On Friday, May 15, 2020, the Small Business Administration (“SBA”) released the Paycheck Protection Program Loan Forgiveness Application (the “Application”) and instructions (the “Instructions”), which, together with applicable rules, will govern loan forgiveness under the Paycheck Protection Program (“PPP”).  Despite varying predictions, and with only limited exception, the Application and Instructions are generally consistent with the forgiveness rules originally proposed under the CARES Act, as subsequently clarified and interpreted by the SBA interim final rules and frequently asked questions, in each case issued in consultation with the Department of Treasury (collectively, “SBA Guidance”).

This Alert summarizes the key provisions of the Application and Instructions, highlighting those terms which  deviate from the initially proposed rules, interpretations and supplemental SBA Guidance.

  1. Covered Period. As originally proposed, the aggregate forgiveness amount of any PPP loan is determined based on the total loan proceeds deployed to cover payroll costs and certain operational expenses over the eight-week period following disbursement of the loan, subject to adjustment (the “Covered Period”). The Application and Instructions provide for an alternative eight-week covered period, which would commence on the first day of the first pay period following disbursement of PPP loan proceeds (the “Alternative Payroll Covered Period”).
  2. Costs Eligible for Forgiveness.

a. Payroll Costs. Per the Instructions, PPP borrowers are eligible for forgiveness for payroll costs paid and payroll costs incurred during the Covered Period or Alternative Payroll Covered Period, as applicable, without duplication. For purposes of the calculation, (i) payroll costs are considered paid on the date that paychecks are distributed or the date on which a borrower initiates an ACH transfer, and (ii) payroll costs are considered incurred on the date that an employee’s pay is earned. In order to be eligible for forgiveness, all payroll costs must be paid during the Covered Period or Alternative Covered Period, as applicable, except for those payroll costs incurred but not paid during the borrower’s last pay period of the Covered Period (or Alternative Covered Period), which will be eligible for forgiveness if paid on or before the immediately succeeding regular payroll date.

Consistent with the CARES Act and SBA Guidance, the total amount of cash compensation eligible for forgiveness may not exceed $100,000 per employee (annualized), as prorated for the covered period. There are still open questions on annual payments of retirement and pension benefits that are not due during the Covered Period or Alternative Payroll Covered Period.

b. Non-Payroll Costs. As previously provided by the CARES Act and SBA Guidance, the following non-payroll costs are also eligible for forgiveness under the PPP:

    • Covered Rent Obligations: Business rent or lease obligations, in each case pursuant to lease agreements entered into and in force prior to February 15, 2020. The Instructions clarify that such lease obligations may relate to real or personal property.
    • Covered Mortgage Obligations: Payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation incurred prior to February 15, 2020. Similar to covered lease obligations, the Instructions provide that such mortgage obligations may relate to real or personal property.
    • Covered Utility Payments: Business payments for utility services for the distribution of electricity, gas, water, transportation, telephone or internet access, in each case for which service commenced prior to February 15, 2020. There is no definition or limitation provided for any of these terms.

Each of the foregoing non-payroll costs must be paid during the Covered Period or the  Alternative Payroll Covered Period, as applicable, or incurred during such period and paid on or before the next regular billing date (even if such date is after expiration of the Covered Period or the Alternative Payroll Covered Period, as applicable). Consistent with the CARES Act and prior SBA Guidance, the foregoing eligible non-payroll costs are not permitted to exceed 25% of the total PPP loan forgiveness amount.

3. Forgiveness Reductions. As introduced by the CARES Act and SBA Guidance, forgiveness amounts are subject to decrease in the event that a borrower (i) reduces its full-time employee headcount, or (ii) decreases salaries and wages by more than 25% for employees making less than $100,000 per year, in each case, during the eight-week covered period, as compared to the selected reference period (detailed below).

a. Workforce Reduction: For purposes of determining the workforce reduction amount, the Instructions require the borrower to calculate its average weekly full-time equivalency (“FTE”) during a selected reference period, which may be either (i) February 15, 2019 to June 30, 2019, (ii) January 1, 2020 to February 29, 2020, or (iii) in the case of seasonal employers, either of the preceding periods or a consecutive 12-week period between May 1, 2019 and September 15, 2019, in each case at the borrower’s option. A borrower’s aggregate forgiveness amount will be reduced if the average number of full-time equivalent employees during the Covered Period (or Alternative Payroll Covered Period) is less than the average number employed during the applicable reference period.

      • Full-Time Equivalent Employees: For purposes of calculating average FTE, borrowers should take the average number of hours paid per week per individual employee, divided by 40 and rounded to the nearest tenth, capped at 1.0. A borrower may also elect to employ a simplified formula, assigning 1.0 for employees who work 40+ hours per week and 0.5 for employees who work less than 40 hours per week.
      • Exceptions: The Application provides that the aggregate forgiveness amount will not be reduced for headcount reductions related to: (A) any position for which the borrower has made a good-faith, written offer to rehire an employee during the Covered Period (or Alternative Payroll Covered Period), which was rejected by such employee, or (B) any employee who, during the applicable period, (1) was fired for cause, (2) voluntarily resigned, or (3) voluntarily requested and received a reduction of their hours.
      • Safe Harbor: As initially proposed under the CARES Act, the Application provides a safe harbor for those borrowers who restore FTE levels by June 30, 2020. Specifically, a borrower will be exempt from PPP loan forgiveness reductions on the basis of headcount decreases if such borrower has reduced its FTE levels during the February 15, 2020 – April 26, 2020 period, and restores such FTE levels by no later than June 30, 2020 to its FTE count in the pay period that included February 15, 2020.

b. Compensation Reduction: As originally proposed, the aggregate forgiveness amount is subject to reduction due to salary or wage decreases of more than 25% for employees making less than $100,000 per year (annualized). The compensation reduction is measured against the period beginning on January 1, 2020 and ending on March 31, 2020. In the event that salary/hourly wage levels are ultimately restored, then the applicable reduction may be eliminated.

4. Unauthorized Use of Funds. Consistent with SBA Guidance, the Application and Instructions reinforce potential civil penalties and/or criminal fraud charges for the unauthorized use of PPP funds. In submitting the Application, an authorized representative of borrower must certify that the requested forgiveness amount (a) was used to pay costs eligible for forgiveness (payroll costs; mortgage obligations, rent or lease payments and utilities payments), (b) includes all applicable reductions due to decreases in the number of full-time equivalent employees and/or salary/hourly wage reductions, (c) does not include non-payroll costs in excess of 25% of the forgiveness amount requested, and (d) does not exceed eight-weeks of 2019 compensation for any owner-employee or self-employed individual or general partner, in each case capped at $15,385.

5. Document Retention. The Application and Instructions require borrowers to retain all PPP loan supporting documentation for a period of six years after the date that the loan is forgiven or repaid in full. Such information includes payroll documentation, documentation supporting borrower’s certifications as to the economic necessity of the PPP loan, documentation delivered in connection with, and in support of, borrower’s loan forgiveness application and any other records demonstrating material compliance with PPP requirements.

The SBA is expected to issue further guidance with respect to the above in the coming weeks and there continues to be some unanswered questions related to loan forgiveness under the PPP. We are continuing to monitor any developments and will update this alert as appropriate. For additional information regarding the PPP and related forgiveness guidelines, please reference our comprehensive Paycheck Protection Program Guide, linked here.  Our attorneys are available to guide you and answer any questions regarding the PPP or other aspects of the CARES Act.


As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice.  For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.