Critical changes regarding Paycheck Protection Program loan forgiveness


Over the past few weeks, some critical changes have been made to the Paycheck Protection Program (PPP). The PPP Flexibility Act (the Act) and various guidelines issued by the Small Business Administration (SBA) provide relief to small businesses utilizing and preparing to seek forgiveness of their PPP loans. Here are questions and answers on some of the major issues:

What portion of the loan must be spent on payroll? Will there be no forgiveness if that portion is not spent on payroll?

At least 60 percent of the loan must be used for payroll to be eligible for full loan forgiveness. The remaining 40 percent may be used for eligible non-payroll costs such as rent on real and personal property, utilities and mortgage interest. Loan forgiveness will be reduced proportionately if less than 60 percent of the loan proceeds are spent on payroll.

Over what period may PPP loan proceeds be used to be eligible for forgiveness?

Loan proceeds used on eligible costs can be eligible for forgiveness if they are incurred or paid over a 24-week period beginning on the date of loan disbursement (or by December 31, 2020, whichever is earlier). Borrowers who received the loan before the enactment of the Act may elect to use the original eight-week period for loan forgiveness. Borrowers with a biweekly or more frequent payroll cycle may elect to use the Alternative Payroll Covered Period (APCP) for payroll costs, only.

Do eligible costs have to be both incurred and paid during the 24 week covered period?

No. Eligible payroll and non-payroll costs incurred before and paid during the 24-week period are eligible to be forgiven, as well as costs incurred during the 24-week period but paid after the 24-week period, provided they are paid on the next regular payroll/billing date.

What if an employee was let go, or does not return to work? Will this affect loan forgiveness?

The following will not be counted toward the full-time equivalent (FTE) headcount reduction:

  • Employer made a good-faith, written offer to rehire an employee and the employee rejected the offer.
  • Employer could not find similarly qualified employees for an open position by December 31, 2020.
  • Employer could not restore business activity to the level comparable to pre-COVID-19 due to social distancing, sanitation or worker/customer safety guidelines issued by federal agencies.
  • Employees who were fired for cause, voluntarily resigned, voluntarily requested and received a reduction of their hours.

In addition, there is another safe harbor test that if met will result in no reduction in loan forgiveness provided any reductions in salary/wage and FTE are restored by December 31, 2020.

Although the Act brings great relief to PPP loan borrowers, it has also raised a number of new questions. We anticipate the U.S Treasury and SBA will provide further guidance in the coming weeks. Please contact Sol Schwartz & Associates at 210.384.8000 to discuss how current guidance applies to your situation.