PPP Loan Forgiveness Guidance: What We Like and Don’t Like

  • 5/20/2020
Woman With Glasses Looking at Paper

While guidance from the SBA doesn’t answer every question about PPP loans, it does paint a clearer picture.

Key insights

On March 27, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. Shortly thereafter, on April 3, Paycheck Protection Program (PPP) loans opened to applicants. One of the most attractive features of PPP loans is the ability to have some or all of the loan forgiven, mostly based on activity occurring within an eight-week period starting at loan origination.

Need help understanding PPP loan forgiveness guidance?

Get In Touch

Unfortunately, Section 1106 of the CARES Act, which addresses forgiveness, contains some troublesome wording and left several open holes. Major questions from the law itself include:

  • Costs incurred and payments made — The CARES Act states, “An eligible recipient shall be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the following costs incurred and payments made” and continues on to list “payroll costs” and a small number of qualifying nonpayroll expense “payments.” The phrase “costs incurred and payments made” caused some people to wonder whether payroll costs might have to be both incurred and paid during the 8-week covered period in order to qualify for forgiveness.
  • Reduction factors — The CARES Act specifies items that reduce forgiveness. It also seems to double-count reductions in hours between the full-time equivalent (FTE) test and the wage reduction test. Furthermore, the wage reduction test would seem to compare a 13-week quarter to an eight-week covered period. What are the key details on the mechanics of the calculation?

While the list of questions could go on, the foregoing questions alone may have caused you to hesitate on spending much PPP funding, for fear the final guidance would result in little to no loan forgiveness.

PPP forgiveness guidance arrives

On May 15, guidance was released in the form of a forgiveness application. While it doesn’t answer every question, it does address some big concerns and paints a clearer picture of the SBA’s direction. Overall, the guidance seems reasonable. Most organizations should be able to include a full eight weeks’ worth of payroll and nonpayroll costs. Below is a rundown of what we like and don’t like.

What we like

  • Flexibility to include eight weeks of payroll — You can include payroll costs for the last pay period of the covered period, if those costs are paid on or before the next regular payroll date. 
  • Flexibility to include eight weeks of nonpayroll costs — You can include nonpayroll costs that you either (a) paid during the covered period or (b) incurred during the covered period and paid on or before the next regular billing date. nonpayroll
  • Flexibility to align with normal pay cycles — You can shift the eight weeks for payroll costs to line up with regular pay cycles. This adds an optional alternative payroll covered period for weekly and biweekly borrowers, which makes tracking easier. Note that this doesn’t shift the eight-week covered period for nonpayroll costs.
  • Simplified FTE calculation method — You can make counting easier by electing a simplified FTE calculation method. Under the simplified method, employees working at least 40 hours per week count as 1.0 and employees working fewer than 40 hours per week count as 0.5.
  • FTEs based on 40-hour workweek — The SBA application settled on a 40-hour workweek, which is in line with how employers generally define a FTE. This might help some borrowers and hurt others, but because it impacts both the numerator and denominator of a ratio in the forgiveness application, much of the impact is offset.

What we don’t like

  • Lack of consistency — The wording of several items in the forgiveness application appears to differ significantly from wording in the CARES Act itself. Those differences create some concerns about the intended meaning of certain provisions in the application.
  • Certain payroll costs still excluded — The new loan forgiveness guidance permits borrowers to request forgiveness of payroll costs incurred in the covered period but paid after, but only if those costs are “paid on or before the next regular payroll date.” Many borrowers are incurring payroll costs now that won’t be paid by the deadline for inclusion in forgiveness. Examples include retirement contributions made annually and employee commissions with holdbacks.
  • Less flexibility for rehires — Although a reduction in FTE employees during the covered period will generally cause a corresponding reduction in the amount of PPP loan forgiveness that a borrower may receive, Section 1106 of the CARES Act allows an exemption for borrowers if employees terminated between February 15 and April 26 are rehired by June 30. We had hoped for flexibility if some, but not all, FTEs were rehired. However, the application makes clear that borrowers must rehire enough FTEs by June 30 to match their February 15 level, in order to qualify for the exemption under Section 1106.
  • Treatment of interest on certain debt obligations is still unclear — Section 1106 of the CARES Act provides that interest on “covered mortgage obligations” (defined to include mortgages on “real or personal property”) can be included in the forgiveness application, but it is unclear whether borrowers can also include interest on other debt obligations. Although “interest on any other debt obligations that were incurred before the covered period” is expressly included in the list of allowable uses of PPP funds that is contained in Section 1102 of the Act, that same wording does not appear in the list of costs eligible for forgiveness in Section 1106 or anywhere in the forgiveness application. Accordingly, many people believe Section 1106 only applies to mortgages on real property and incidental “personal property” covered by the mortgage. However, we have heard some advisors suggest that Congress intended to include other debt obligations in Section 1106.
  • Self-employed individuals — The Interim Final Rule released on April 14 limits forgiveness for self-employed individuals to eight weeks’ worth of 2019 net profit. As a result, self-employed individuals would not get forgiveness of any payroll costs for employees or any nonpayroll costs.

Will pending legislation change everything?

Bills are being worked on in the House and Senate, but they do not seem to be moving as quickly as prior coronavirus relief packages. On May 12, House Democrats unveiled the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act. If passed as is — which seems unrealistic — it would modify a number of PPP loan provisions from the CARES Act.

Those changes to the PPP would include additional funding through December 2020, lengthening the forgiveness covered period, explicitly including interest on other debt obligations as an eligible nonpayroll cost, and more. Many of these changes would be welcomed by borrowers who are finding it difficult to fully spend PPP funds in the current eight-week covered period. As the lawmaking process continues to play out, we will continue to post updates on the potential impact.

How we can help

As you sort through the guidance and your PPP loan forgiveness application, we encourage you to contact us. Our team has the tools to help you navigate the complex and ever-changing PPP process.

Contact Us

Experience the CLA Promise