Cavitch Familo & Durkin, Co., L.P.A.

Borrowers will cheer SBA’s forgiveness application

Michael Rasor

As April and May passed, smaller companies piled up questions about how to get their PPP loans forgiven.

They will be pleased to learn that the SBA answered many of their questions– in their favor.

Here are my main takeaways from the SBA’s forgiveness application, which was released May 15 and supplemented May 22:

  • Paid vs. incurred
    • Statutory language/previous guidance: The CARES Act said that a borrower will earn forgiveness credit for “costs incurred and payments made” during the 8-week covered period.
    • Questions raised: Does a certain cost need to be both incurred and paid in the 8-week period? If so, the first payroll might not count (incurred prior to 8-week period), and the last payroll period might not count (paid after the 8-week period).
    • Resolution: The SBA will use an expansive interpretation, so that a cost can result in forgiveness if it is either incurred or paid during the covered period. For example, to obtain forgiveness on payroll, either: (a) pay is distributed within the 8-week period (whether by paycheck delivery or ACH initiation), or (b) the wages must be earned during the 8-week period (as long as they’re paid before the next regular payroll date). Because a cost need not be both “incurred and paid” during the 8-week period, forgiveness will be available for prepayments (other than for mortgage interest) and payments of arrearages, as long as they’re made during the covered period.
  • Employee bonuses/hazard pay
    • Statutory language/previous guidance: The definition of “payroll costs” is fairly broad. The CARES Act does not specifically prohibit the payment of bonuses.
    • Questions raised: Borrowers who might not fill their forgiveness bucket have wondered: Can I just issue bonuses at the end of the period?
    • Resolution: Yes, but each employee’s pay can only result in forgiveness to the extent it does not exceed an annualized $100,000 during the covered period. The pre-payment of a bonus that is otherwise contractually due to the employee, if paid during the covered period, would also appear to be a forgiveness credit.
  • Rent for personal property
    • Statutory language/previous guidance: The CARES Act allows forgiveness for “covered rent obligations,” which had a mostly circular definition of “rent obligated under a leasing agreement.”
    • Questions raised: Is rent for personal property (i.e., vehicles) a forgivable expense? In the context of interest payments, the CARES Act explicitly included loans obtained to purchase personal property. The statutory silence for rent expenses led some to believe that rent would only apply to real estate, under the rule of construction of expressio unius est exclusio alterius (the explicit mention of one thing is the exclusion of another).
    • Resolution: Yes. Forgiveness can be obtained for personal property rent (subject to 75%/25% limitation).
  • Full-time equivalents
    • Statutory language/previous guidance: The CARES Act limits a borrower’s forgiveness by a ratio to reflect a reduction in headcount. To calculate headcount, the CARES Act uses a familiar term of “full-time equivalent employees” (FTEs).
    • Questions raised: Is this the same FTE definition used in the Affordable Care Act (which is based on a 30-hour work week)?
    • Resolution: No. SBA provides two alternative formulas (at the borrower’s election):
      • Enter the average number of hours paid per week, divide by 40, and round the total to the nearest tenth. The maximum for each employee is capped at 1.0.
      • 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.
  • Forgiveness reductions for employees not laid off
    • Statutory language/previous guidance: The CARES Act reduces forgiveness for an employer who does not restore the FTE count by June 30, 2020.
    • Questions raised: Many borrowers will have employees who refuse to come back to work, who are fired for reasons unrelated to Covid-19, or who quit. Will the borrower be punished for a lower FTE count when the reduction is beyond the borrower’s control?
    • Resolution: No. A borrower can exclude from the FTE calculations an employee if: (1) the borrower made a good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or the alternative payroll covered period; (2) the offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours; (3) the offer was rejected by such employee; (4) the borrower has maintained records documenting the offer and its rejection; and (5) the borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer. Similarly, there will be no reduction for an employee who is fired for cause, voluntarily resigns, or voluntarily requests a reduced schedule during the covered period or the alternative payroll covered period. If any of these people was replaced, however, then the position should be included within FTE calculation.

SBA also introduced new guidance and rules in the forgiveness application:

  • Owner limitation
    • Everyone is aware of the prorated $100,000-per-employee forgiveness limitation. SBA added another limitation for owners, partners, and self-employed individuals. For these workers, forgiveness also cannot exceed eight weeks’ worth of 2019 compensation. This provision is most likely to hurt shareholders in S-corporations, who often minimize their W-2 wages for FICA tax purposes.
    • However, an optimist might say: By limiting the forgiveness for owners–and not for other employees– the SBA has provided a green light for employers who would like to pay bonuses to non-owners, including a prepayment of a bonus that otherwise may have been paid at year-end.
  • Documentation for forgiveness – Borrowers should prepare now to prove up their forgiveness. Specifically:
    • For payroll costs,
      • bank account statements,
      • third-party payroll provider reports,
      • IRS Form 941,
      • state employee wage reports and unemployment filings, and/or
      • checks or account statements for health insurance or retirement contributions.
    • For other costs, have the following documentation, both for February 2020 and the 8-week period:
      • Mortgage interest –
        • Lender amortization schedule,
        • Receipts,
        • Cancelled checks, or
        • Lender account statements.
      • Rent –
        • Current lease agreement,
        • Receipts, or
        • Cancelled checks
      • Utilities –
        • Invoices,
        • Receipts,
        • Cancelled checks, or
        • Account statements.
  • Alternative 8-week period – Borrowers who disburse payroll every two weeks (or more frequently) may delay the start of their 8-week period until the first day of the first pay period after their PPP loan is disbursed. This will allow for a simpler computation for payroll costs forgiveness, but it might not be advantageous based on the paid/incurred rule mentioned above. An ideal 8-week period would begin on the day before a payroll, not the day after. You want to include a payroll that is partially accrued before the 8-week period begins, if possible.
  • PPP loan increases – Separately, last week, the SBA set forth a procedure for increasing a borrower’s PPP loan for the reason that the original principal balance did not account for partner compensation. Many lenders excluded partner compensation until the SBA clarified on April 14 that it could be included. Another reason to increase the loan would be if a seasonal employer received a loan prior to the April 28 change in alternative criterion.
  • No double-whammy – A borrower who cuts an employee’s hours could conceivably be dinged for both the reduction in headcount and the cut in compensation. However, in this instance, the SBA will consider the person’s pay to not have been cut (unless hourly rate was reduced).

The next big news might be a Covid 4.0 bill from Congress. Two items that could change: (1) removal of the 75%/25% forgiveness limitation for payroll costs, and (2) an expansion of the 8-week period for retail/restaurants, who were subject to a state’s shutdown order.

I will be staying on top of PPP developments. Please email me at with any questions.

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