SBA releases more details on Paycheck Protection Program loan forgiveness


The Paycheck Protection Program, or PPP, was great news for business owners who needed a lifeline when the COVID-19 pandemic began sweeping the United States. The key benefit of the PPP is the opportunity for federal loans to be forgiven if certain conditions are met.

But the program was enacted so quickly that some details of the loan forgiveness opportunity were unclear. Last Friday, May 15, the SBA released Form 3508 – PPP Loan Forgiveness Application, which answers some of the questions many borrowers have asked about how to get their loan forgiven. Here are the highlights:

Clarification on paid or incurred costs eligible to be forgiven

Payroll – Payroll costs paid or payroll costs incurred during the covered eight-week period are eligible to be forgiven. Payroll costs incurred but not paid during the eight-week period are eligible for forgiveness if paid on or before the next regular payroll date.

Payroll costs are considered paid on the day paychecks are distributed or the borrower originates an ACH (automated clearing house) credit transaction. Payroll costs are considered incurred on the day they are earned.

Payroll costs eligible for forgiveness include owner-employees’ or self-employed individuals/general partners’ calculated eight weeks’ worth of 2019 compensation, capped at $15,385 per individual. Amounts do not need to be paid or incurred, unless later guidance indicates otherwise.

Non-payroll costs such as business mortgage interest, rent and utilities must be paid during the eight- week period, or incurred during the eight-week period and paid on the next regular billing date, even if the billing date is after the eight-week period to be eligible for forgiveness.

Based on the above, costs incurred before the eight-week period and paid during the eight-week period are eligible to be forgiven, as well as costs incurred during the eight-week period but paid after the eight-week period.

Business mortgage interest, rent or lease payments on real and personal property are eligible to be forgiven.

Introduction of alternative payroll covered period for payroll, only

Borrowers may elect to calculate eligible payroll costs using an eight-week (56- day) period that begins on the first day of their first pay period following their PPP loan disbursement date. For example, if the PPP loan proceeds were received on May 1, 2020 and the first pay period following the PPP loan disbursement is May 4, 2020, the first day of the Alternative Payroll Covered Period is May 4, 2020, and the last day of this period is June 28, 2020. This alternative eight-week period is only for determining eligible payroll costs.

Clarification on what reduces loan forgiveness

1. No payroll costs, no forgiveness

If none of the PPP loan is used for payroll costs (even if you spent 25 percent of the loan proceeds on qualifying non-payroll costs), none of the loan will be forgiven.

2. Salary/hourly wage reduction safe harbor

Salary/hourly wage reduction calculations are done on an employee-by-employee basis.

A safe harbor is available if the average annual salary/hourly wage of an employee for the period February 15, 2020 through April 26, 2020 is less than the employee’s average annual salary as of February 15, 2020. Safe harbor is met and forgiveness will not be reduced for any salary reduction of that employee if that employee’s average annual salary is restored by June 30, 2020 to the employee’s average annual salary level as of February 15, 2020.

3. Average full-time equivalent (FTE) calculation, exceptions and available safe harbor

FTE is calculated as average number of hours paid per week to an employee divided by 40 hours, rounded to the nearest tenth. Maximum for each employee is capped at 1.0

Alternatively, borrowers may elect to use a simplified method. This method assigns a 1.0 for employees who work 40 hours or more and 0.5 for employees who work fewer than 40 hours.

The following cases will not reduce the borrower’s loan forgiveness:

  • Borrower made a good-faith, written offer to rehire an employee and the employee rejected the offer
  • Employees who were fired for cause
  • Employees who voluntarily resigned
  • Employees who voluntarily requested and received a reduction of their hours

A safe harbor is available if the average number of FTEs for the period February 15, 2020 and April 26, 2020 is less than the average as of February 15, 2020. Safe harbor is met and forgiveness will not be reduced if the average number of FTEs on June 30, 2020 are greater than or equal to the average number of FTEs on February 15, 2020.

Next steps

While the SBA has provided some useful guidance on the PPP loan forgiveness through the application, we anticipate further guidance will be provided.

Call your Sol Schwartz & Associates professional at 210.384.8000 to discuss how this guidance on PPP loan forgiveness applies to your own situation. We are also ready anytime to discuss how you can take full advantage of the federal government’s efforts to help your business.