PPP Loan Forgiveness

PPP Loan Forgiveness

June 02, 2020

Updated February 22, 2022

What is PPP Loan Forgiveness?

PPP Loan Forgiveness is where qualified program participants are NOT required to pay back loaned funds, effectively making it a full or partial grant. Application for PPP loan forgiveness is required; it is not automatic.

The purpose of loan forgiveness is to encourage small businesses to be able to maintain headcount and payrolls to ensure stabilization of the economy throughout the COVID-19 pandemic. For those businesses, to ensure they didn’t take on more debt, the government created a loan forgiveness program, a lending program that uses a straight-forward and minimal-documentation process. The stipulation was if employers don’t lay off employees or cut wages, the loans can be FULLY forgiven, effectively making them full (or partial if layoffs or wage reductions occurred) grants, depending on how borrowers put the proceeds to use.

PPP Loan Forgiveness Rules

To qualify for full loan forgiveness on first draw loans during the 8- to 24-week period following loan disbursement ALL PPP forgiveness requirements below must be met:

  • Employee and compensation levels are maintained
  • Loans are spent on payroll and other PPP eligible expenses
  • At least 60% of the proceeds are spent on payroll

A portion of the loan is forgivable if the following conditions are met:

  • Your business has been substantially impacted by COVID-19. Issues would include supply chain disruptions (quantity and lead time, quality, technology), staffing challenges, decrease in sales/customers and/or closures.
  • Your 7(a) loan is granted from February 15, 2020 to June 30, 2020

The total of the following costs incurred, and payments made during the covered period can be forgiven:

  • Payroll
  • Payment of interest on any covered mortgage obligation
  • Any payment on any covered rent obligation
  • Any covered utility payment

Learn how to prepare for loan forgiveness in this video which digs into the known and unknown variables and takes a deeper look into the qualifications for forgiveness.

Deduction Exceptions

The original Coronavirus Aid, Relief, and Economic Security (CARES) Act clearly exempted forgiven amounts from being included in gross income but left unaddressed anything to do with the deductibility of the expenses used for forgiveness. In this vacuum, the IRS issued guidance this fall that such expenses could not be deducted, nor could they be pushed into 2021 if no forgiveness application had yet been submitted.

Section 276 of the new law tackles that issue head-on, stating that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income” of the forgiveness amount. Going one step further, partnerships and S corporations may treat forgiven amounts as tax exempt income and any increase in the adjusted basis of a partner’s interest in a partnership under section 705 of the Internal Revenue Code “shall equal the partner’s distributive share of deductions resulting from costs giving rise to forgiveness.”

Clarifications of Gray Areas

There have been several areas that borrowers still had questions, in which we hopefully have provided clarification for these “gray” areas:

  • The 75% rule is confirmed to be calculated against the forgiveness amount spent and not the loan proceeds amount
  • There is no longer a bright line on 75% of spent amount on labor to qualify for forgiveness. The borrower gets the smaller of:
    • Labor costs divided by .75 where labor makes up less than 75% of spend
    • Net forgiveness amount in the case where labor makes up 75% or more of spend
    • Total loan amount
  • Accrued but not paid expenses are included
  • FTE is defined as 40 hours, with an option to just use 0.5 for part-timers
  • The salary reduction calculation now includes the word “average” into as anticipated, removing the issue of comparing 8 weeks of total pay against 13 weeks as originally written
  • They defined the order of events on the forgiveness reduction factors — subtract salary reduction dollars from gross forgiveness amount first, then multiply that result by the FTE quotient to get to the preliminary forgiveness amount
  • The safe harbors for the two reduction factors are separate from each other, meaning a borrower can get safe harbor for one factor but not the other — it is not necessary to meet both safe harbor tests in order to qualify
  • Documentation required to be submitted to the lender has been defined

PPP Loan Forgiveness Application & Deadline

The much-anticipated PPP loan forgiveness application and instructions became available on May 15, 2020. This application provides borrowers with both the form on which they will need to submit the loan forgiveness application to their lender, along with the needed guidance in the form of attached instructions.

The form itself contains four components:

  1. The Loan Forgiveness Calculation Form
  2. PPP Schedule A (Reduction of Loan Forgiveness Calculation)
  3. PPP Schedule A Worksheet (Individual Employee Details)
  4. The PPP Borrower Demographic Form (optional)

Deadlines to apply for loan forgiveness are within 10 months of the end of the covered period under which a business had to spend the money. That means, for loans granted in April 2020, there was an eight-week covered period, which would put the deadline in the middle of July 2021. For loans operating under a 24-week covered period, that would mean a deadline in September 2021.

The PPP loans will automatically convert to a standard loan at 1% interest if the deadline is missed. To avoid deadlines altogether, borrowers can apply for forgiveness any time up to the maturity date of the loan once all proceeds have been used.


To apply for loan forgiveness, the following general steps must be taken. It is greatly encouraged to use assistance for this step of the process to ensure everything is filed accurately to ensure continued eligibility.

  1. Complete the appropriate form that corresponds to your business/loan
  2. Gather documentation that corresponds with the loan requirements. This could include bank account statements, tax forms, payment receipts, payroll costs, etc.
  3. Submit the form and documentation to your lender
  4. Follow up with the lender to ensure proper handling of your forms and documentation

If your business received, or will receive, a PPP loan of $2 million or more, you will need to file a Form 3509 to be eligible for forgiveness. In this video, our experts explain how to navigate the form’s open-ended questions, when to file it, what supplemental documentation to include, and the story you need to tell to keep your application from being rejected.

Simplified Forgiveness Application for Loans Up To $150,000

In October 2020, the SBA released Form 3508S for borrowers with loans under $50,000, which greatly simplified the process of applying for forgiveness, essentially requiring only a few certifications by the borrower that the loan was put to proper use.

With this new law, this simple forgiveness process has been expanded to any loan under $150,000. By January 20, 2021, the Small Business Administration (SBA) is required to publish a new forgiveness form to be used by any borrower who has not yet filed for forgiveness, and who has a loan up to $150,000. This simple form will require the borrower to provide:

  • The number of employees retained by use of the loan
  • The estimated amount of the loan used for payroll costs (note: the 60% rule remains in place)
  • The total loan amount
  • An attestation that the loan was used in compliance with the law

While the documentation required upon submission of the forgiveness application has been simplified, borrowers should note documentation must be maintained by the borrower to support the forgiveness application for 3 years (non-payroll costs) or 4 years (payroll costs only) in the event of a subsequent audit. In addition, the law expressly prohibits lenders from requiring any documentation to be submitted by the borrower beyond the items above.

Introduction of the EZ Form for Filing

In early June, the SBA and the Treasury Department introduced an EZ form, to be used only by borrowers with any of the following:

  • No employees included in their original loan application
  • No salary reductions >25% (same calculation as originally instructed) AND no reductions in number of employees (not FTEs) or in average paid hours of employees from 1/1/20-End of Covered Period (this is a brand new calculation and no guidance is given on the comparison period for the “average paid hours” test nor for what constitutes a reduction; for instance, if one employee is paid for only 38 hours in one pay period, is that a reduction?)
  • No salary reductions >25% AND they were unable to restore to the 2/15/20 level of business activity solely due to requirements set by HHS, CDCP or OSHA – note that state, county or city requirements do not meet this test

In the EZ application, they now allow retirement insurance contributions on behalf of owner-employees “capped at 2.5 months’ worth of the 2019 contribution amount.” But in the main application, they do not indicate this is allowable or limited if allowable.

We anticipate that the majority of borrowers using the EZ form will be the ones who meet bullet point one above. Many businesses will struggle with the “average paid hours” issue in bullet point two, and we expect few will be impacted by bullet point three all the way through the end of the year.

Benefits of Filing Early

So, why file sooner rather than later? There are several reasons:

  • Freedom – If your Covered Period hasn’t yet ended, submitting your forgiveness application to your lender now stops the clock on the FTE Reduction Factor, which is the biggest impediment to achieving 100% forgiveness. This allows you to make whatever business decisions you need without worrying about a potential forgiveness impact.
  • Balance Sheet – Carrying the PPP loan on your balance sheet into 2021 could affect your financial ratios, which might violate covenants you hold. Even though the loan can reasonably be expected to be forgiven, it will be easier to have a clean balance sheet at year-end.
  • Tax Alignment – If you can get forgiveness wrapped up before December 31, 2020, you will easily align the expenses that drove the forgiveness with the forgiven amount, making your tax return much easier to figure out.
  • Mergers/Acquisitions Activity – If your organization is involved in a transfer of ownership, it will need to be disclosed to the lender and will have an impact on the ultimate responsibility for the PPP liability. It may also change FTE calculations if the M&A work involves staff changes.
  • Rear-View Mirror – Let’s face it, 2020 has not been the most fun year, and most people would prefer to put it behind them. The emotional relief of having the PPP in the past can be worth more than everything else combined.

PPP Loan Forgiveness Calculation

The following outline the general steps in order to calculate your loan forgiveness:

  1. Record the sum of your (1) Payroll costs, (2) Mortgage Interest payments, and (3) Utility costs
  2. Subtract the total amount of salary/hourly wage reductions from this number
  3. Multiply this number by the FTE Reduction Quotient (Schedule A, line 13) (Option 1)
  4. Record your PPP Loan Amount (Option 2)
  5. Divide your payroll cost by .75 (Option 3)
  6. Your PPP Loan forgiveness amount will be LESSER between Options 1, 2 and 3.

PPP Loan Forgiveness Reduction Factors

There are two factors that can reduce a borrower’s net forgiveness:

Salary/Hourly Wage Reduction

The actual amount of loan forgiveness depends on whether the average salary or hourly wages of certain employees (those under $100,000 annualized) during the Covered Period or Alternative Payroll Covered Period was less than during the first quarter of 2020. If the average during the Covered Period was more than 25% lower for any employee, the reduction factor applies. If the borrower restores the salary/hourly wage levels as of June 30, 2020, the borrower will qualify for elimination of this reduction.

PPP Schedule A Worksheet must be completed (but not submitted) for all employees and must include: employee’s name, employee identifier (Last 4 digits SSN), cash compensation, average FTE, and, for employees who earned an annualized rate of pay of $100k and less during any single pay period in 2019, any salary/hourly wage reduction.

The reduction in loan forgiveness is calculated for each eligible employee, but borrowers may be able to eliminate this reduction by restoring the salary/hourly wages of that employee by June 30, 2020. However, the guidance language for this test is confusing: it uses the “average annual salary or hourly wage as of June 30, 2020” without defining the applicable time period for which to calculate the “average”. This suggests that a borrower could use the rate of pay on June 30 to find safe harbor, even if pay was restored to that level only on June 29. This is another area where additional clarifying guidance may be forthcoming.

It also means that many borrowers will hold off on submitting their applications for forgiveness until after June 30 — which covers about four million borrowers funded prior to May 6 — and suggests a massive wave of forgiveness applications hitting lenders’ portals in the first two weeks of July.

Additionally, although borrowers don’t need to submit Worksheet A, the application should not be based solely on summary payroll data without completing the detailed employee by employee information. Plan accordingly.

Full-Time Equivalency Reduction

In order to compare the reduction in average employees from one of two periods (February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020) to the Covered Period or Alternative Payroll Covered Period, the PPP requires the borrower to calculate full-time equivalency (FTE) during both periods and determine a reduction quotient. Interestingly, the borrower may skip the detailed calculation and simply assign 1.0 to all employees who work 40 hours or more per week and 0.5 to any part-time employee.

Seasonal Employers(which have not been clearly defined)have the option to include either of the two elective periods or a consecutive twelve-week period between May 1, 2019, and September 15, 2019.

There is an FTE reduction exception for:

  • Any positions for which the borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Covered Period that was subsequently rejected by the employee
  • Any employees who during the Covered Period or Alternative Payroll Covered Period:
  • Were fired for cause
  • Voluntarily resigned
  • Voluntarily requested and received a reduction in their hours

FTE Reduction Safe Harbor: Borrowers will not have loan forgiveness reduced based on this calculation if:

  1. The borrower reduced its FTEs between February 15, 2020, and April 26, 2020
  2. The borrower then restored its FTE employee levels by June 30, 2020, to its FTE employee levels in the borrower’s pay period that included February 15, 2020.

Borrowers can calculate each individual employee’s FTE to the tenth of a percentage or take the administratively easier approach to count any employee who works less than 40 hours a week as 0.5 FTE. Borrowers should consider both methods as one method may result in a greater reduction in loan forgiveness over the other.

Additionally, borrowers should pay attention to the changes in the FTE reduction exception and safe harbor as the requirements have been updated from prior interim guidance. Borrowers should also note that any layoffs that occurred after April 26, 2020, are not considered in the safe harbor calculation other than to the extent they impact the FTE count at June 30, 2020.

The video below discusses in more in detail about the two key factors above around PPP loan forgiveness reduction that could lower forgiveness amount.

PPP Loan Forgiveness Appeals Process

With little fanfare, the Small Business Administration released a procedural notice on January 27, 2022 offering PPP borrowers who received less-than-full forgiveness of their loan the possibility of appealing their lender’s decision to the SBA if they do not agree with the outcome.

Importantly, this is a time-sensitive situation. Borrowers with partial forgiveness must now be notified by their lender that they have 30 calendar days from receipt of the notification to submit a request through the lender for the SBA to review the loan. The SBA is not required to accept the borrower’s request, but if they do there are three possible outcomes:

  1. The SBA overrules the partial forgiveness decision of the lender and grants full forgiveness or, alternatively, more than the lender approved
  2. The SBA agrees with the lender’s decision and no changes ensue
  3. The SBA reduces the approved forgiveness amount (including to zero if, for example, the SBA determines the borrower was not eligible for a PPP loan)

But, what about the vast majority of PPP borrowers who have already filed for and received forgiveness? For those borrowers, lenders have until February 26, 2022 to notify borrowers of their right to receive an SBA review. Borrowers will then have 30 days from the receipt of the lender notification to submit their request through the lender for the SBA loan review.

If the borrower applied for less than full forgiveness when they submitted their forgiveness application, this new process does not apply. It is only for borrowers whose forgiveness was reduced by the lender in their review process.

Here is the entire procedural notice from SBA: https://www.sba.gov/sites/default/files/2022-02/SBA Loan Reviews of PPP Lender Partial Approval Forgiveness Decisions Procedural Notice 5000-827666-508.pdf

Navigating PPP

From Start to Forgiveness

Despite being touted as simplistic, the PPP loan and forgiveness processes are not without complexities. Ensure you have the right calculations for your business and all the appropriate supporting documentation to gain the maximum amount of loan forgiveness.


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