SBA Issues Loan Forgiveness Application and Instructions for Borrowers

On May 15, 2020, the U.S. Department of the Treasury (the Treasury) and the Small Business Administration (SBA) issued the Paycheck Protection Program (PPP) – Loan Forgiveness Application and Instructions for Borrowers (the Forgiveness Application), which provides clarity of several topics relevant to PPP loan forgiveness and provides a PPP Loan Forgiveness Calculation Form, along with supporting schedules and worksheets. The following summarizes some of the more significant clarifications to previously issued PPP guidance within the Forgiveness Application:

Alternative Payroll Covered Period – This concept was introduced for administrative convenience and allows “borrowers with a biweekly (or more frequent) payroll schedule…to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date.” If a borrower elects to use the Alternative Payroll Covered Period then the borrower must apply the Alternative Payroll Covered Period in other areas of the application where reference is made to “the Covered Period or the Alternative Payroll Covered Period.”  However, for areas of the application that refer only to “the Covered Period,” borrowers must apply the eight week period beginning on the first day of the disbursement of the PPP loan proceeds, and not the Alternative Payroll Covered Period.

Two Million Rule – Borrowers will self-report whether the borrower, together with its affiliates, received PPP loans with an original principal amount exceeding $2 million by checking the respective box on the Forgiveness Application. As previously discussed in the SBA’s Frequently Asked Question (FAQ) #46, the $2 million threshold is based on the original loan amount and would include affiliates to the extent required under the interim final rule on affiliates.[1]

Paid and Incurred – The Forgiveness Application clarifies the concept of “paid and incurred” for eligible payroll costs stating, “Borrowers are generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the eight-week (56-day) Covered Period (or Alternative Payroll Covered Period).” Payroll costs are considered paid when a check is distributed to an employee or an Automated Clearing House (ACH) credit transaction is initiated, and “payroll costs are considered incurred on the day the employee’s pay is earned.” If payroll costs are incurred, but not paid as of the last pay period in the covered or alternative payroll period, those amounts are eligible for forgiveness if paid before or on the next regularly scheduled payroll date. This clarification allows for the continued cadence of payments for payroll costs that aligns with the borrower’s normal payroll cycle to be eligible for forgiveness. For purposes of completing Line 1 of the Forgiveness Application, borrowers should, “Enter total eligible payroll costs incurred or paid during the Covered Period or the Alternative Payroll Covered Period.”

Nonpayroll Costs – With regard to nonpayroll costs, “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.” This guidance allows for payments for eligible costs that have been incurred during the period, but not yet billed, and will be paid after the covered period. 

Maximum Cash Compensation – The maximum cash compensation, including gross salary, gross wages, gross tips, gross commissions, paid leave (vacation, family, medical or sick leave, not including leave covered by the Families First Coronavirus Response Act) is $15,385, which is equivalent to eight weeks of pay for an employee with a salary of $100,000. This guidance is consistent with the formula introduced in Question 1.f. of   (IFR 3), which also stated the maximum forgiveness per individual is $15,385 for eight weeks.

Calculation of Average Full-Time Equivalents (FTEs) – It was anticipated that the FTE calculation would be based on a 30-hour-per-week threshold similar to the guidelines in the Patient Protection and Affordable Care Act; however, for the purposes of PPP forgiveness, the Forgiveness Application provides guidance on the calculation of average FTEs. The calculation of FTEs during the Covered Period or the Alternative Payroll Covered Period is based on the average number of hours paid per week for each employee divided by 40 hours and rounding the total to the nearest tenth, but is capped at a maximum of 1.0 for each employee. The Forgiveness Application offers another method for administrative convenience wherein the borrower can assign a 1.0 for employees who work 40 or more hours per week and assign a 0.5 for employees who work less than 40 hours per week. The simplified method can be used at the election of the borrower.

Salary/Hourly Wage Reduction – In order to determine the amount of loan forgiveness, borrowers must consider on an employee by employee basis any annual salary or hourly wage reduction for certain employees that have occurred during the Covered Period or the Alternative Payroll Covered Period as it compares to the average annual salary or hourly wage between Jan. 1, 2020, and March 31, 2020. A reduction in average annual salary or hourly wage results in a reduction in the amount of the loan to be forgiven; however, borrowers may eliminate the reduction amount through the Salary/Hourly Wage Reduction Safe Harbor. This safe harbor allows for restoration of annual salary or hourly wage level on an employee by employee basis as of June 30, 2020, if the average annual salary or hourly wage between Feb. 15, 2020, and April 26, 2020, decreased from the annual salary or hourly wage as of Feb. 15, 2020.

FTE Reduction Exceptions – There are exceptions that would allow the exclusion of certain FTEs in the calculation of the FTE reduction quotient applied to the loan forgiveness. The SBA had previously indicated in that forgiveness amounts will not be reduced for any employee who was laid off where the PPP borrower makes a good faith, written offer of rehire at the same salary/wages and same number of hours, and the employee rejects the offer of rehire. The Forgiveness Application adds additional exceptions for employees who during the covered period or alternative payroll covered period: “(a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours. In all of these cases, include these FTEs on this line only if the position was not filled by a new employee. Any FTE reductions in these cases do not reduce the Borrower’s loan forgiveness.”

FTE Reduction Safe Harbor – The Forgiveness Application clarifies the application of the FTE reduction safe harbor and the concept of restoration of FTEs by June 30, 2020, to apply the safe harbor. A PPP borrower is exempt from the FTE reduction if it reduced employee levels from Feb. 15, 2020, to April 26, 2020, and restores FTE levels to the levels included in the Feb. 15, 2020, pay period by June 30, 2020.  FTE levels used in the determination of the April 26, 2020, comparison date is calculated as the total average FTEs between Feb. 15, 2020, and April 26, 2020, following the same methods used to calculate average FTEs elsewhere in the Forgiveness Application.

Ordering of the Forgiveness Reduction Provisions – The Forgiveness Application provides the ordering of the various loan forgiveness reduction provisions. First, the salary/hourly wage reduction is applied to the total qualified payroll and nonpayroll costs. Next, the net forgiveness amount after the application of the salary/hourly wage reduction is multiplied by the FTE reduction quotient. Finally, the modified total forgiveness after application of the salary reduction calculations and the FTE is compared to the PPP loan amount, and the total payroll costs divided by 0.75. The total forgiveness equals the smaller of those three numbers.

Currently, the Forgiveness Application is set to expire on Oct. 31, 2020.

For questions or additional information about the PPP loan forgiveness application process and other guidance issued by the Treasury and the SBA, please contact us at


[1] Business Loan Program Temporary Changes; Paycheck Protection Program. 85 FR 20817. April 15, 2020.


Denny Ard
Managing Partner, DHG Solutions Lab
© Dixon Hughes Goodman LLP. All rights reserved.
DHG is registered in the U.S. Patent and Trademark Office to Dixon Hughes Goodman LLP.