Applying for PPP Loan Forgiveness: The Definitive Guide

Overview

A recipient of a PPP loan is eligible to have the debt forgiven if the proceeds are used to pay payroll, mortgage, rent, and utilities over the covered period lasting between eight and 24 (at the borrower’s election) weeks beginning on the date the loan proceeds are disbursed. The Economic Aid Act expanded covered expenses to include covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures. The Economic Aid Act also authorized second-draw loans for certain businesses that have already received a PPP loan, subject to more stringent requirements. Eligible borrowers of second-draw PPP loans are eligible for loan forgiveness in the same manner as for a first-time PPP loan. Costs paid or incurred during the covered period are generally eligible for forgiveness. Limitations apply to the amount of forgivable payroll costs that are paid or incurred during the covered period attributable to employees, owner-employees, self-employed taxpayers and general partners. The total amount eligible for forgiveness is reduced if the borrower decreases headcount or substantially reduces salary during the covered period. The reduction can be restored, however, if the borrower restores employees and salary before December 31, 2020 or, for loans made on or after December 27, 2020, by the end of the covered period, or meets one of several additional safe harbors. The amount of a PPP loan that may be forgiven cannot exceed the principal balance of the loan, and no more than 40% of the forgiven amount can be attributable to non-payroll costs. Forgiven amounts are not included in gross income of the borrower, and the exclusion from gross income won’t result in the denial of any otherwise allowable income tax deduction or basis increase, or in a reduction of tax attributes.

Eligible Costs and Covered Period

A recipient of a Paycheck Protection Program (PPP ) loan is eligible to have up to the full principal amount of the debt forgiven in an amount equal to the sum of the following costs incurred and payments made during the “covered period.”

Eligible Costs

Payroll costs, which include cash compensation payroll costs and non-cash compensation payroll costs.
Any payment of interest on any covered mortgage obligation (not including any prepayment of or payment of principal on a covered mortgage obligation).²The term “covered mortgage obligation” means any indebtedness or debt instrument incurred in the ordinary course of business that is a liability of the borrower, is a mortgage on real or personal property, and was incurred before February 15, 2020.
Any payment on any covered rent obligation.The term “covered rent obligation” means rent obligated under a leasing agreement in force before February 15, 2020.
Any covered utility payment.A “covered utility payment” is a payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.
Any covered operations expenditure,
Any covered property damage cost,
Any covered supplier cost.Any covered worker protection expenditure.
Second-Draw PPP Loans – An eligible borrower of second-draw PPP loans is eligible for loan forgiveness in the same manner as an eligible borrower of a first-time PPP loan.¹²

Covered Period

The covered period – the time over which the borrower has to spend PPP proceeds on qualified expenses, begins on the date the lender disburses the PPP loan, but the borrower has the flexibility to choose an end date for the covered period that is between eight weeks and 24 weeks from the beginning date.

The original covered period was an eight-week period beginning on the date the borrower received the loan proceeds. It was later changed to a 24-week period, subject to an eight-week election by borrowers who received PPP proceeds before June 5, 2020.The flexibility of the new provision should allow a borrower faced with forced reductions in workforce to affirmatively cut off the testing period once the PPP funds are paid out so that the anticipated reduction does not force a reduction to the amount forgiven; reductions are generally not required so long as the workforce is at the February 15 level on the last day of the covered period.

Forgivable Cash Compensation Payroll Costs

Payroll costs paid or incurred during the covered period are eligible for forgiveness.Forgivable payroll costs include cash compensation (discussed below) and certain non-cash compensation costs.

Cash compensation includes compensation to employees whose principal place of residence is the U.S. in the form of

salary, wages, commissions, or similar compensation,
cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good faith employer estimate of such tips),
paid leave (vacation, parental, family, medical or sick leave, not including leave covered by the Families First Coronavirus Response Act),
allowances for dismissal or separation paid or incurred, and
for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation (see Maximum Forgiveness for Cash Compensation: Owner-Employees and Self-Employed Individuals and Self-Employed Borrowers).

Payroll costs also include bonuses or other forms of incentive paypaid during the covered period.

Payments made by a borrower to furloughed employees of salary, wages, or commissions during the covered period are eligible for forgiveness as long as they do not exceed an annual salary of $100,000, as prorated for the period during which the payments are made or the obligation to make the payments is incurred. An employee’s hazard pay and bonuses are also eligible for loan forgiveness if the employee’s total compensation does not exceed $100,000 on an annualized basis, as prorated for the period during which the payments are made or the obligation to make the payments is incurred because they constitute a supplement to salary or wages, and are thus a similar form of compensation.

Payroll costs that are qualified wages taken into account in determining the Employer Retention Credit are not eligible for loan forgiveness.

Payroll costs must be paid or incurred during the covered period for the costs to be eligible for forgiveness. Payroll costs that are incurred during borrower’s last pay period of the covered period are eligible for forgiveness if paid on or before the next regular payroll date; otherwise, payroll costs must be paid during the covered period to be eligible for forgiveness.

Payroll costs are considered incurred on the day that the employee’s pay is earned. For employees who are not performing work but are still on the borrower’s payroll, payroll costs are incurred based on the schedule established by the borrower (typically, each day that the employee would have worked).

Payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction.

Owner-Employees and Self-Employed Individuals

Forgiveness is capped at 2.5 months’ worth of an owner-employee’s or self-employed individual’s 2019 or 2020 compensation (up to a maximum $20,833 per individual in total across all businesses).

The amount of compensation of owners who work at their business that is eligible for forgiveness depends on the business type and the length of the covered period (between eight and 24 weeks). However, the amount of loan forgiveness on account of payroll costs (including salary, wages, and tips) for owner-employees and self-employed individuals’ own payroll compensation cannot exceed $100,000 on an annualized basis, as prorated for the period during which the payments are made or the obligation to make the payments is incurred. For example, the amount of loan forgiveness for owner-employees and self-employed individuals’ payroll compensation is capped at eight weeks’ worth (8/52) of 2019 or 2020 compensation (i.e., approximately 15.38% of 2019 or 2020 compensation) or $15,385 per individual, whichever is less, in total across all businesses. For borrowers that elect to use a ten-week covered period, the cap is ten weeks’ worth (10/52) of 2019 or 2020 compensation (approximately 19.23 percent) or $19,231 per individual, whichever is less, in total across all businesses. For a covered period longer than 2.5 months, the amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation is capped at 2.5 months’ worth (2.5/12) of 2019 or 2020 compensation (up to $20,833) in total across all businesses.

C Corporations

The employee cash compensation of a C corporation owner-employee, defined as an owner who is also an employee (including when the owner is the only employee), is eligible for loan forgiveness up to the amount of 2.5/12 of his or her 2019 or 2020 employee cash compensation, with cash compensation defined as it is for all other employees. This limitation prevents an owner-employee from maximizing PPP loan forgiveness by increasing salary during the covered period relative to what the owner-employee was paid in 2019 or 2020, prorated for a 2.5 month period.

S Corporations

The employee cash compensation of an owner of an S corporation who is also an employee is eligible for loan forgiveness up to the amount of 2.5/12 of his or her 2019 or 2020 employee cash compensation, with cash compensation defined as it is for all other employees. Example: A is the sole shareholder of S Co. In 2019, A took a salary of $40,000. During the 24-week covered period in 2020, A takes a salary of $20,833. The forgivable portion of A’s salary is limited to 2.5 months of A’s 2019 cash compensation, or $8,333 ($40,000/12 × 2.5).

Self-Employed Borrowers

The forgivable payroll costs for a self-employed borrower with no employees are not computed based on the use of the loan proceeds, as they are for an employer who pays employees; rather, the computation of the owner compensation replacement amount is purely mechanical and is based on the taxpayer’s owner compensation replacement. Owner compensation replacement is calculated based on 2019 or 2020²⁷net profit (Payroll Costs for Self-Employed Borrowers). Forgiveness of owner compensation replacement amounts is limited to either the prorated portion of 2019 or 2020 net profit as reported on IRS Form 1040 Schedule C line 31 for a covered period up to 2.5 months, or 2.5 months’ worth (2.5/12) of 2019 or 2020 net profit (up to $20,833) for a covered period greater than 2.5 months, excluding any qualified sick leave equivalent amount for which a credit is claimed under section 7002 of the Families First Coronavirus Response Act (FFCRA)²⁸or qualified family leave equivalent amount for which a credit is claimed under section 7004 of FFCRA.

A self-employed taxpayer with employees can include the cash compensation paid to employees in the computation of forgivable payroll costs, up to $100,000 of annualized pay (e.g., for 24 weeks, a maximum of $46,154 per individual ($100,000 × 24/52), or, for eight weeks, a maximum of $15,385 per individual).

Since the maximum loan proceeds available to a self-employed borrower with no employees generally is computed as 2.5 months of the taxpayer’s 2019 IRS Form 1040 Schedule C Line 31 (see ¶3001:172), a self-employed borrower with no employees using a 24-week covered period can generally apply for full forgiveness.

Self-employed borrowers that file IRS Form 1040, Schedule F and have no employees can use gross income instead of net profit. Self-employed borrowers that file Schedule F and have employees can use the difference between gross income and employee payroll costs instead of net profit.

On March 3, 2021, the IRS issued an interim final rule (IFR) allowing an IRS Form 1040, Schedule C filer to elect to calculate the owner compensation share of payroll costs based on gross income. For PPP loans that are approved after the effective date of the IFR (the date it is filed at the Office of Federal Register),³²owner compensation replacement is calculated based on proprietor expenses, which, for self-employed borrowers with no employees, equal gross income as reported on line 7 of IRS Form 1040, Schedule C, and, for self-employed borrowers with employees, equal the difference between gross income and employee payroll costs, i.e., gross income as reported on line 7 of IRS Form 1040, Schedule C, minus lines 14 (employee benefit programs), 19 (pension and profit sharing plans), and 26 (wages less employment credits).

General Partners

The compensation of general partners that is eligible for loan forgiveness is limited to 2.5/12 of their net earnings from self-employment that is subject to self-employment tax, computed from 2019 or 2020 IRS Form 1065 Schedule K-1 box 14a (reduced by any box 12 Section 179 expense deduction, unreimbursed partnership expenses deducted on IRS Form 1040 Schedule SE, and depletion claimed on oil and gas properties) multiplied by 0.9235.

LLC Owners

LLC owners must follow the instructions that apply to how their business was organized for tax filing purposes for the year used to determine the loan amount.

Cash Compensation of Employees

For each individual employee, the total amount of cash compensation eligible for forgiveness cannot exceed an annual salary of $100,000, as prorated for the covered period. For a 24-week covered period, that total is $46,154 ($100,000/52 × 24). For an eight-week covered period, that total is $15,385 ($100,000/52 × 8).

Forgivable Non-Cash Compensation Payroll Costs

In addition to cash compensation or owner compensation replacement amounts,forgivable payroll costs include amounts paid for the provision of employee benefits consisting of

group health care or group life, disability, vision, or dental insurance benefits, including insurance premiums,
employer contributions to defined-benefit and defined-contribution retirement plans,and
payment of state or local tax assessed on employee compensation,

Forgivable health care benefit costs include employer contributions to a self-insured, employer-sponsored group health plan, but exclude any pre-tax or after-tax contributions by employees⁴¹or plan beneficiaries, such as the employee share of their health care premium. Forgiveness is not provided for expenses for group health benefits accelerated from periods outside the covered period. If a borrower has an insured group health plan, insurance premiums paid or incurred during the covered period qualify as payroll costs as long as the premiums are paid during the applicable period or by the next premium due date after the end of the applicable period. Only the portion of the premiums paid by the borrower for coverage during the applicable covered period is included, not any portion paid by employees or plan beneficiaries or any portion paid for coverage for periods outside the applicable period.

Likewise, forgivable retirement benefit costs include employer contributions to employee retirement plans that are paid or incurred by the borrower during the covered period . The employer contributions for retirement benefits included in the loan forgiveness amount as payroll costs cannot include any retirement contributions deducted from employees’ pay or otherwise paid by employees. Forgiveness is not provided for employer contributions for retirement benefits accelerated from periods outside the covered period.

The instructions for Form 3508 , PPP Loan Forgiveness Application, include an example of a forgivable state or local tax a state unemployment insurance tax paid by the employer on employee earnings.

Non-Cash Compensation Payroll Costs Paid on Behalf of Owner-Employees, Self-Employed Individuals, and General Partners

As is the case with cash compensation, non-cash compensation payroll costs are treated differently if paid on behalf of a non-owner employee, owner-employee, self-employed taxpayer, or general partner in a partnership.

Non-cash compensation payroll costs paid on behalf of non-owner employees are permitted in addition to the applicable cash compensation cap. Covered benefits for employees (but not owners) include health care expenses, retirement contributions, and state taxes imposed on employee payroll paid by the employer (such as unemployment insurance premiums), but do not include any qualified wages taken into account in determining the Employer Retention Credit.

C Corporations

Amounts of qualifying non-cash compensation payroll costs paid on behalf of a C corporation owner-employee are eligible for forgiveness. This includes payments for employer state and local taxes paid by the borrower and assessed on their compensation, amounts paid by the borrower for employer contributions for their employee health insurance, and employer retirement contributions to their employee retirement plans, capped at the amount of 2.5/12 of the 2019 employer retirement contribution. Payments other than for cash compensation should be included on lines 6-8 of PPP Schedule A of the loan forgiveness application ( Form 3508 or lender equivalent), for borrowers using that form, and do not count toward the $20,833 cap per individual.

S Corporations

Payments for employer state and local taxes paid by the borrower and assessed on S corporation owner-employee compensation is eligible for loan forgiveness as are employer retirement contributions to owner-employee retirement plans, capped at the amount of 2.5/12 of the 2019 employer retirement contribution. Employer health, life, disability, vision and dental insurance contributions made on behalf of S corporation owner-employees cannot be separately added to payroll costs of an S corporation owner-employee; those payments are already included in their employee cash compensation.The eligible non-cash compensation payments should be included on lines 7 and 8 of PPP Schedule A of the Loan Forgiveness Application ( Form 3508 ), for borrowers using that form, and do not count toward the $20,833 cap per individual.

Self-Employed Taxpayers

For self-employed individuals, including Schedule C or F filers, retirement and health, life, disability, vision or dental insurance contributions are included in their net self-employment income and therefore cannot be separately added to their payroll calculation.

If the borrower did not submit its 2019 IRS Form 1040 Schedule C (or Schedule F) to the lender when the borrower initially applied for the loan, it must be included with the borrower’s forgiveness application.

General Partners

Separate payments for health insurance, retirement, or state or local taxes of general partners are not eligible for additional loan forgiveness. A partnership that did not submit its 2019 IRS Form 1065 K-1s when it first applied for the loan must include them with the partnership’s forgiveness application.

Forgivable Non-payroll Costs

Types of Forgivable Non-payroll Costs – In addition to payroll costs, the following categories of non-payroll costs are eligible for forgiveness when 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.

Example – A borrower that received a loan before June 5, 2020 uses a 24-week covered period that begins on June 1 and ends on November 15. The borrower pays its electricity bills for June through October during the covered period and pays its November electricity bill on December 10, which is the next regular billing date. The borrower may seek loan forgiveness for its June through October electricity bills, because they were paid during the covered period. In addition, the borrower may seek loan forgiveness for the portion of its November electricity bill through November 15 (the end of the covered period), because it was incurred during the covered period and paid on the next regular billing date.

For borrowers that are individuals with self-employment income who file a Form 1040, Schedule C or F, the amounts described below are eligible for forgiveness to the extent they are deductible on Form 1040 Schedule C or F.Amounts paid for expenses described at Additional Covered Expenses are eligible for forgiveness only if the SBA had not yet remitted a forgiveness payment on the borrower’s loan to the borrower’s PPP lender as of December 27, 2020.

Interest on Covered Mortgage Obligation

Any payment of interest on any “covered mortgage obligation” (not including advance payments of interestor any prepayment of or payment of principal on a covered mortgage obligation) is eligible for forgiveness when paid or incurred within the covered period.

The term “covered mortgage obligation” means any indebtedness or debt instrument incurred in the ordinary course of business that (1) is a liability of the borrower,(2) is a mortgage on real or personal property,and (3) was incurred before February 15, 2020.Thus, for example, amounts spent to pay interest on a mortgage for a warehouse where a borrower stores business equipment or the interest on an auto loan for a vehicle used in the borrower’s business would be forgivable.

If a mortgage loan on real or personal property that existed before February 15, 2020 is refinanced on or after February 15, 2020, the interest payments on the refinanced mortgage loan during the covered period are eligible for loan forgiveness.

Covered Rent Obligations

Any payment on any “covered rent obligation” is eligible for forgiveness when paid or incurred within the covered period.

The term “covered rent obligation” means rent obligated under a leasing agreement in force before February 15, 2020.A covered rent obligation includes the rental of personal property, such as the lease of a business vehicle.

If a lease that was in existence before February 15, 2020 expires on or after February 15, 2020 and is renewed, the lease payments made under the renewed lease during the covered period are eligible for loan forgiveness.

Example – A borrower entered into a five-year lease for its retail space in March 2015. The lease was renewed in March 2020. For purposes of determining forgiveness of the borrower’s PPP loan, the March 2020 renewed lease is deemed to be an extension of the original lease, which was in force before February 15, 2020. As a result, the lease payments made under the renewed lease during the covered period are eligible for loan forgiveness.

The amount of loan forgiveness requested for non-payroll costs cannot include any amount attributable to the business operation of a tenant or sub-tenant of the PPP borrower or, for home-based businesses, household expenses.

Example – A borrower rents an office building for $10,000 per month and sub-leases out a portion of the space to other businesses for $2,500 per month. Only $7,500 per month is eligible for loan forgiveness.

Example – A borrower has a mortgage on an office building it operates out of, and it leases out a portion of the space to other businesses. The portion of mortgage interest that is eligible for loan forgiveness is limited to the percent share of the fair market value of the space that is not leased out to other businesses. If the leased space represents 25% of the fair market value of the office building, then the borrower can claim forgiveness only on 75% of the mortgage interest.

Example – A borrower shares a rented space with another business. The borrower must prorate rent and utility payments in the same manner as on the borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020 tax filings to compute the amount eligible for loan forgiveness.

Example – A borrower works out of his or her home. When determining the amount of non-payroll costs that are eligible for loan forgiveness, the borrower may include only the share of covered expenses that were deductible on the borrower’s 2019 tax filings, or if a new business, the borrower’s expected 2020 tax filings.

Rent payments to a related party are eligible for loan forgiveness as long as (1) the amount of loan forgiveness requested for rent or lease payments to a related party is no more than the amount of mortgage interest owed on the property during the covered period that is attributable to the space being rented by the business, and (2) the lease and the mortgage were entered into before February 15, 2020.Any ownership in common between the business and the property owner is a related party for these purposes. The borrower must provide its lender with mortgage interest documentation to substantiate these payments. While rent or lease payments to a related party may be eligible for forgiveness, mortgage interest payments to a related party are not eligible for forgiveness.

Covered Utility Payments

A “covered utility payment” is eligible for forgiveness when paid or incurred within the covered period.The term “covered utility payment” means payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.While the CARES Act and subsequent SBA guidance prohibit the prepayment of mortgage interest, no such prohibition exists on the prepayment of rent or utilities.

Under this definition, covered utility payments eligible for forgiveness include a “payment for a service for the distribution of . . . transportation.” A service for the distribution of transportation refers to transportation utility fees assessed by state and local governments. Payment of these fees by the borrower is eligible for loan forgiveness.

Electricity supply charges are eligible for loan forgiveness even if they are charged separately from electricity distribution charges. The entire electricity bill payment is eligible for loan forgiveness including supply charges, distribution charges, and other charges such as gross receipts taxes (even if charges are invoiced separately).

Additional Covered Expenses

The following costs are also treated as eligible non-payroll costs for PPP loans. These categories of eligible costs were added by the Economic Aid Act and apply to all PPP loans disbursed before and after the enactment of the Economic Aid Act except for initial PPP loans for which the borrower received forgiveness before December 27, 2020.

Covered Operations Expenditures

Covered operations expenditures are payments for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.

Covered Property Damage Costs

Covered property damage costs are costs related to property damage and vandalism or looting resulting from public disturbances that occurred during 2020 not covered by insurance or other compensation.

Covered Supplier Costs

Covered supplier costs are expenditures to a supplierunder a contract, order, or purchase orderin effect any time before the loan is disbursedor, in the case of a contract, order, or purchase order for perishable goods, in effect before or at any time during the covered period,if the goods are essential to operations.

Covered Worker Protection Expenditures

Covered worker protection expenditures are costs related to personal protective equipment (PPE) and other costs that facilitate the adaptation of activities to comply with federal, state or local health and safety requirements or guidance during the period beginning on March 1, 2020 and ending the date on which the COVID-19 emergency ends.

Covered worker protection costs can include:

the purchase, maintenance, or renovation of assets that create or expand
a drive-through window facility,
an indoor, outdoor, or combined air or air pressure ventilation or filtration system,and
a physical barrier such as a sneeze guard,
an expansion of additional indoor, outdoor, or combined business space,
an onsite or offsite health screening capability,or
other assets relating to the compliance with the federal, state or local health and safety requirements or guidance.

and the purchase of

Surgical N95 filtering facepiece respirators, including devices that are disposable half-face-piece non-powered air-purifying particulate respirators intended for use to cover the nose and mouth of the wearer to help reduce wearer exposure to pathogenic biological airborne particulates,
PPE surgical masks, including masks that cover the user’s nose and mouth and provide a physical barrier to fluids and particulate materials,
PPE nitrile gloves, including exam gloves and surgical gloves,
Level 3 and 4 surgical gowns and surgical isolation gowns that meet all of the requirements in ANSI/AAMI PB70 and ASTM F2407-06 and are classified by surgical gown barrier performance based on AAMI PB70,
particulate filtering face piece respirators approved by the National Institute for Occupational Safety and Health, including those approved only for emergency use authorization,or
other kinds of personal protective equipment, as determined by the Administrator in consultation with the Secretary of Health and Human Services and the Secretary of Labor.

Covered worker protection costs does not include costs for residential real property or intangible property.¹

When Are Non-payroll Costs Eligible for Forgiveness

A non-payroll cost is eligible for forgiveness if it was 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.

Example – A borrower’s 24-week covered period runs from April 20 through October 4, 2020. On May 4, the borrower receives its electric bill for April. The borrower pays its April electric bill on May 8. Although a portion of the electricity costs were incurred before the covered period, these electricity costs are eligible for loan forgiveness because they were paid during the covered period.

Example – A borrower’s 24-week covered period runs from April 20 through October 4, 2020. On October 6, the borrower receives its electricity bill for September. The borrower pays its September electricity bill on October 16. These electricity costs are eligible for loan forgiveness because they were incurred during the covered period and paid on or before the next regular billing date (November 6).

Limitation on Forgiveness

The sum of all eligible non-payroll costs cannot exceed 40% of the total amount eligible for forgiveness.

Example – X Co. borrowed $100,000 in PPP loan proceeds. During the 24-week covered period, X Co. incurred $50,000 of payroll costs and $40,000 of non-payroll costs eligible for forgiveness. X Co.’s forgivable amount is capped at $83,333 ($50,000 of payroll costs/.60): $50,000 of payroll costs and $33,333 of non-payroll costs.

A borrower may receive forgiveness for the expenses discussed at Additional Covered Expenses only if the SBA had not remitted a forgiveness payment on the borrower’s loan to the borrower’s PPP lender as of December 27, 2020.

Reductions to Forgiveness Amount

A borrower totals the eligible payroll and non-payroll costs paid or incurred during the applicable covered period to arrive at the total amount eligible for forgiveness. This total may be reduced, however, if the borrower either (1) reduces the average annual salary or hourly wage of certain employees or (2) reduces full-time equivalent (FTE) employees during the covered period relative to a reference period.

These rules do not apply to borrowers of loans of $50,000 or less that use Form 3508S (or lender’s equivalent form) to apply for loan forgiveness.

Reduction to Forgiveness Relating to Salary and Wages

The total amount of forgiveness on a PPP loan is reduced for any reduction in an employee’s salary or wages in excess of 25%,unless an exception applies. The reduction on account of any particular employee is equal to the total dollar amount of the salary or wage reductions in excess of 25% of base salary or wages of that employee during the most recent full quarter during which the employee was employed before the covered period(the “reference period”).

The reduction to forgiveness on account of a reduction in salary and wages is computed on a per employee basis, not in the aggregate. That is, the borrower must determine the salary or wage reduction for each new employee in 2020 and 2021, as well as each existing employee who was not paid more than the annualized equivalent of $100,000 in any pay period in 2019.The reduction is computed on the worksheet for Table 1 of PPP Schedule A of Form 3508 , PPP Loan Forgiveness Application.

A statutory exemption applies for borrowers that have eliminated the reduction in salary or wages on or before December 31, 2020, or, in the case of a PPP loan made on or after December 27, 2020, not later than the last day of the covered period.In addition, a borrower with a loan of $50,000 or less, other than a borrower that together with its affiliates received first-draw PPP loans totaling $2 million or more, or second-draw PPP loans totaling $2 million or more, is exempt from any reductions to the loan forgiveness amount based on reductions in employee salary or wages that would otherwise apply.

The salary/wage reduction is computed as described below.

Step 1. For each employee employed by the borrower at any point during the covered period whose principal place of residence is in the U.S. that received compensation at an annualized rate of $100,000 or lower for all 2019 pay periods or who was not employed at any point in 2019, determine whether pay during the covered period was reduced more than 25% relative to pay during the base period.
Compute the average annualized salary or hourly wage during the covered period.
Compute the average annualized salary or hourly wage during the most recent full quarter before the covered period.
Divide the result in 1.a. by the result in 1.b. If the result is 0.75 or more, no reduction is required. If the result is less than 0.75, continue to Step 2.

Step 2. Determine whether the salary/hourly wage reduction safe harbor is satisfied.
Determine the annual salary or hourly wage as of February 15, 2020.
Determine the average annual salary or hourly wage between February 15, 2020 and April 26, 2020. If 2.b. is equal to or greater than 2.a., skip to Step 3. Otherwise, proceed to 2.c.
Determine the average annual salary or hourly wage as of December 31, 2020 (for pre-December 31, 2000 loans) or the last day of the covered period (for post December 27, 2020 loans). If 2.c. is equal to or greater than 2.a., the salary/hourly wage reduction safe harbor is met, and there is no reduction to payroll costs on account of that employee. Otherwise proceed to Step 3 to determine the salary/hourly wage reduction.
Step 3. Determine the salary/hourly wage reduction that exceeds 25%.
Multiply the amount computed in Step 1.b. by 75%.
Subtract the amount from Step 1.a. from the amount computed in Step 3.a.
If the employee is a salaried worker, the required reduction is the amount determined in Step 3.b., prorated for the covered period. Thus, if the borrower is using a 24-week covered period, the amount determined in Step 3.b. is divided by 52 and multiplied by 24. If the borrower is using an eight-week covered period, the amount determined in Step 3.b. is divided by 52 and then multiplied by 8.
If the employee is an hourly worker, the required reduction is the amount determined in Step 3.b., multiplied by the average weekly hours worked by the employee from January 1 through March 31, 2020, with that product then multiplied by the number of weeks (eight to 24) in the covered period.

Example – A borrower using a 24-week covered period reduced a full-time employee’s weekly salary from $1,000/week during the reference period to $700/week during the covered period. The employee continued to work on a full-time basis during the covered period, with an FTE of 1.0. In this case, the first $250 (25% × $1,000) does not reduce loan forgiveness. The borrower seeking forgiveness would list $1,200 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction × by 24 weeks).

Example – The facts are the same as in Example 3001:185-1 except that the borrower uses an eight-week covered period. As in Example 3001:185-1, the first $250 (25% × $1,000) does not reduce loan forgiveness. The borrower seeking forgiveness would list $400 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction × eight weeks).

Example – X Co. received a PPP loan in June of 2020. X Co. paid employee A, who earned less than $100,000 in 2019, $24,000 during its 24-week covered period. A was paid $20,000 between January 1 through March 31, 2020. X Co. determines the reduction in its forgiveness amount attributable to A as follows:

Under Step 1, the quotient of A’s average annual salary during the covered period ($52,000) and A’s average annual salary during the period from January 1 through March 31, 2020 ($80,000) is 0.65. Because this amount is less than 0.75 and the salary/hourly wage reduction safe harbor is not met under Step 2 (because the salary reduction was not restored by December 31, 2020), X.Co. moves on to Step 3.
Step 3.a. $80,000 × 75% = $60,000.
Step 3.b. $60,000 – $52,000 = $8,000.
Step 3.c. $8,000 × 24/52 = $3,692.

Example – X Co. received PPP loan proceeds and is using an eight-week covered period. Employee A is a full-time salaried employee. A’s pay was reduced during the covered period from $52,000/year to $36,400/year on April 23, 2020 and not restored by December 31, 2020. A continued to work on a full-time basis with a FTE of 1.0.

The employee’s annual salary was reduced by more than 25%. The salary/hourly wage reduction safe harbor is not met under Step 2, because the salary reduction was not restored by December 31, 2020.

Under Step 3.a., $39,000 (75% of $52,000) is the minimum salary that must be maintained to avoid a reduction. Salary was reduced to $36,400, and the excess reduction of $2,600 is entered in Step 3.b. Because this employee is salaried, the borrower would multiply the excess reduction of $2,600 by 8 (in the case of an eight-week covered period) and divide by 52 to arrive at a loan forgiveness reduction amount of $400 in Step 3.e.

For hourly workers, the wage reduction rules look to a reduction in hourly rate, rather than total pay. Thus, no reduction is required if an hourly employee has his or her hours cut in half during the covered period, but the pay rate remains the same.

Example – X Co. received PPP loan proceeds in June of 2020 and uses a 24-week covered period. Employee A is an hourly employee. A’s hourly wage was reduced from $20/hour to $15/hour during the covered period. A worked 10 hours/week between January 1, 2020 and March 31, 2020. Because the A’s hourly wage was reduced by exactly 25% (from $20/hour to $15/hour), the wage reduction does not reduce the amount eligible for forgiveness. Because the amount on line 1.c would be 0.75 or more, X Co. would enter $0 in the salary/hourly wage reduction column for that employee on the PPP Schedule A Worksheet, Table 1.

If A’s hourly wage had been reduced to $14 per hour and the reduction were not remedied as of December 31, 2020, X Co. would proceed to Step 3. This reduction in hourly wage in excess of 25% is $1/hour. In Step 3, X Co. would multiply $1/hour by 10 hours/week to determine the weekly salary reduction, and then multiply the weekly salary reduction by 24 (because the borrower is using a 24-week covered period). A borrower that applies for forgiveness before the end of the 24-week covered period must account for the salary reduction (the excess reduction over 25%, or $240) for the full 24-week covered period.

Example – A, an employee of X Co. earned a wage of $20/hour between January 1, 2020 and March 31, 2020, and worked 40 hours/week. During the covered period, A’s wage was not changed, but his hours were reduced to 25 hours/week. In this case, the salary/hourly wage reduction for A is zero, because the hourly wage was unchanged. The employee’s reduction in hours would be taken into account in the borrower’s calculation of its FTE during the covered period, which is calculated separately and can result in a reduction of the borrower’s loan forgiveness amount.

Reduction to Forgiveness Based on Reduction in Number of Employees

After a PPP borrower reduces its total payroll and non-payroll costs eligible for forgiveness to account for reductions of annual salary or hourly wage, the amount of loan forgiveness is further reduced to reflect any reduction in the borrower’s number of full-time equivalent (FTE) employees. In general, a reduction in FTEs during the covered period reduces the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees.

FTE Reduction Quotient

For both first-time PPP loans and second-draw PPP loans, the borrower must first select one of the following reference periods.

February 15, 2019 through June 30, 2019,
January 1, 2020 through February 29, 2020, or
in the case of a seasonal employer,
either of the two preceding periods, or
a consecutive 12-week period between February 15, 2019 and February 15, 2020.

If the average number of FTE employees during the covered period is lower than during the reference period, the total eligible expenses available for forgiveness is reduced proportionally by the percentage reduction in FTE employees.

Example – X Co had 10.0 FTE employees during the reference period and 8.0 FTE employees during the covered period. The percentage of FTE employees declined by 20%, and only 80% of otherwise eligible expenses are available for forgiveness.

The salary/wage reduction to PPP amounts eligible for forgiveness applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction. This will help ensure that borrowers are not doubly penalized for reductions.

Example – An hourly wage employee had been working 40 hours per week during the borrower selected reference period (FTE employee of 1.0) and the borrower reduced the employee’s hours to 20 hours per week during the covered period (FTE employee of 0.5). There was no change to the employee’s hourly wage during the covered period. Because the hourly wage did not change, the reduction in the employee’s total wages is entirely attributable to the FTE employee reduction and the borrower is not required to conduct a salary/wage reduction calculation for that employee.

FTE Reduction Exceptions

Safe Harbor for Restored FTEs

A statutory exemption is available for borrowers that have eliminated the reduction in FTEs by December 31, 2020, or, in the case of a PPP loan made on or after December 27, 2020, not later than the last day of the covered period.In addition, a borrower with a loan of $50,000 or less, other than a borrower that together with its affiliates received first draw PPP loans totaling $2 million or more, or second-draw PPP loans totaling $2 million or more, is exempt from any reductions to the loan forgiveness amount based on reductions in FTE employees.

A borrower can determine whether this safe harbor is met by applying the following three-step process:

Step 1. Determine the borrower’s FTE levels on February 15, 2020.
Step 2. Determine if the borrower’s FTEs decreased during the period beginning February 15, 2020 and ending on April 26, 2020 (the “safe harbor period”). If the number of FTEs increased, the safe harbor is not available. If the number of FTEs decreased, the borrower moves on to Step 3.
Step 3. Determine if the borrower restored its FTEs to February 15, 2020 levels before the earlier of (1) the date the borrower submits its application for forgiveness to its lender or (2) December 31, 2020 (or, for a PPP loan made on or after December 27, 2020, by the last day of the loan’s covered period). If the FTEs have been restored to the February 15 levels, no reduction to the amount of forgiveness is required.

Example – X Co had 8 FTEs during its covered period, and 10 FTEs during each of its base reference periods. Thus, the tentative FTE reduction quotient is 80%. On February 15, 2020, X Co. had 10 FTEs, and during the period beginning February 15, 2020 and ending April 26, 2020, X Co.’s FTEs were reduced to 8. On October 7, 2020, X Co. hires two new employees, restoring its FTE levels to 10. On November 1, 2020, X Co. files its application for forgiveness with its lender. Because X Co. restored its FTEs to its February 15, 2020 levels prior to filing its application for forgiveness, no reduction in the forgiveness amount is required.

In addition, the SBA and Treasury have adopted four regulatory exemptions allowing certain individuals who are no longer employed by a borrower to continue to count towards the FTE total.¹²⁴Specifically, a borrower can exclude a reduction in FTE headcount attributable to an individual employee if

the borrower reduced the hours of an employee, but made a good faith, written offer to restore the reduced hours at the same salary or wages that were paid to the employee in the last pay period prior to the reduction in hours, and the employee rejected the offer.
An employee was fired for cause.
An employee voluntarily resigned.
An employee voluntarily requested and received a reduction of their hours.

In each of these cases, a borrower that has not filled the position with a new employee continues to include these FTEs in its headcount.

Example – At the beginning of its covered period, X Co. had three full-time employees by June 30, A, B, and C, and each worked more than 40 hours/week. During the covered period, B was fired for cause and C voluntarily resigned. Neither employee was replaced, and, at the end of the covered period, A was the only remaining employee. Thus, it would appear X Co. went from 3 FTE employees to 1 FTE employee during the covered period. But because B was fired for cause and C voluntarily resigned, B and C will each continue to count as a full FTE employee in computing X Co.’s FTE employees for the covered period. Thus, X Co. will be treated as having had 3 FTE employees throughout the covered period.

Additional Safe Harbors for FTE Reductions

There are two additional safe harbors based on employee availability and business activity that, if met, will eliminate the reduction to the forgiveness amount for a borrower that reduced FTEs during the covered period.

First, borrowers are exempted from the loan forgiveness reduction arising from a proportional reduction in FTE employees during the covered period if the borrower is able to document in good faith an inability to rehire individuals who were employees of the borrower on February 15, 2020, and an inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020, (or, for a PPP loan made on or after December 27, 2020, not later than the last day of the loan’s covered period).Borrowers are required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer.

Borrowers should maintain documents that show compliance with this exemption, including, but not limited to, the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of efforts to hire a similarly qualified individual.

The second FTE safe harbor applies to borrowers that can document in good faith an inability to return business activity to the same level at which the borrower was operating before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 (or, for a PPP loan made on or after December 27, 2020, not later than the last day of the loan’s covered period) by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention (CDC), or the Occupational Safety and Health Administration related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19 (COVID Requirements or Guidance).Specifically, borrowers that can certify that they have documented in good faith that their reduction in business activity during the covered period stems directly or indirectly from compliance with such COVID Requirements or Guidance are exempt from any reduction in their forgiveness amount stemming from a reduction in FTE employees during the covered period. This documentation must include copies of applicable COVID Requirements or Guidance for each business location and relevant borrower financial records.

Example – A PPP borrower is in the business of selling beauty products both online and at its physical store. During the covered period, the local government where the borrower’s store is located orders all non-essential businesses, including the borrower’s business, to shut down their stores, based in part on COVID-19 guidance issued by the CDC in March 2020. Because the borrower’s business activity during the covered period was reduced compared to its activity before February 15, 2020 due to compliance with COVID requirements or guidance, the borrower satisfies the safe harbor and will not have its forgiveness amount reduced because of a reduction in FTEs during the covered period, if the borrower in good faith maintains records regarding the reduction in business activity and the local government’s shutdown orders that reference a COVID Requirement or Guidance as described above.

Determining Full-Time Equivalent Employees

A “full-time equivalent” (FTE) employee is an employee who works 40 hours or more, on average, each week. The hours of employees who work less than 40 hours are calculated as proportions of a single FTE employee and aggregated.

Borrowers seeking forgiveness must document their average number of FTE employees during the covered period and their selected reference period. If applicable, a borrower must perform this calculation for both its first-draw or second-draw PPP loan. To determine FTE employees, borrowers must divide the average number of hours paid for each employee per week by 40, capping this quotient at 1.0. For example, an employee who was paid 48 hours per week during the covered period would be considered to be an FTE employee of 1.0.Because the determination of FTEs is based on the average number of hours paid rather than hours worked, a taxpayer on furlough should still count as an FTE based on the hours paid.

For employees who were paid for fewer than 40 hours per week, borrowers can calculate the FTE in one of two ways. The borrower can calculate the average number of hours a part-time employee was paid per week during the covered period. For example, if an employee was paid for 30 hours per week on average during the covered period, the employee could be considered to be an FTE employee of 0.75. Similarly, if an employee was paid for ten hours per week on average during the covered period, the employee could be considered to be an FTE employee of 0.25. Alternatively, for administrative convenience, borrowers may elect to use a full-time equivalency of 0.5 for each part-time employee.

SBA Form 3508 , PPP Loan Forgiveness Application, instructs borrowers to round the result to the nearest tenth,(although the Interim Final Rules on forgiveness do not account for such rounding).

Borrowers may select only one of these two methods, and must apply that method consistently to all of their part-time employees for the covered period and the selected reference period. In either case, the borrower aggregates the total of FTE employees for both the selected reference period and the covered period by adding together all of the employee-level FTE employee calculations. The borrower must then divide the average FTE employees during the covered period by the average FTE employees during the selected reference period, resulting in the FTE Reduction Quotient .

Determining the Amount That Can Be Forgiven

Up to the full principal amount of a PPP loan can be forgiven if the loan proceeds are used to cover eligible payroll and certain eligible non-payroll expenses. No more than 40% of the amount forgiven may be attributable to non-payroll costs Reductions may be required to the extent that employee compensation or employee headcount is reduced and not restored.

The actual amount of loan forgiveness will depend, in part, on the total amount spent during the covered period.

Treatment of Expenses Paid with Forgiven PPP Proceeds

PPP borrowers are eligible for forgiveness to the extent loan funds are used for covered expenses during an eight- to 24- week covered period.Forgiveness of any amount of a PPP loan, however, does not result in gross income to the borrowerand the exclusion from gross income will not result in the denial of any otherwise allowable income tax deduction or basis increase, or in a reduction of tax attributes.This means that businesses that pay payroll and other business expenses with proceeds of a PPP loan can deduct those expenses.

Although ordinary and necessary business expenses, such as salaries and rent, that are paid out of borrowed funds generally continue to be deductible under IRC § 162 in determining taxable income, the IRS had taken the position that while the CARES Act explicitly prevented the forgiveness of a PPP loan from creating COD income, it did not expressly allow for the deduction of otherwise deductible business expenses that are paid with PPP proceeds, and, therefore, that expenses paid with PPP proceeds were disallowed under IRC § 265(a)(1) and Reg. § 1.265-1. Those provisions deny a deduction for any amount otherwise allowable as a deduction that is allocable to one or more classes of exempt income, other than exempt interest income. The IRS reasoned that deductions for expenses paid with PPP loan proceeds that result in forgiveness of a covered PPP loan are disallowed when the income associated with the forgiveness is excluded from gross income because the payment of those expenses is allocable to tax-exempt income.

The denial of deductions for business expenses paid with proceeds of a PPP loan that is later forgiven, at least arguably, undermines the legislative intent behind the PPP, and the tax treatment of forgiveness of PPP loans in the COVID-related Tax Relief Act is labeled a clarification.

The Act went one step further to pass-through income and tax basis of ownership interests. Specifically, in the case of a partnership or S corporation borrower, amounts forgiven are treated as tax-exempt income under IRC § 705 (under which a partner’s basis in its partnership interest is increased by its distributive share of tax-exempt income) and IRC § 1366 (resulting in the shareholder’s basis in its stock being increased under IRC § 1367 by the tax-exempt income), respectively, and a partner’s increase in basis in its partnership interest under IRC § 705 equals its distributable share of deductions attributed to the forgiveness.These provisions together prevent partners and S corporation shareholders from later facing capital gain that would eliminate the benefit of forgiveness.

The COVID-related Tax Relief Act extended this tax treatment (no income inclusion for forgiven loan amounts, no denial of deductibility or basis increase, no reduction in tax attributions, and tax-exempt income treatment for partners and S corporation shareholders), to subsequent PPP loans (in tax years ending after December 27, 2020), forgiveness of debt described in CARES Act Sec. 1109(d)(2)(D) (expanding eligible lenders of PPP loans), emergency EIDL grants and targeted EIDL advances, subsidy payments described in CARES Act Sec. 1112(c) (see Section 7(a) Loans and Subsidies (Other Than PPP Loans)), and grants for shuttered venue operators.

Application for and Acceptance of Forgiveness

General Requirements

To receive loan forgiveness on either a first-time PPP loan or a second-draw PPP loan, a borrower must complete and submit the loan forgiveness application ( SBA Form 3508 , Form 3508EZ , Form 3508S ),or lender equivalent, to its lender (or to the lender servicing its loan). A borrower of a second-draw PPP loan of $150,000 or more must submit its loan forgiveness application for the first PPP loan before or simultaneously with the loan forgiveness application for the second-draw PPP loan, even if the calculated amount of forgiveness on the first-time PPP loan is zero.

As a general matter, the lender will review the application and make a decision regarding loan forgiveness (see Lender and SBA Review ). The lender has 60 days from receipt of a complete application to issue a decision to the SBA. If the lender determines that the borrower is entitled to forgiveness in whole or in part, the lender must request payment from SBA at the time it issues its decision to SBA.

Any EIDL advance received by the borrower will not reduce the amount of forgiveness and will not be deducted from the forgiveness payment amount that SBA remits to the lender.

When Must a Borrower Apply for Loan Forgiveness?

A PPP borrower can submit a loan forgiveness application any time on or before the maturity date of the PPP loan if the borrower has used all of the loan proceeds for which forgiveness is requested, except that a borrower applying for forgiveness of a second draw PPP loan that is more than $150,000 must submit the loan forgiveness application for its first-time PPP loan before or simultaneously with the loan forgiveness application for its second-draw PPP loan.

If the borrower does not apply for loan forgiveness within 10 months after the last day of the maximum covered period of 24 weeks,¹⁵³or if SBA determines that the loan is not eligible for forgiveness (in whole or in part), the PPP loan is no longer deferred and the borrower must begin paying principal and interest. If this occurs, the lender must notify the borrower of the date the first payment is due. The lender must report that the loan is no longer deferred to SBA on the next monthly SBA Form 1502 report filed by the lender.

Form 3508EZ

A borrower can use a streamlined application for forgiveness – Form 3508EZ , PPP Loan Forgiveness Application – if at least one of the following three requirements are met.

First, sole proprietors, independent contractors, and self-employed individuals who had no employees at the time of the PPP loan application and did not include any employee salaries in the computation of average monthly payroll on the Borrower Application Form ( SBA Form 2483 ) automatically qualify to use Form 3508EZ .

A borrower that did not reduce annual salary or hourly wages of any employee by more than 25% during the covered period compared to the period between January 1, 2020 and March 31, 2020 can use the Form 3508EZ if the borrower

also did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the covered period (reductions arising from an inability to rehire individuals who were employees on February 15, 2020 are ignored if the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020 (reductions in an employee’s hours that the borrower offered to restore and the employee refused are also ignored) or
was unable to operate during the covered period at the same level of business activity as before February 15, 2020 because of compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

If either of these requirements is met, the borrower does not have to compute a reduction in forgiveness for wages or FTEs. The Form 3508EZ reflects this.

Form 3508S

A borrower that receives a PPP loan of $50,000 or less can use the simplified SBA Form 3508S (or a lender’s equivalent form) to apply for forgiveness, as long as the borrower, together with its affiliates, did not receive PPP loans totaling $2 million or more.

Form 3508S requires fewer calculations and less documentation, and borrowers that are eligible to use Form 3508S are exempt from otherwise mandatory reductions in loan forgiveness amounts based on reductions in full-time equivalent employees or in salaries or wages.

The instructions to Form 3508S direct borrowers to compute that amount to be forgiven and include a description of the computation steps, but the form itself does not require borrowers to show the calculations used to determine their loan forgiveness amount. However, borrowers are responsible for self-certifying the accuracy of the calculation of the loan forgiveness amount, and, while lenders can rely on the borrower’s representations, the SBA may request information and documents to review those calculations as part of its loan review process, in which case the borrower must be able to provide detailed support.

SBA Form 3508S requires borrowers to retain all records relating to a PPP loan, including documentation submitted with the PPP loan application, documentation supporting the borrower’s certifications as to eligibility, documentation necessary to support the loan forgiveness application, and documentation demonstrating the borrower’s material compliance with PPP requirements, for six years after the date the loan is forgiven or repaid in full, and allow authorized representatives of SBA, including representatives of its Office of Inspector General, to access such files on request.

Lender and SBA Review

If the lender determines that the borrower is entitled to forgiveness of some or all of the amount applied for under the statute and applicable regulations, the lender must request payment from the SBA at the time the lender issues its decision to the SBA. The SBA will, subject to any SBA review of the loan or loan application, remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to the SBA.

If the SBA determines in the course of its review that the borrower was ineligible for the PPP loan based on the provisions of the CARES Act, the SBA rules or guidance available at the time of the borrower’s loan application, or the terms of the borrower’s PPP loan application (for example, because the borrower lacked an adequate basis for the certifications that it made in its PPP loan application), the loan will not be eligible for loan forgiveness.

The lender is responsible for notifying the borrower of the forgiveness amount. If only a portion of the loan is forgiven, or if the forgiveness request is denied, any remaining balance due on the loan must be repaid by the borrower on or before the maturity date of the loan.¹⁶⁴The lender is responsible for notifying the borrower of remittance by the SBA of the loan forgiveness amount (or that the SBA determined that no amount of the loan is eligible for forgiveness) and the date on which the borrower’s first payment is due, if applicable. If the SBA determines that the full amount of the loan is eligible for forgiveness and remits the full amount of the loan to the lender, the lender must mark the PPP loan note as “paid in full” and report the status of the loan as “paid in full” on the next monthly SBA Form 1502 report filed by the lender.

The general loan forgiveness process described above applies only to loan forgiveness applications that are not reviewed by SBA before the lender issues its decision on the forgiveness application.

Documentation Required for Forgiveness

Borrowers seeking forgiveness of a PPP loan must submit an application for forgiveness to their lenders along with certain documentation;no forgiveness is allowed unless the borrower submits the required documentation, except when the loan is not more than $150,000 and the simplified application procedure applies. An eligible borrower that received a loan of $150,000 or less should use Form 3508S and does not have to submit any application or documentation in addition to the certification and information required under that procedure (see Form 3508S). However, an eligible borrower that received a second-draw loan of $150,000 or less and is using the Form 3508S must, before or at the time of its application for loan forgiveness, submit documentation sufficient to establish that the borrower experienced a 25% reduction in revenue, unless the borrower already provided such documentation at the time of its application for the second-draw PPP loan.

The loan forgiveness application form – either Form 3508 or Form 3508EZ – details the documentation each borrower must submit with its loan forgiveness application ( Form 3508 , Form 3508EZ , or a lender equivalent), the documentation each borrower is required to maintain and make available on request, and the documentation each borrower may voluntarily submit with its loan forgiveness application. Documentation may include relevant tax forms, including annual tax forms, or, if relevant tax forms are not available, a copy of the applicant’s quarterly income statements or bank statements.

PPP lenders are allowed to accept scanned copies of signed loan forgiveness applications and documents containing the information and certifications required by Form 3508 , Form 3508EZ , or lender equivalent. Lenders may accept any form of e-consent or e-signature that complies with the requirements of the Electronic Signatures in Global and National Commerce Act (PL 106-299).

For second-draw PPP loans, all borrowers must certify on their loan forgiveness application that the borrower used all first-draw PPP loan amounts on eligible expenses before the disbursement of the second-draw PPP loan. If the second-draw PPP loans is greater than $150,000, the borrower must submit its loan forgiveness application for the first-draw PPP loan before or simultaneously with the loan forgiveness application for the second-draw PPP loan, even if the calculated forgiveness amount for the first-draw PPP loan is zero.

The instructions to Form 3508 , PPP Loan Forgiveness Application, requires a borrower to include the following documentation with the application:

Payroll: Documentation verifying the eligible cash compensation and non-cash benefit payments from the covered period consisting of each of the following:

Bank account statements or third-party payroll service provider reports documenting the amount of cash compensation paid to employees.
Tax forms (or equivalent third-party payroll service provider reports) for the periods that overlap with the covered period:
Payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941, Employer’s Quarterly Federal Tax Return), and
State quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state.
Payment receipts, cancelled checks, or account statements documenting the amount of any employer contributions to employee health insurance and retirement plans that the borrower included in the forgiveness amount.

FTEs: Documentation showing (at the election of the borrower):

The average number of FTE employees on payroll per week employed by the borrower between February 15, 2019 and June 30, 2019,
The average number of FTE employees on payroll per week employed by the borrower between January 1, 2020 and February 29, 2020, or
In the case of a seasonal employer, the average number of FTE employees on payroll per week employed by the borrower between February 15, 2019 and June 30, 2019, between January 1, 2020 and February 29, 2020, or any consecutive 12-week period between May 1, 2019 and September 15, 2019. The selected time period must be the same time period selected for purposes of completing PPP Schedule A, line 11. Documents may include payroll tax filings reported, or that will be reported, to the IRS (typically, Form 941) and state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported, or that will be reported, to the relevant state. Documents submitted may cover periods longer than the specific time period.

Nonpayroll: Documentation verifying existence of the obligations/services prior to February 15, 2020 and eligible payments from the covered period.

Business mortgage interest payments: Copy of lender amortization schedule and receipts or cancelled checks verifying eligible payments from the covered period; or lender account statements from February 2020 and the months of the covered period through one month after the end of the covered period verifying interest amounts and eligible payments.
Business rent or lease payments: Copy of current lease agreement and receipts or cancelled checks verifying eligible payments from the covered period; or lessor account statements from February 2020 and from the covered period through one month after the end of the covered period verifying eligible payments.
Business utility payments: Copies of invoices from February 2020 and those paid during the covered period and receipts, cancelled checks, or account statements verifying those eligible payments.

Borrowers must maintain certain documents that they are not required to submit, including the PPP Schedule A Worksheet or its equivalent and the following:

Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 1, including the “Salary/Hourly Wage Reduction” calculation, if necessary.
Documentation supporting the listing of each individual employee in PPP Schedule A Worksheet Table 2; specifically, that each listed employee received during any single pay period in 2019 compensation at an annualized rate of more than $100,000.
Documentation regarding any employee job offers and refusals, refusals to accept restoration of reductions in hours, firings for cause, voluntary resignations, written requests by any employee for reductions in work schedule, and any inability to hire similarly qualified employees for unfilled positions on or before December 31, 2020.
Documentation supporting the certification, if applicable, that the borrower was unable to operate between February 15, 2020, and the end of the covered period at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19. This documentation must include copies of the applicable requirements for each borrower location and relevant borrower financial records.
Documentation supporting the PPP Schedule A Worksheet “FTE Reduction Safe Harbor 2.”¹⁷³

All records relating to the borrower’s PPP loan, including documentation submitted with its PPP loan application, documentation supporting the borrower’s necessity certification, loan request, and its eligibility, documentation necessary to support the borrower’s loan forgiveness application, and documentation demonstrating the borrower’s material compliant with PPP requirements. The borrower must retain all such documentation in its files for six years after the date the loan is forgiven or repaid in full, and permit authorized representatives of SBA, including representatives of its Office of Inspector General, to access such files upon request.

Individual Borrowers With Self-Employment Income Who File Form 1040, Schedule C or F

An individual borrower with self-employment income that received a loan of $150,000 or less and that uses Form 3508S must submit the required certification and information and, for a second-draw PPP loan, revenue reduction documentation if that documentation was not provided when the borrower applied for the PPP loan. All other borrowers must submit the certification that the documentation is true and correct and the amount for which forgiveness is requested was used for an eligible purpose,and (if the borrower has employees) Form 941 and state quarterly business and individual employee wage reporting and unemployment insurance tax forms or equivalent payroll processor records that best correspond to the covered period (with evidence of any retirement and group health, life, disability, vision, and dental insurance contributions). Whether or not the borrower has employees, the borrower must submit evidence of business rent, business mortgage interest payments on real or personal property, business utility payments, or payments for a covered operations expenditure, covered property damage cost, covered supplier cost, or covered worker protection expenditure during the covered period if the borrower used loan proceeds for those purposes. This documentation may include cancelled checks, payment receipts, transcripts of accounts, purchase orders, orders, invoices, or other documents verifying payments on non-payroll costs. For all loans, the 2019 or 2020 Form 1040 Schedule C or F that the borrower provided at the time of the PPP loan application must be used to determine the amount of net profit (or gross income for certain Schedule C filers, see Cash Compensation for Self-Employed Borrowers) allocated to the owner for the covered period.

Documentation Relating to Conflicts Certification

A borrower is required to make certain disclosures after it submits an application for loan forgiveness for any first-draw PPP loan made before December 27, 2020 if the President of the United States, Vice President of the United States, the head of an Executive department, or a Member of Congress, or the spouse of any such person as determined under applicable common law, directly or indirectly held a controlling interest in the borrower on the date of the loan application.

If the borrower submitted a loan forgiveness application to the lender before December 27, 2020, then the principal executive officer, or individual performing a similar function, of the borrower must submit an SBA Form 3508D disclosing the controlling interest(s) not later than January 26, 2021. If the PPP lender has already submitted a forgiveness decision to SBA, the lender should promptly transmit the SBA Form 3508D to the SBA. Otherwise, the PPP lender is required to transmit the SBA Form 3508D to the SBA when it issues its forgiveness decision to SBA. If the borrower submits a loan forgiveness application to its PPP lender on or after December 27, 2020, then the principal executive officer, or individual performing a similar function, of the borrower has to submit an SBA Form 3508D to its PPP lender disclosing the controlling interest(s) not later than 30 days after submitting the application, and the PPP lender then has to transmit the SBA Form 3508D to SBA with the PPP lender’s forgiveness decision. Alternatively, the PPP lender can transmit the completed Form 3508D to the SBA when received.

An entity is prohibited from receiving a PPP loan after December 27, 2020 if a controlling interest is held directly or indirectly by the President of the United States, Vice President of the United States, the head of an Executive department, or a Member of Congress, or the spouse of any of the preceding.

Simplified Application Procedure

A borrower can apply for forgiveness of a PPP loan that is not more than $150,000 by submitting to the lendera one-page certificationthat includes

description of the number of employees it was able to retain because of the PPP loan,
the estimated amount of the loan amount spent on payroll costs,and
the total loan value.

The borrower must also attest that it has accurately provided the required certification,complied with applicable requirements,and retains records relevant to the form that prove compliance with those requirements.The recordkeeping requirement is four years for employment recordsand three years for other records.No additional documentation will be required,but the SBA retains the right to review and audit loans that are forgiven under the simplified forgiveness procedure.

Procedures for Changes of Ownership

Lenders must obtain SBA consent before approving certain changes in ownership of PPP borrowers. A notice issued on October 2, 2020 addresses when prior approval of the SBA is required and certain procedural requirements.

A “change of ownership” occurs for PPP purposes when,

in one or more transactions, at least 20% of the ownership interest of the borrower is sold or otherwise transferred, including to an affiliate or an existing owner of the entity,
in one or more transaction, the borrower sells or otherwise transfers at least 50% of its assets (based on fair market value), or
a borrower is merged with or into another entity.

In the case of any change of ownership, the borrower remains responsible for the performance of all obligations under the loan, including the certification of economic necessity, and continued compliance with all other PPP requirements, including all form and documentation requirements. The borrower must notify the lender of the transaction in writing before the closing of the sale or transfer and provide copies of the proposed transaction documents.

SBA consent is not required for a “change in ownership” if, before the closing, the borrower

repaid the PPP note in full or
completed the loan forgiveness process as required under the PPP and either the SBA remitted funds to the lender in full satisfaction of the note or the borrower repaid any remaining balance on the loan.

If the PPP note is not fully satisfied before the closing, the lender can unilaterally approve the change of ownership without SBA prior approval in certain situations. If the change of ownership is structured as a sale or other transfer of ownership interest in the borrower, or as a merger, SBA prior approval is not required if either 50% or less of the borrower ownership interest is to be sold or transferred, or the borrower completes and submits its forgiveness application and supporting documentation showing its use of all of the PPP loan proceeds to the PPP lender and establishes an interest-bearing escrow account controlled by the lender in an amount equal to the outstanding balance of the PPP loan.

If the change of ownership is structured as an asset sale of 50% or more of the borrower’s assets (by fair market value), SBA prior approval is not required if the borrower completes and submits its forgiveness application and supporting documentation showing its use of all of the PPP loan proceeds to the PPP lender and establishes an interest-bearing escrow account controlled by the lender in an amount equal to the outstanding balance of the PPP loan.

SBA prior approval is required, and the lender cannot unilaterally approve a change in ownership, in all other cases. The lender’s request for SBA prior approval must be submitted to the appropriate SBA Loan Servicing Center and include (1) the reason the borrower cannot fully satisfy the PPP note or satisfy the escrow requirement, (2) the details of the requested transaction, (3) a copy of the executed PPP note, (4) any letter of intent and the purchase or sale agreement setting forth the responsibilities of the borrower, seller (if different from the borrower), and buyer, (5) disclosure of whether the buyer has an existing PPP loan and, if so, the SBA loan number, and (6) a list of all 20%-or-more owners of the purchasing entity. The SBA may require additional risk mitigation measures as a condition of its approval of the transaction as appropriate.

SBA approval of a change of ownership involving the sale of 50% or more of a borrower’s assets (by fair market value) will be conditioned on the purchaser’s assumption of all of the borrower’s obligations under the PPP loan, including compliance with the terms of the loan. The purchase or sale agreement must include appropriate language regarding the assumption of the PPP borrower’s obligations under the PPP loan by the purchasing person or entity, or a separate assumption agreement must be submitted to the SBA. The SBA will review and provide a determination within 60 calendar days of receipt of a “complete request.”

Regardless of whether SBA prior approval is required, the borrower, in the case of a sale or other transfer of common stock or other ownership interest, or the successor to the borrower, in the case of a merger of the borrower with or into another entity, is responsible for all obligations under the loan, but the SBA will have recourse against any new owner(s) that use PPP funds for unauthorized purposes after the closing. If the new owner(s) or successor has a separate PPP loan, the PPP loan funds have to be segregated and properly allocated among the two borrowers or the two loans. Following a sale of ownership interests, both the PPP borrower and the new owner(s) are responsible for segregating and delineating PPP funds and expenses to demonstrate compliance with PPP requirements by each PPP borrower; after a merger, only the successor is responsible for demonstrating such compliance with respect to both PPP loans.

The lender must notify the appropriate SBA Loan Servicing Center within five business days of completion of the transaction of the identity and ownership percentage(s) of the new owner(s) and provide tax ID number(s) for holders of 20% or more of the equity in the business. The lender must also provide the location and amount of funds in any required escrow account.

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Applying for PPP Loan Forgiveness: The Definitive Guide