Understanding the Paycheck Protection Program Loan Forgiveness Application

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On a May 15, 2020, the Small Business Association (“SBA”) provided its first draft of the Paycheck Protection Program loan forgiveness application (“Loan Forgiveness Application”). Although there will be a great deal of work to do in order to unpack everything in the application from a legal and accounting perspective, it is helpful to take a first look at it now so that borrowers who received Paycheck Protection Program loans (“PPP loans”) in the first round of funding can begin preparing immediately (borrowers in the second round of PPP loan funding still have some more time).

Notably absent from the Loan Forgiveness Application is definitive guidance on several areas of frequent confusion by borrowers, including the distinction between “paid and incurred” versus cash method or accrual accounting (although there is some guidance), the treatment of bonuses, and questions about the common area maintenance or triple-net charges under triple net leases. No doubt as the SBA continues to work through the PPP loan program, it will pivot to these questions. Notwithstanding the foregoing omissions, there is much information available in the Loan Forgiveness Application itself.

Variation in Selection of the 8-Week Covered Period

For good reason, attorneys have been reminding taxpayers that the 8-week forgiveness period (the “Covered Period”)  is more accurately thought of as 56 days. This means that if you received PPP loan proceeds on Friday, April 17, 2020, then the last day of your Covered Period would be Thursday, June 11, 2020. This has been confirmed by the formula used in the application.

Surprisingly, however, the application allows for an “Alternative Payroll Covered Period.” For borrower convenience, businesses with bi-weekly (or more frequent) payroll schedules may elect to calculate eligible payroll costs using the 8-week (56-day) period that began on the first day of their first pay period following PPP loan disbursement. This removes some of the uncertainty surrounding the “incurred and paid” language in the CARES Act and how that would be reconciled during the Covered Period for costs that span outside of the Covered Period. This applies only to payroll costs. An example may be helpful:

If a borrower received its PPP loan proceeds on Friday, April 17, 2020, and the first day of its first pay period following that date is Monday, April 20, 2020, then the borrower may elect to use April 20, 2020, as the first day of its first pay period within the 8-week period, bringing the last day of that Alternative Payroll Covered Period out to June 14, 2020.

If a borrower elects to use this Alternative Payroll Covered Period, then you must follow certain rules in the Loan Forgiveness Application. This Alternative Payroll Covered Period will likely help some borrowers avoid needing to run a “short” or “stub” payroll at the end of the Covered Period. However, it is important to note that this does not apply to other expenses that qualify for forgiveness—it appears to apply only to payroll costs. In that sense, it leaves borrowers wanting for more guidance on the “paid and incurred” issue discussed above.

Eligible Nonpayroll Costs

The Loan Forgiveness Application gives us more guidance on non-payroll items (rent, mortgage interest, and utilities) with billing periods that do not align with the Covered Period. The Loan Forgiveness Application says that an “eligible nonpayroll 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.” (emphasis added). The mechanics of this will have to be spelled out in greater detail in guidance, but this should be a benefit to most borrowers.

Paying Back Excess Loans

The Loan Forgiveness Application also confirms that a borrower who received a loan in excess of $2 million cannot pay back a portion of the PPP loan to bring the balance below $2 million to avoid the mandatory audit of its application. This is consistent with the advice Helsell Fetterman LLP has been giving clients.

Stacking of Limitations

Under the PPP loan program, there are three limitations on the total amount that your PPP loan will be forgiven. First, PPP loan proceeds must be applied to costs which are either eligible payroll costs or qualified other expenses (e.g., business rent, mortgage interest, and utilities) and be within a 75% to 25% ratio to one another. By way of example, if a borrower received a $100,000 PPP loan, then, in order to maximize and achieve 100% forgiveness, at least $75,000 would have to be used for eligible payroll costs and the remaining $25,000 would have to be used for qualified other expenses.

Second, the amount the PPP loan will be forgiven is subject a “headcount limitation” if a reduction in the average amount full-time employees (“FTE”) occurred between the initial base period used in calculating your PPP loan amount and the average amount of FTEs during the Covered Period.

Third, the amount the PPP loan will be forgiven by must be reduced if salary/hourly wage reductions in excess of 25% for certain employees occurred (i.e., those employees who make less than $100,000 per year).

The Loan Forgiveness Application is quite surprising because of the formula that it uses to “layer” these limitations, which will make it so that borrowers will have to take the combined limitation of the wage reduction and FTE reduction limitations or the 75/25 limitation, depending on their unique circumstances and which limitation group creates the greatest decrease in that borrower’s PPP forgiveness amount. Although layering these limitations may seem harsh, it is better than having to reduce the PPP loan forgiveness amount.


Because certifications for the application for PPP loans ended up being more of an issue than initially anticipated, it is worthwhile to review the Loan Forgiveness Application’s certifications now. All borrowers would be wise to take these certifications seriously. The only thing worse than owing the federal government money is owing the federal government money that the federal government thinks you should not have taken in the first place.

The first certification is one that most people who have studied the PPP loan program expected: the borrower must certify that:

    1. the dollar amount for which forgiveness is requested were used for eligible costs (e., payroll costs to retain employees, business mortgage interest, business rent or lease payments, or business utility payments);
    2. the headcount numbers for FTEs is accurate along with the wage reduction calculations;
    3. there is not an excess of 25% of nonpayroll eligible costs reported for forgiveness; and
    4. none of the costs used for forgiveness exceed 8-weeks’ worth of 2019 compensation for owner-employees or self-employed individuals capped at $15,385 per individual.

Although straightforward on its face, this first certification is important because it confirms two of Helsell Fetterman LLP’s previous interpretations of the CARES Act. First, that borrowers who are owner-employees or self-employed will have a limited ability to “bonus” themselves up and use that bonus amount for forgiveness—instead they will be  limited to eight weeks’ worth of compensation in 2019. If the borrower-owner had net profits (Schedule C) or made more than $100,000 wages or similar compensation, in 2019, this is not that much of a limitation. However, for those individuals who made less than $100,000 as owner-employees or self-employed individuals in 2019 and planned to bonus themselves out up to $15,385, this will cause problems for you when it comes time for forgiveness. Helsell Fetterman LLP anticipates a lot of commentary and guidance on this issue as it will no doubt frustrate many borrowers.

Second, the borrower must certify that if the funds were “knowingly used for unauthorized purposes,” that the federal government may pursue recovery of loan amounts and/or civil or criminal fraud charges. This is no doubt a side effect of borrowers taking PPP loans with no intention of retaining payroll. However, it begs the question as to what the exposure of the borrower would be if the borrower simply chose not to seek forgiveness. Additionally, it is also questionable as to whether this applies to amounts for which the borrower is seeking forgiveness or the entire amount of the borrower’s PPP loan. We expect that the SBA will view it as the latter, though the former makes more sense if you review the plain language of the CARES Act. This latter interpretation is supported by the fact that the Loan Forgiveness Application states that you do not have to include information on expenses for which you do not wish to seek forgiveness. Nevertheless, the takeaway is clear: the SBA believes the PPP loan amounts should be predominantly used for payroll. As a result, any business planning to use the PPP loan proceeds predominantly for non-payroll costs would be wise to speak to legal counsel prior to expending those funds. Alternatively put, this certification confirms Helsell Fetterman LLP’s initial suspicion that PPP loans are not a blank check and that the Department of the Treasury and SBA expect that these funds will be used for the retention of employees first and foremost. Intentionally using the proceeds of your PPP loan for non-eligible costs creates at least some risk to borrowers based on this second certification.

There are additional certifications and guidance on substantiating your Loan Forgiveness Application, what documents need to be provided, and what documents do not need to be provided (but still need to be retained) for the statute of limitations, which is six years. We will follow-up with separate guidance on that.

FTE Reduction Exceptions

The attorneys at Helsell Fetterman LLP were hopeful to see a softening of the harshness of the FTE headcount limitation. This is memorialized in the Loan Forgiveness Application which provides two avenues of relief in comparing FTE headcount from the base period to the FTE headcount in the Covered Period.

First, any position for which the borrower made a good-faith, written offer to rehire, which was rejected (there are likely other requirements in light of FAQs issued by the SBA, including the necessary warning to the employee that failure to accept employment will impact his or her rights to unemployment payments), will not impact the FTE headcount. Second, any employee who is fired for cause, voluntarily resigns, or voluntarily requests a reduction in his or her hours will not negatively impact the FTE headcount limitation.

This news should be a welcome relief to borrowers who have wanted to rehire their employees once they are allowed to reopen or once they acquired the PPP loan proceeds.


In the coming days, Helsell Fetterman LLP will elaborate and provide additional guidance on the formulas used by the SBA in the Loan Forgiveness Application and work with its clients to prepare their Loan Forgiveness Applications for submission. If you have any questions about your PPP loan, the Application for Forgiveness, PPP loan audits, or the use of PPP loan funds generally, please immediately reach out to Tyler Jones or Scott Collins.

Disclaimer: This document and its contents are not a substitute for specific legal advice in your specific situation based on your specific facts and circumstances. As a result, it is not intended to be legal advice nor should it be relied upon as such.

About the Authors

Tyler Jones

Tyler’s practice consists of advising businesses and individuals on state and federal tax and business planning issues, such as business formation, risk management, corporate governance, and business succession planning. He also advises medical and health care professionals on purchasing and selling medical practices, real estate leases and purchase agreements, and employment and non-compete agreements.

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