A Walk Through the PPP Loan Forgiveness Application

May 20, 2020 | by Kevin J. Gienger, CPA

We have been waiting for a while to get answers to some of the Paycheck Protection Loan questions that arose as soon as these loans were created.  A forgivable loan was a big draw and many small businesses received their loans weeks ago.  The loan proceeds need to be spent on forgivable expenses over an 8-week (56-day period) if you don’t want to pay this money back.

We still expect more guidance from the SBA, but late on Friday May 15th they released the Loan Forgiveness Application.  The instructions for the application will give you more details on how to measure your forgivable expenses.  However, be warned, there are a lot of detail calculations to make.  It appears you need to jump though ALL the hoops to fill out the application even if it doesn’t appear to change the final answer.

The most important part of this program is still payroll costs.  The more you spend on forgivable payroll expenses the less you will have to pay back at the end of your Covered Period.


Before Loan Forgiveness

Hopefully you have already begun looking at your payroll data for the periods in 2019 and the first quarter of 2020.  Now is when you need to use this information, but they have changed the rules, so you have more calculations to make.


Important Dates:

You will need a lot of detailed payroll data to make the necessary calculations.  Many payroll providers will create reports for your use, but you may not want to wait. Create a detail list of hours worked and amounts paid for these dates / date ranges:

  • Every payroll paid during 2019.
  • February 15, 2019 to June 30 ,2019
  • If you are a seasonal employer: The 12-week period you select between May 1, 2019 and September 15, 2019
  • January 1, 2020 to March 31, 2020
  • February 15, 2020 to April 26, 2020
  • The payroll that includes February 15, 2020
  • The payroll that includes June 30, 2020
  • Your Covered Period – This begins the day you get your first loan disbursement and ends 56 days later. For example, if you receive your loan on Monday April 20th your period ends Sunday June 14th.
  • Oh, and if you have a weekly or biweekly payroll you may also have an Alternative Payroll Covered Period (APCP), more on this next.


Alternative Payroll Covered Period (APCP)

A new optional “covered” period was introduced in the Loan Forgiveness Application. If you pay your employees biweekly (every other week) or more often, then you might consider using the APCP to measure your forgivable payroll costs. The APCP allows you to move your loan origination date forward to align with your payroll cycle.  This will make some of your work easier, but it is unclear if it will result in a higher amount of forgivable payroll costs.

For example, if you received your loan on Monday April 20th and your next payroll starts on Sunday April 26th you can choose to begin your ACPC period on Sunday April 26th. Your 56-day period then ends (for payroll costs only) on Saturday June 20th. Your Covered Period for non-payroll costs remains Monday April 20th to Sunday June 14th.


Loan Forgiveness Reductions

To fill out your Forgiveness Application you actually need to start on Page 7 to calculate the Salary / Hourly Wage Reduction amounts.


Payroll Reductions:

Look back at your detail list of employees paid during 2019 and between January 1, 2020 to March 31, 2020. You will break this list into two tables.

  1. Those employees who in 2019 were paid over $100k on an annualized basis at any time during the year go on Table 2 and there is no impact if their salary or hourly wage rate was reduced.
  2. The rest of your employees will go on Table 1.

Note: Both owners (self-employed individuals and partners) and owner-employees are NOT listed on these tables.  Their wages are input directly on Worksheet A line 9.  They are limited to the lower of these three amounts:

  • The actual amount paid during the covered period.
  • The result of 8 /52 of your 2019 self-employment or wages paid.
  • Or if both these amounts exceed $15,385 then enter $15,385.

Some good news, the rest of this section you only have to deal with those employees on Table 1.  Move through the not so easy 3-step process for each employee on Table 1.

  1. You will compare the average annual salary or hourly wage rate paid during the Covered Period or ACPC to the average paid during January 1, 2020 to March 31, 2020. This is the rate paid per hour, not the actual wages paid. Determine anyone who was paid less than 75% of their average Q1 salary or wage. For anyone more than 75% you’re done. If they were paid under 75% of their prior rate, move to step 2.
  2. There is also a new Safe Harbor calculation. Determine the average annual salary or hourly wage rate paid on the payroll for February 15, 2020 and compare that to the average paid during February 15, 2020 to April 26, 2020.  If the wage paid during the second period is higher there is no reduction. If not, then move to step 3.
  3. Next compare the average rate paid from February 15, 2020 to April 26, 2020 to one more period of time. If this amount is equal or higher to the average annual salary or hourly wage rate paid on the payroll for June 30, 2020, congrats! You also have no reduction.


FTE Reductions:

We now have two ways to determine FTE. First, FTE was clarified to be 40 hours per week, but we also have a simplified FTE method as well. You need to determine your FTE using both methods to see which is best. You are looking for the lower number in one of the following periods, because you get to choose.

Your FTE Prior Period is one of the following:

  • February 15, 2019 to June 30, 2019
  • OR January 1, 2020 to February 29, 2020.
  • OR if you are a seasonal employer you get to pick any 12-week period between May 1, 2019 and September 15, 2019.

For each applicable period calculate your FTE using both methods:

  • For each employee you will determine the average hours paid per week for the periods above. Divide by 40 and round to the nearest tenth. No employee can be more then 1.0.
  • Simplified FTE Method: Or you can use the simplified method in which every 40-hour employee is 1.0 and every other employee is 0.5.

Once you choose a method you must use the same method to count FTEs in the Covered Period or APCP as you did in the Prior Period you chose. You need to make this calculation even if you don’t think you have a reduction, because the results are part of the Application for Forgiveness. You will want to calculate the ratio between the two periods (Prior period FTE count divided Covered period FTE count) to determine which is higher, as that is the method you want to choose.


FTE Safe Harbor:

Just like the wage reduction calculation we now have a Safe Harbor for FTE reductions. Under this Safe Harbor you will not have to reduce of your allowable forgiveness expense based on the FTE counts, If BOTH of the following conditions are true:

  1. You reduced your FTE between February 15, 2020 and April 26, 2020 AND
  2. You restore your FTE to the level it was on the payroll that included February 15, 2020 not later than June 30, 2020.

Currently there are no further details on the restoration process.


Exceptions to FTE:

The SBA has also added three additional exceptions to your measurement of FTE reductions. We already learned about number one in the SBA’s ever-changing FAQ. In this application they gave us three more:

  1. Your good faith written offer to rehire for the same wage and hours was rejected by your employee.
  2. You fired the employee for cause.
  3. Your employee voluntarily resigned.
  4. Your employee voluntarily requested and received a reduction in hours.

If any of these situations caused your FTE to be reduced in the covered period AND you did not replace that worker, then you can exclude them from the reduction calculation.  Make sure all these situations are documented in writing in your HR files.


What are “Payroll Costs”?

There were no significant changes to what is considered allowable or forgivable payroll costs. The biggest thing we learned is payroll costs can be included in forgiveness if they are either paid OR earned in your Covered Period or ACPC:

  • Cash compensation that is either earned (hours worked) or paid (the day you cut the paycheck) during the Covered Period or APCP are eligible.
  • State and local employer paid employment taxes like state unemployment.
  • Employer Health Insurance earned or paid.
  • Employer Retirement Contributions earned or paid.


Unallowed Payroll Costs

Not all payroll expenses will be allowed for your loan forgiveness. For each payroll in your Covered Period or APCP you will need to separate the unallowed expenses from your forgivable expenses. The following are unallowed payroll costs and need to be paid with non-PPP loan funds:

  1. Wages paid in excess $15,385 to any employee or owner during the Covered Period or ACPC.
  2. Social security and Medicare taxes paid by the employer.
  3. Sick leave paid to employees in which you qualified for a tax credit against payroll taxes under the Families First Coronavirus Response Act.


How Much is Forgiven?

In the CARES act the law stated the maximum forgiveness was the full principal amount of the loan. Interest would accrue from the inception of the loan and payments would be deferred. Later, the SBA noted that forgiveness could include the accrued interest. However, in this Loan Forgiveness Application the maximum amount of forgiveness is the loan principal amount. You will owe some interest even if you get 100% forgiveness, based on the application released.


Non Payroll Costs

You can also use your loan proceeds to pay for:

  • Mortgage Interest on real and personal property (for obligations you entered prior to February 15, 2020).
  • Rent for real or personal property (for leases in place prior to February 15, 2020)
  • Utilities (electricity, gas, water, transportation, telephone or internet)

However, of the total amount of money you request to be forgiven, these non-payroll costs cannot exceed 25% of the total amount of the lower of:

  1. The loan amount reduced for Wage / Hourly Reduction and FTE Reduction amount.
  2. The original loan amounts.
  3. The total eligible payroll costs.


Requesting Forgiveness

In order to have your loan forgiven you need to submit a Loan Forgiveness Application to your bank.  Each bank will likely handle this process differently.  Remember, it is your responsibly as the borrower to request forgiveness and provide the documentation to support your spending.  You will need to retain the documentation listed below for six years after the loan is forgiven or paid in full.

Along with your signed application, here is what is required to be submitted with your Application for Loan Forgiveness.

To Support Payroll:

  • Bank statements or 3rd Party Payroll reports documenting cash compensation
  • Payroll Tax Filings like your Form 941
  • State Income, Payroll and Unemployment insurance tax filings
  • Cancelled checks, payment receipts, account transcripts, or other documents verifying your payments for health insurance or retirement contributions.

To Support FTE:

  • Your calculation of FTE for the prior period you choose supported by:
    • 3rd Party Payroll reports documenting hours and payroll or
    • Payroll Tax Filing like your Form 941 or
    • State Income, Payroll and Unemployment insurance tax filings

To Support Non Payroll Costs:

  • Copy of your lender amortization schedule for any Mortgage interest payments.
  • Copy of your current lease agreement for real or personal property leases.
  • Copy of utility invoices from February 2020 AND your covered period.
  • Also include cancelled checks, payment receipts, account transcripts, or other documents verifying your payments for qualifying rent, utilities or mortgage interest.

Documents you must keep but not submit:

  • Employee data to support the Worksheet A Table 1 calculations.
  • Employee data to support the Worksheet A Table 2 information. Specifically, how each employee meets the annualized over $100k amount in 2019.
  • Documentation of any changes in employees that are exempt from the FTE reduction as listed above.
  • Documentation supporting the FTE reduction Safe Harbor in Worksheet A.

Organizing, tracking, and reporting your allowable expenses for your Paycheck Protection Loan will take time and careful work. We are sure to get more guidance on this application, as well as potential changes in the laws. Any amount that is not forgiven will be amortized over two years at a 1% interest rate. Interest will accrue but no payments will be due until six months after your loan is funded.


We are experts in documentation and supporting schedules like the ones in this application.  We want to help you, please contact us so we can support you in the preparation of your Loan Forgiveness Application.