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By:  Diva Bole, Esquire

Last updated 6/30/2020

  1. What is the process for PPP loan forgiveness?

The first step is submitting a loan forgiveness application. The SBA has its own form of loan forgiveness application and your lender may have its own form to use. If you haven’t already heard from your lender, check with them.  Your lender has 60 days to let the SBA know whether it believes you are entitled for full or partial loan forgiveness.  If so, the lender will request payment from the SBA for the amount that is forgiven.  The SBA has the right to review the loan and the loan application.  Unless the SBA uncovers any issues in its review, the SBA will pay the forgiven amount to the lender within 90 days. The lender will let you know how much is forgiven.

  1. What changes did the Paycheck Protection Program Flexibility Act enact?

On June 26, 2020, the SBA revised parts of its Loan Forgiveness Rule and Loan Review Rule to conform with the PPP Flexibility Act. The two biggest changes are (1) the eight-week period to use your PPP funds has now been extended to 24 weeks, and (2) you now need to spend only 60% of the funds on payroll. Previously, you had to spend at least 75% of the funds on payroll. [LINK TO PPP FLEXIBILITY ARTICLE]

  1. What will reduce my forgiveness amount?

The amount of loan forgiveness will generally be reduced if the number of full-time equivalent employees (FTE) is reduced, if employees’ salaries or hourly wages fall by more than 25%, or if the your eligible non-payroll expenses exceed 40% of the total eligible expenses. There’s also a cap on how much can be forgiven for owner-employees and self-employed individuals – forgiveness can be no more than 15.38% of your 2019 compensation or $15,385 (whichever is less).

  1. How do I calculate average FTEs for the applicable period?

For each employee, you should calculate the average number of hours paid per week, divide by 40 and round the total to the nearest tenth.  The maximum for each employee is capped at 1.0. You may also choose to use a simplified method that assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours.

  1. How do I determine Salary/Hourly Wage Reduction?

Salary/wage reduction is individually assessed for every employee that did not receive more than $100,000 in annualized pay in 2019. If the employee’s pay over the covered period is less than 75% of the pay they received during the most recent quarter, the eligible amount for forgiveness will be reduced by the difference between their current pay and 75% of the original pay.

  1. What is the covered period?

Generally, the covered period is either (1) the 24-week (168-day) period beginning on date your PPP loans are disbursed, or (2) if you received your PPP loan before June 5, 2020, you may choose to use an eight-week (56-day) covered period. For example, if you opt to use a 24-week covered period and received your PPP loan proceeds on Monday, April 20, the first day of the covered period is April 20 and the last day of the covered period is Sunday, October 4. However, no covered period may extend beyond December 31, 2020.

However, for the purposes of payroll only, you may choose to have your pay period being on the first day of the first payroll cycle in the covered period.  For example, if you receive the loan proceeds on June 10, and your pay period begins on June 15, you may elect to have the covered period start on June 15 for payroll purposes only.

  1. What happens if only part of my loan is forgiven?

For loans made before June 5, you are required to repay the amount of the loan that is not forgiven within two years of the date you received the loan (though you and your lender may agree to extend that to five years). For loans made after June 5, 2020, the due date for the loan is five years from the date you receive it. During that time, your loan will accrue interest at a rate of 1%.  Payments are deferred for six months from the date you received loan proceeds.

  1. What happens if I make payments on the loan that end up getting forgiven?

If you submit your forgiveness application within 10 months, you do not have to make any payments until either the SBA remits the amount forgiven to your lender or lets your lender know that you are not eligible for forgiveness. If you make payments on your loan during the forgiveness application process and the SBA ends up paying your lender more than the outstanding principal balance on your loan, your lender is required to repay you the excess over the remaining balance.

  1. What happens if my forgiveness application is rejected?

You will have to repay the loan within by the due dates described in Question 7, plus interest (which accrues at a rate of 1%).

  1. If my forgiveness application is rejected, can I appeal?

If a lender denies your application for forgiveness, the lender must notify you and the SBA that it has issued a decision denying the application. Within 30 days of the notice from the lender, you may request that the SBA review the lender’s decision. If the SBA opts to review, the SBA will notify the lender, who must then notify you in writing within 5 business days of receipt.

  1. When must payroll costs be incurred or paid to qualify for loan forgiveness?

For SBA purposes, you are considered to have paid payroll costs on the day that paychecks are distributed.  If you incur payroll costs but do not pay them during the covered period described in Question 6, you are eligible for forgiveness if you pay them before the next regular payroll date. For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the covered period.

  1. When must non-payroll costs be incurred or paid to qualify for loan forgiveness?

If you pay non-payroll costs (such as rent, interest on preexisting debt, or utilities) during the covered period described in Question 6, those are eligible for loan forgiveness (assuming other requirements are met).  An eligible nonpayroll cost must be paid 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. Eligible nonpayroll costs cannot exceed 40% of the total forgiveness amount.

  1. What if an employee refuses my offer to return to work?

Specifically, you can exclude any reduction in FTE that is attributable to an individual employee if: (a) you made a good faith, written offer to restore the reduced hours of such employee; (b) the offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the reduction in hours; (c) the offer was rejected by such employee; and (d) you have maintained records documenting the offer and its rejection.

  1. What if I had to fire an employee for cause, or the employee resigned or requested a reduction in schedule?

If an employee is fired for cause, voluntarily resigns, or voluntarily requests a reduced schedule, you can count that employee as the same FTE they were before the employee was fired, resigned, or requested a reduced schedule.

  1. What if I cannot hire individuals to take unfilled positions?

Your loan forgiveness will also not be reduced if you can document, in good faith: an (1) an inability to rehire individuals who were employees of yours on February 15, 2020; and (2) an inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020. According to the SBA, you must inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection.

*If you have any additional questions, please consult the recent SBA revisions available here, or speak to one of our highly-qualified attorneys.

Diva Bole is an Attorney in PK Law’s Corporate and Real Estate Group. She focuses her practice on business formation, mergers and acquisitions, joint ventures, commercial lending, financing and leasing, complex contracts, and corporate restructuring.  Diva can be reached at 410-938-2645 or