By Raffi Yousefian | Published 05/17/2020; Updated 05/17/2020 2:49:41 PM

Happy Sunday!

The PPP loan forgiveness application has been released. Although we have yet to receive an Interim Final Rule around loan forgiveness, the application provides a wealth of information and updates worth sharing. The good news is that most of our clients’ frequently asked questions have been answered. The bad news is that the 8-week period has begun for many of us, and unless Congress can provide a time machine as part of the next stimulus plan, then it might be too late to shift our “strategy”.

Nonetheless, here are the key takeaways regarding loan forgiveness that were previously unclear:

The 8-week Period

By default, the 8-week loan forgiveness period begins on the date of the disbursement of the loan. However, SBA took the AICPA’s advice and allows for the 8 -week period (related to payroll expenses only) to begin on the first day of the first weekly or biweekly pay period after the loan has been disbursed. This is referred to as the Alternative Payroll Covered Period and is meant to simplify the calculation of eligible payroll costs.

Costs Paid or Incurred

To qualify for forgiveness, expenses must be paid or incurred during the 8-week period. Incurred means accrued, and paid means payment is issued. For example, if a payroll period covers 5/18 – 5/24, and payment is issued to employees on 5/27, then the expenses for this payroll are incurred between 5/18 and 5/24, and paid on 5/27. 

For expenses to be eligible for forgiveness, they must be either:

(1) paid during the 8-week period; or

(2) incurred during the 8-week period and be paid by its next regular due date (for non-payroll costs) or by the next regular pay date (for payroll costs).

For example, if you issued payment to employees during the 8-week period for work performed before the 8-week period, then presumably this payment would qualify for forgiveness. However, amounts incurred in the 8-week period but paid outside of the 8-week period must be paid on or before the next regular pay date. There is currently nothing in the application that limits the amounts paid in the 8-week period to be for expenses incurred in the 8-week period, thus allowing borrowers to pay employees for work performed any time outside of the 8-week period, or possibly make payments for overdue mortgage interest or rent. I suspect this will be revisited when the FAQ or Interim Final Rule is issued by the SBA. 

Loans <$2m

Loan amounts of less than $2m will not be subject to the same amount of scrutiny and oversight in determining whether the loan was made in good faith. Therefore, it’s important to NOT check the box that asks if your loan was in excess of $2m including affiliates unless it applies to you.

Determining FTEs

The average # of FTEs during the 8-week period and the other relevant time periods is calculated by dividing the total number of hours worked by each employee per week, by 40 hours. The max number per employee is 1.0 per week. Alternatively, you can use a simplified method which considers any employee with 40+ hours as 1 FTE, and any employee with less than 40 hours as .50 FTE.

Reduction in Wages

If you reduce an employee’s wages by more than 25% during the 8 week-period compared to the wages paid for Q1 2020, the forgivable amount is reduced dollar for dollar for any wage reduction greater than 25%. The reduction for hourly wages is based on an hourly basis not on total wages paid, so as long as you maintain the same hourly wage rate then you shouldn’t have any reduction for that employee. The reduction will be ignored if the salary or hourly wage is restored to what it was as of 2/15/2020, by 6/30/2020.

Reduction in FTEs

The amount eligible for forgiveness is reduced by the same ratio in which you reduced your average FTE count during the 8-week period compared to (at your discretion) the FTE count during:

  • 2/15/2019 – 6/30/2019
  • 1/1/2020 – 2/29/2020
  • Seasonal employers: either of those two date ranges, or any 12-week period between 5/1/2019 and 9/15/2019

This was always the case, however the safe harbor for restoring your workforce by 6/30/2020 has been clarified; the reduction in FTEs during the covered period is ignored if the reduction occurred between 2/15/2020 and 4/26/2020, and the borrower restored its FTE employee levels no later than 6/30/20 to its FTE employee levels in the pay period including 2/15/2020. If an employer can show that it made a good-faith, written offer to rehire an employee during the covered period but was rejected by the employee, then that reduction in headcount will not result in a reduction in forgiveness. The same is true if an employee was fired for cause, voluntarily resigned, or voluntarily required and received a reduction in hours. You don’t need to submit proof of the written offer with your application, but you should have it on file in the case it’s requested through an examination.

Owners Compensation and Partner Guaranteed Payments  

For purposes of calculating eligible payroll costs, SBA has clarified that owners’ compensation and partner payments are capped to the lesser of $100k annualized, or 2019 compensation.

Previous guidance from the SBA suggested that managing partners’ share of profits, or self-employment income, will be included in payroll costs for both determining the loan amount and forgiveness. The application is suggesting that it will be more straightforward, only guaranteed payments to partners will be counted. We will wait for an Interim Final Rule regarding forgiveness, but for now assume that guaranteed payments to partners should be included instead of overall self-employment income.


As you can see, there are a lot of moving parts and calculations. We’re expecting that payroll processors will issue reports that provide most of these calculations. We’re worried that by the time these reports are ready, we will be deep into the 8-week period and may not be able to rely on these reports to make useful decisions. Like everything else, we’ll see what happens… In the meantime, feel free to email me directly if you have any questions. You can read about the fundamentals of the PPP and other CARES act relief here.

Monthly plan holders, rest assured we will be preparing the loan forgiveness applications for you when the time comes.