is available for “costs incurred and payments made during the covered period”. Until recently, it was unclear whether expenses were to be captured under a cash basis, and accrual basis, or some combination of the two.

Happily, for borrowers, the recent guidance makes clear that the forgiveness calculation includes both qualified expenses paid, and qualified expenses incurred during the covered period (or, for payroll costs, the alternate covered period discussed above). To include costs incurred but not paid, the borrower must pay the costs in the next regular payroll run (for payroll costs) or by the next regular billing date (for nonpayroll costs).

As a result, for many employers, the payroll costs that will be eligible for inclusion in the forgiveness calculation will include more than 8 weeks of payroll. The same applies to other eligible costs (loan interest, rents, and utilities). An example may be helpful here:

Reductions of Forgiveness

As mentioned, even after determining the total qualified expenses for the covered period, the amount of forgiveness may be reduced. First, to the extent that the borrower received an advance payment under the EIDL program, the amount of that advance will be subtracted from the forgiveness calculation. This is likely the only simple piece of the forgiveness reduction calculation for most borrowers.

To the extent that the borrower has reduced its employee headcount (as measured by FTE’s) or reduced compensation levels for any individual employees by more than 25%, the forgiveness amount will be reduced, unless headcount and/or pay rates are restored to former levels by June 30. Apparently, as long as borrowers reach their baseline FTE headcount and restore compensation levels to their baseline by June 30, these forgiveness reductions will be ignored. However, questions remain as to whether these restorations must be maintained for some minimum period of time.

For purposes of calculating FTE’s, borrowers can elect to either based on average hours worked, with an employee who averages 40 or more hours per week to be counted as 1.0 FTE, and any employee below that level as a fraction of an FTE, or they can elect to calculate all part-time employees as 0.5 of an FTE.

The new IFR also provides that borrowers will not be penalized twice in a situation where an employee has reduced hours, thereby resulting in both a reduction of their FTE level and a reduction of their compensation level by more than 25%. In this situation, the FTE reduction will be factored into the forgiveness reduction, but the compensation reduction will be ignored.

Guidance has now made clear that borrowers will not be penalized through reductions of forgiveness if the employer made a good faith, written offer to rehire former employee(s) (or restore them to their prior level of service), as long as the offer was at the same level of service and pay rate as they were prior to separation or reduction and the employee or former employee rejected the offer. In such case, records must be maintained, and the employer must notify their state unemployment commission of the employee’s rejection of an offer.

Further, the new guidance provides that employees whose employment is terminated for cause, voluntarily resigns, or voluntarily requests a reduced schedule will not be counted as a reduction in the FTE count for purposes of the forgiveness calculation.

SBA Review and Implications

Recent guidance has shed light on the SBA review process and implications. The SBA has the right to review all loan and forgiveness applications. This can include calculations of eligible loan and forgiveness amounts, as well as eligibility for the loan and whether the borrower had adequate basis to make the necessary certifications at the time of application for the loan and/or forgiveness.

Generally, upon filing a complete application to the lending bank for forgiveness, the bank must perform its review and issue a decision to the SBA within 60 days. Within 90 days from the receipt of the bank’s decision, the SBA will perform its review and issue its own determination to the bank. The SBA may approve the application in full, reduce the forgiveness award, or even conclude that the borrower was ineligible for the loan from inception and decline forgiveness entirely. The bank will be responsible for notifying the borrower of the forgiveness amount. Any remaining balance on the loan must be repaid to the bank within the 2-year maturity of the loan.

However, in recent guidance, the SBA has indicated that it intends to issue future additional guidance on its process for certain additional reviews that may be required on some loans. Presumably, this future guidance will be directed at PPP loans more than $2,000,000, which the Department of Treasury has previously targeted for in-depth review.

Potential for Additional Lawmaking

As Congress adjourned for the Memorial Day holiday, there appeared to be bipartisan support for a new bill that would relax several components of the forgiveness calculation. The most significant changes being discussed include:

  • Expansion of the Covered Period – under current law, the covered period is set at 8 weeks. Proposals under consideration could expand that period to as many as 24 weeks, greatly improving the likelihood that a borrower might achieve complete forgiveness of their PPP loan.
  • Expansion of the Definition of Qualified Expenses – potential that employer costs associated with personal protective equipment (PPE) and COVID-19 facility improvements might be included as qualified expenses.
  • Changes to the 75% Rule – potential relaxation or elimination of the limitation that provides that payroll costs must represent at least 75% of any amount of loan forgiveness.

After weeks of speculation, we appear to be making progress on many of the questions that are associated with the PPP loan application, issuance, and forgiveness process. However, several important questions remain. In addition, Congress appears to be at the brink of changing the rules (for the better) in the coming days or weeks.

Stay tuned, we will update our thinking as new information is available. In the meantime, if you have any questions for the SC&H Group Team, please reach out to us directly through our website.