Paycheck Protection Program Loans (PPP Loans)

A guideline for small businesses and lenders on use of funds, and calculating, documenting, and applying for the amount of loan forgiveness for Paycheck Protection Program Loans (“PPP Loans”)

PPP Loans can be forgiven in whole or in part. The actual amount of loan forgiveness can be up to the full principal amount of the loan and any accrued interest. PPP Loan proceeds used during the eight‑week covered period can be forgiven, if :

PPP Loan proceeds are spent on forgivable payroll costs and forgivable non‑payroll costs;
Over the eight (8) week covered period or alternative payroll covered period following the date the PPP Loan was funded;
At least 75% of the PPP Loan proceeds are used for specified payroll costs;
Not more than 25% of the PPP Loan proceeds are used for non‑payroll costs;
Full‑Time Equivalent Employee headcount is maintained; and
Salary/wage levels for employees earning less than $100,000.00 per year are not reduced by more than 25%.

There will be a reduction in the amount of the PPP Loan that will be forgiven (and correspondingly there will be an amount that becomes a loan that must be repaid) to the extent portions of the PPP Loan money are spent outside the eight‑week period (with limited exceptions) and/or on non-forgivable costs and expenses, and to the extent the 75/25 Percentage Test, FTE Employee Test and Salary/Wage Level Test are not met. Unfortunately, although most PPP Loans were funded throughout April and by the first week of May of 2020 (and each borrower’s eight‑week period is now running), the SBA did not issue the Application and Instructions for PPP Loan Forgiveness (the “Application”), nor final regulations on calculating the amount of loan forgiveness, until just recently. On May 15, 2020, the SBA issued the Application and its instructions. On May 22, 2020, the SBA finally issued regulations clarifying certain issues on what, when and how certain eligible payroll costs and non-payroll costs (i.e., business expenses) can be paid with PPP Loan proceeds and qualify for forgiveness. The SBA noted the recent regulations were issued so borrowers can take immediate steps to maximize the eligible loan forgiveness amounts and lenders can develop their policies and procedures for timely review of and processing of PPP Loan forgiveness applications.*

Generally, amounts of the PPP Loan spent during the eight‑week period (with certain exceptions) on categories of costs that are approved payroll costs and non‑payroll costs are forgivable and will not have to be repaid. The following payroll costs and non‑payroll costs are eligible for loan forgiveness:

I. THE FOLLOWING 6 CATEGORIES CONSTITUTE ELIGIBILE PAYROLL COSTS THAT CAN BE PAID WITH PPP LOAN FUNDS:

1. The gross amount of employee wages, salaries, commissions, average cash tips, overtime, bonuses and similar cash compensation paid during the eight‑week covered period. Note it is the gross amount of each employee’s salary, wages and cash compensation that can be paid out of the PPP Loan proceeds. The normal employee withholdings, such as the employee’s share of federal, state and local income taxes, must still be withheld and paid over to government entities. Also, annualized employee salary/wages in excess of $100,000.00 per year, are not to be paid with PPP Loan proceeds. Accordingly, employees with annualized salary/wages in excess of $100,000.00 per year can only be paid a maximum of approximately $15,385.00 per each such employee over the eight weeks (the equivalent of $1,923.08 per week or $3,846.16 per bi-weekly pay periods). Independent contractors paid by the business do not count as employees and should not be paid with PPP Loan funds. Furloughed employees who are not performing their day-to-day duties (because of lack of work or state stay-at-home orders) can still be paid their salary, wages or similar cash compensation with PPP Loan funds by the employer, if desired (but not to exceed the annualized $100,000.00 limitation). Employees whose annualized income does not exceed $100,000.00 may be paid overtime, hazard pay and bonuses with PPP Loan funds because it constitutes a supplement to salary/ wages and an acceptable form of cash compensation. However, employees with annualized income in excess of $100,000.00 are capped at the maximum of $15,385.00 salary/wages over the eight-week covered period and cannot be paid hazard pay, bonuses or other monetary compensation in excess of the total $15,385.00 over the eight weeks.
2. State and local income taxes paid by the employer (such as SUTA) that are assessed on employee compensation. However, the employer’s side of federal payroll taxes (such as the employer’s share of FUTA and FICA) are not to be paid with PPP Loan proceeds.
3. Employer Contributions to Employee Retirement Plans. This would include the employer’s share of 401k contributions for each employee for each paycheck. While the Application and regulations do not provide clear guidance, it would appear a retirement contribution could be made for employees out of PPP Loan funds for the borrower’s/employer’s share of contributions prior to year-end. For example, if the employer has an employee pension or retirement plan whereby the employer contributes 5% of the employee’s total annual compensation in the last week of December each year, the employer could pay in the last few days of the eight-week covered period to the pension 5% of what each employee received in wages/salary and cash compensation from PPP Loan funds.
4. Payment to employees for vacation, parental, family, medical or sick leave, as well as allowance for separation or dismissal.
5. Employer Contributions for Employee Health Insurance. This includes group health insurance premiums paid for employees and employer contributions to a self-insured employer-sponsored group health plan. Note, however, health insurance premiums paid for owners/partners cannot be paid out of PPP Loan proceeds.
6. Owner/Partner Compensation Replacement. The business’s owner(s) or principal(s) can pay themselves with PPP Loan proceeds over the eight‑week period as a payroll expense. Owners or principals of the business generally include a sole proprietor, all partners of a general partnership or LLP, and owners of 20% or more of a corporation or LLC. The business’s owner(s)/partner(s) can pay themselves based on each owner’s/partner’s 2019 Form 1040 Schedule C or 2019 Form K-1. Owner/partner compensation replacement is also capped at a maximum of $100,000.00 annualized. For example, if an owner’s/partner’s 2019 Form 1040 Schedule C net income/profit or 2019 Form K‑1 income was $120,000.00, that owner/partner can receive compensation replacement of $1,923.08 per week or $3,846.16 bi-weekly for a total of no more than $15,385.00 over the eight‑week period. (e.g. $100,000.00 ÷ 52 weeks = $1,923.08 per week times 8 weeks equals $15,385.00 maximum compensation replacement over the eight weeks). If, however, the owner’s/partner’s 2019 income was $74,984.00, that owner/partner can receive $1,442.00 per week or $2,884.00 bi-weekly for a total of no more than $11,536.00 over the eight weeks. (e.g. $74,984.00 ÷ 52 weeks = $1,442.00 per week times 8 weeks equals $11,536.00 maximum compensation replacement over the eight weeks). The SBA Regulations make it clear PPP Loan forgiveness for owner/partner compensation replacement over the eight-week period is capped at 8/52 (approximately 15.38%) of their 2019 Schedule C, K-1 or net profit income. So even if an owner/partner had annualized income of less than $100,000.00 in 2019, owners/partners cannot receive any hazard pay, bonuses or other compensation in excess of the determined amount based on 2019 income. In addition, health insurance premiums and retirement plan contributions for owners/partners cannot be paid with PPP Loan funds.

Covered Period vs. Alternative Payroll Covered Period. The CARES Act and prior regulations indicated the Covered Period for a PPP Loan is exactly eight weeks (56 days). The first day of the Covered Period begins on the date the PPP Loan is funded. For example, if the borrower’s PPP Loan was funded on Monday, April 20, that becomes the first day of the eight-week (56-day) Covered Period and the last day would be Sunday, June 14. However, the Application provides the borrower with an option if the borrower uses a weekly or bi-weekly payroll schedule. The option is referred to as the “Alternative Payroll Covered Period.”

Payroll Costs Paid or Incurred. The SBA realized the eight-week Covered Period will not always align with a borrower’s payroll cycle. Accordingly, for administrative convenience to the borrower, a borrower with a weekly or bi-weekly payroll cycle may elect to use an Alternative Payroll Covered Period that begins on the first day of the first payroll cycle in the Covered Period and continues for the eight weeks (56 days) thereafter. In general, payroll costs paid or incurred during the eight-week (56-day) Covered Period are eligible for forgiveness. Borrowers may seek forgiveness for payroll costs for the eight weeks beginning on either: (i) the date of the disbursement of the borrower’s PPP Loan proceeds from the lender (the start date of the Covered Period); or (ii) the first day of the first payroll cycle in the Covered Period (the “Alternative Payroll Covered Period”). Payroll costs are considered paid on the day that paychecks are distributed or the employer originates an ACH credit transaction. Payroll costs are incurred on the day the employee’s pay is earned. In other words, on the day the employee works. 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 performed work). If payroll costs are incurred during the eight-week Alternative Payroll Covered Period, but paid after the last day of the Alternative Payroll Covered Period, such payroll costs will be eligible for forgiveness if they are paid not later than the first regular payroll date thereafter. Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period) to be eligible for forgiveness.

Example A: A borrower’s PPP Loan is funded on Thursday, April 30. The SBA counts the day the loan was funded as the first day of the 56-day period. Accordingly, the eight-week (56 day) Covered Period ends on Wednesday, June 24. The borrower is on a weekly payroll cycle and pays employees every Friday. Because of uncertainty or confusion, the employer is not able to do payroll on Friday, May 1, with PPP Loan funds. The employer can pick Sunday, May 3, as the start date of the Alternative Payroll Covered Period and make the first payroll payment with PPP Loan funds on Friday, May 8. On the Application, the employer will indicate that the employer picked the Alternative Payroll Covered Period beginning Sunday, May 3, and the eight-week (56-day) Alternative Payroll Covered Period will now run to and end on Saturday, June 27 for all payroll costs.

Example B: A borrower has a bi-weekly pay schedule (every other week). The borrower’s PPP Loan fund was funded on Wednesday, April 29, and, therefore, the eight-week Covered Period begins on Wednesday, April 29, and ends on Tuesday, June 23. The first day of the borrower’s first payroll cycle that starts in the Covered Period is Sunday, May 3. The borrower may elect an Alternative Payroll Covered Period for payroll cost purposes that starts on Sunday, May 3, and ends 55 days later (for a total of 56 days) on Saturday, June 27. All payroll costs paid during this Alternative Payroll Covered Period are eligible for forgiveness. In addition, payroll costs incurred during this Alternative Payroll Covered Period are eligible for forgiveness as long as they are paid on or before the first regular payroll date occurring after Saturday, June 27.

Example C: The borrower received the PPP Loan funds on Monday, April 20, and the first day of the first pay period following the funding of the PPP Loan is Sunday, April 26. The borrower can pick the Alternative Payroll Covered Period starting Sunday, April 26, and the last day of the Alternative Payroll Covered Period would become Saturday, June 20.

It is important to note that only payroll expenses paid during the Covered Period or Alternative Payroll Covered Period are eligible for PPP Loan forgiveness. In Example A above, it is permissible for the business to pay the full employee payroll (and health insurance, pension, SUTA taxes, etc.) out of PPP Loan funds on Friday, May 1 (even though most of the employee and other payroll costs were incurred prior to the date of the loan funding on Thursday, April 30). However, by making payment of payroll costs on Friday, May 1, the borrower has effectively decided to use the eight-week Covered Period starting on the date the Loan was funded because the employer did not wait until the next payroll period to pay payroll costs with PPP Loan funds. However, as stated in Example A, if the employer was not able to make any disbursements for payroll costs prior to the first day of the first pay period following the date the PPP Loan was funded, then the employer will want to pick the Alternative Payroll Covered Period to get the extra days at the tail end of the eight weeks.

It is also important to note that the Application provides that a borrower who elects to use the Alternative Payroll Covered Period must apply the Alternative Payroll Covered Period consistently through the Application and in the use of the PPP Loan funds on payroll costs. Remember, payroll costs are not only cash compensation to employees, such as wages, salaries and commissions, but also employer contributions to retirement plans, employee health insurance plans and premiums, and payment of owner/partner compensation replacement. Accordingly, the borrower needs to be consistent with only paying these payroll costs after the first day of the first pay period following the loan disbursement date when using the Alternative Payroll Covered Period. Non-payroll costs (business expenses) discussed below remain governed by the Covered Period and cannot be governed by the Alternative Payroll Covered Period. So, it is possible to have two separate eight-week (56-day) periods for the employer. An Alterative Payroll Covered Period for eligible payroll costs and the regular Covered Period for eligible non-payroll costs.

Finally, it is important to note that payroll costs can be incurred but not paid during the borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) and still be eligible for forgiveness if paid on or before the next regular payroll date.

Example D: If the last day of the Covered Period or Alternative Payroll Covered Period is Wednesday, June 24, it is permissible to run and pay cash compensation payroll on Friday, June 26, and pay these payroll expenses because the payroll costs were incurred during the Covered Period (or Alternative Payroll Covered Period) and paid on or before the next regular payroll date. Similarly, because payment of health insurance premiums are an eligible payroll cost, the borrower could pay a health insurance premium invoice after the last day of the eight-week Covered Period or Alternative Payroll Covered Period if the premiums were incurred prior to the last day. However, it appears that employers cannot prepay in advance salary, wages and other cash compensation that have not yet been incurred. In the above examples, the employer would not be able to prepay payroll costs that won’t be incurred until July or thereafter.

The borrower/business has to document all PPP Loan proceeds used for eligible payroll costs and provide this documentation to the Lender at the end of the eight weeks with an Application requesting forgiveness of all or part of the PPP Loan. The Application and regulations clarify that documentation to be submitted with the Application to verify eligible cash compensation and non-cash benefits paid with PPP Loan funds include bank account statements, payroll summaries or third party payroll service provider reports, federal and state payroll tax filings, as well as payment receipts, canceled checks and invoices/account statements. Accordingly, it is strongly recommended that every borrower/business put all PPP Loan proceeds in a new separate bank account and pay permissible payroll costs out of the new PPP Loan bank account as a means to help document the use of the PPP Loan proceeds. In addition, each borrower should create spreadsheets and/or charts with attached employee paystubs or payroll summaries to document employee wages/salaries, employer share of state and local taxes, employer’s retirement contributions, group health insurance premiums and owner/partner compensation replacement paid with the PPP Loan proceeds.

It would be a good idea to move the gross amount of employee payroll each week from the new PPP Loan bank account to the businesses’ payroll account and then handle employee tax withholdings, ACH transfers of net paycheck amounts to employees, etc., as the business customarily does each week or bi‑weekly. If the borrower uses a third-party payroll service, the account history for the new PPP Loan bank account combined with the payroll documentation from the payroll service and the borrower’s spreadsheets should be sufficient documentation. It would be proper to transfer gross amounts of employee compensation and owner/partner compensation replacement from the PPP Loan account to a payroll account each pay period.

Another reason to set up a separate new bank account for PPP Loan funds is for annual accounting and income tax purposes. Pursuant to the CARES Act, the amount of the PPP Loan forgiven will not constitute income to the business. However, the permissible payroll costs and non‑payroll costs paid with the forgiven amount of the PPP Loan cannot be taken as a business expense or deduction on the businesses’ 2020 income tax return because of IRC §265, which disallows deduction of expenses relating to tax‑exempt income. Accordingly, the business should essentially run a separate “set of books” or “QuickBooks” for the PPP Loan funds and not co‑mingle the receipt and disbursement of the PPP Loan proceeds with the businesses general operating account. The businesses’ tax accountant will appreciate it next year when completing the businesses’ 2020 tax returns. This will also make the Lender’s review of the Application for PPP Loan forgiveness easier.

II. THE FOLLOWING 3 CATEGORIES CONSTITUTE ELIGIBLE NON-PAYROLL COSTS (BUSINESS/OPERATING COSTS) THAT CAN BE PAID WITH PPP LOAN FUNDS:

Payments of interest on business mortgage obligations on real estate or personal property that were incurred before February 15, 2020. Accordingly, the interest portion of a mortgage payment secured by real estate and/or secured by a security agreement and UCC financing statement on business assets can be paid with PPP Loan proceeds and be forgivable. It is the interest only portion that is forgivable, the principal portion of any mortgage payment should not be paid with PPP Loan proceeds. Also, the new regulations make clear that you cannot prepay or make advanced payments of mortgage interest with PPP Loan funds. The mortgage interest must be incurred during the Covered Period in order to be paid with PPP Loan funds. Although the CARES Act also provides PPP Loan proceeds can be used for “interest on any other debt obligations”, SBA regulations note that such interest paid is not eligible for PPP Loan forgiveness. Accordingly, if the accrued interest is for an unsecured line of credit loan, payment of this interest would not qualify as a use of PPP Loan proceeds eligible for forgiveness and, therefore, avoid use of PPP Loan proceeds for interest payments on unsecured loans.
Business Rent Payments or Lease Payments pursuant to lease agreements for real or personal property in force prior to February 15, 2020. The Application and new regulations expressly refer to both “business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020.” PPP Loan funds can be used to pay rent for real property, such as a building or office space. In addition, PPP Loan funds can also be used for monthly lease payments under lease agreements for computer systems, copiers, phone systems, company vehicles, machinery and other equipment.
Business Utility Payments for which service began before February 15, 2020. Business utility payments include service for distribution of gas, electric, water, transportation, telephone, and internet access. While most of these are self-explanatory, many are not familiar with “transportation” as a utility. Some municipalities have instituted transportation utility fees based on the premise that the municipalities transportation system and improvements thereto should be financed through user/utility fees.

In order to be eligible for forgiveness, non-payroll (business) costs must be either: (i) paid during the Covered Period; or (ii) 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. Please note that eligible non-payroll (“business”) costs must be paid during the “Covered Period.” If the borrower chooses an Alternative Payroll Covered Period for payroll costs, the Alternative Payroll Covered Period only applies to payroll costs. It does not apply to non-payroll (business) costs. Near the end of the eight-week period, a non-payroll cost can be paid if the cost was incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the end of the Covered Period.

Example: Borrower’s PPP Loan is funded on, and the Covered Period starts, on Wednesday, April 22. Therefore, the eight-week Covered Period runs from Wednesday, April 22, through Tuesday, June 16. The borrower pays its April and May electric bills during the Covered Period and pays its June electric bill on July 1, which is the next regular billing date. The borrower may seek loan forgiveness for its April and May electric bills because they were paid during the Covered Period. It does not matter that the April electric bill relates to electric use prior to April 22. In addition, the borrower may seek loan forgiveness for the portion of its June electric bill through Tuesday, June 16 (the last day of the Covered Period) because it was incurred during the Covered Period and paid on the next regular billing date (July 1). Note that a portion of the April electric bill was incurred before the Covered Period began, but paid during the Covered Period. Accordingly, non-payroll costs that were incurred prior to the PPP loan funding date (and the first day of the Covered Period) are eligible for forgiveness when they are paid during the Covered Period. Also note that, even though the June electric bill was paid after the last day of the Covered Period, a portion of the electric bill was incurred during the Covered Period and up to the last day of the Covered Period is forgivable because it was incurred during the Covered Period. It needs to be emphasized the rule is non-payroll costs paid during the eight-week Covered Period or incurred during the eight-week period and paid by the next regular due date are eligible. Accordingly, by allowing all payments made during the period to be eligible for forgiveness, a borrower is permitted to pay rent, mortgage interest, equipment lease payments, and utility payments during the eight-week period and have those expenses forgiven even if they were actually incurred before the PPP Loan funding date (i.e., borrower can pay rent, equipment lease invoices and utility payments in arrears during the Covered Period).

Just like permissible payroll costs, these permissible non‑payroll (overhead/operating) costs should be paid directly out of the new bank account to which the borrower/business has placed the PPP Loan proceeds as a way of documenting the proper and permissible use of the PPP Loan proceeds. The Application for loan forgiveness requires borrower to submit to the Lender at the end of the eight-week period bank accounts, cancelled checks, payment receipts, account statements, invoices and other documentation verifying payments from the PPP Loan proceeds. Accordingly, additional documentation that should be included with the borrower’s Application for forgiveness and spreadsheets include: the account history for the new PPP Loan account with cancelled checks and/or ACH transfers for the account, copies of mortgage statements, lease agreements, monthly rent/lease payment invoices, and utility bills paid. If certain bills/invoices are paid by ACH transfer out of the business’s general operating account and the ACH transfer is not temporarily moved to the new PPP Loan bank account, the business should write a check out of or transfer money out of the PPP Loan bank account to the general operating account for the exact amount of the bill/invoice being paid and note/memo on the check or ACH transfer what is being paid (e.g., $250.00 – gas service, $523.21‑ mortgage interest, $5,000.00 – rent).

The Application was not issued until May 15. The SBA regulations providing clarification concerning loan forgiveness requirements and seeking loan forgiveness were not issued until May 22. The first PPP Loans were funded as early as a few days after April 3, 2020. Most all of the first round of PPP Loans were funded at least a week before the end of April. Accordingly, by the time the Application and the new PPP regulations were issued, some borrowers were already four to six weeks into their eight-week Covered Period. Many borrowers did not realize that they could pay lease payments on equipment, such as leased computer systems, copiers and machinery, with PPP Loan funds or that business rent and utility payments could be paid out of PPP Loan funds at the end of April even though the invoices for the rent and utility services were incurred prior to the date of PPP Loan funding. Accordingly, many of these expenses may have been paid during the Covered Period out of the business’ general operating account, rather than with PPP Loan proceeds. The intent of the CARES Act is that the SBA provide relief to America’s small businesses and the stated intent of the SBA regulations is providing clarity to borrowers and lenders as to the loan forgiveness requirements so as to “enhance (borrowers’) ability to take the necessary steps to maximize eligible loan forgiveness amounts.” Accordingly, if eligible non-payroll costs were paid out of a borrower’s general account (instead of with PPP Loan proceeds), during the Covered Period (after the first day the PPP Loan), the business should write a check out of or transfer money out of the PPP Loan bank account to the general operating account for the exact amount of each bill/invoice being reimbursed and paid with the PPP Loan funds (e.g., $1,000.00—April Computer Lease Payment, $500.00—May Vehicle Lease Payment, $1,200.00 –April Copier Lease Payment). As stated above, the monthly invoices will have to be provided, along with the ACH transfer statement or canceled check from the PPP Loan bank account to show the payment of the invoice was effectively made with PPP Loan proceeds.

III. AS A REMINDER, THE MAXIMUM POSSIBLE AMOUNT OF LOAN FORGIVENESS IS BASED ON THE SUM OF PERMISSIBLE PAYROLL COSTS AND NON-PAYROLL COSTS (MORTGAGE INTEREST, BUSINESS RENT,EQUIPMENT LEASES AND UTILITIES) PAID OVER THE EIGHT-WEEK PERIOD FOLLOWING THE DATE OF LOAN DISBURSEMENT. THE ACTUAL AMOUNT OF PPP LOAN FORGIVENESS DEPENDS ON A SERIES OF TESTS.

1. The 75%/25% Rule and Test. In order for all amounts of the PPP Loan spent on eligible payroll costs and non‑payroll costs over the eight-week covered period to be forgiven, at least 75% of the amount forgiven must be attributable to eligible payroll costs and no more than 25% of the amount forgiven must be attributable to eligible non-payroll (overhead/operating) costs. Provided no less than 75% of the loan proceeds are used to pay eligible payroll costs and no more than 25% of the loan proceeds are used to pay eligible operating or overhead costs (such as business mortgage interest, rent/lease payments and utilities), all such amounts paid will qualify for forgiveness. The forgiveness calculation was anticipated to be a simple percentage comparison of the sum of all eligible payroll costs paid and eligible operating costs paid over the eight-week period with PPP Loan funds. However, this is not how the Application implements the 75%/25% test. Rather, regardless of how much is spent on payroll costs, the Application ensures that no more than 25% of the total forgiveness amount is attributable to non-payroll costs with the following formula:

Total Payroll Potential

Costs Paid with ÷ 75% (.75) = Forgiveness

PPP Loan Funds Amount

* The potential forgiveness amount cannot exceed the total loan amount.

Example A: The PPP Loan amount was in the amount of $105,000.00. Assume $85,000.00 was paid toward eligible payroll costs and $20,000.00 was paid towards eligible non-payroll (overhead/operating) costs.

Test: $85,000.00 ÷ .75 = $113,333.33 (potential) $113,333.33

forgiveness amount), then – 85,000.00

$ 28,333.33

The loan amount is the maximum forgivable amount and $28,333.33 is the amount that could be spent on non-payroll costs. Since only $20,000.00 was spent on non-payroll costs, the full $105,000.00 loan amount ($85,000.00 payroll costs + $20,000.00 spent on eligible non-payroll costs) would be forgivable (assuming properly documented). Note, for example, if $5,000.00 of the PPP Loan proceeds were used towards non‑forgivable payroll costs (such as the employer’s share of federal income taxes) and/or non‑forgivable overhead/operating costs (such as payment of mortgage principal), then that $5,000.00 would not be forgivable and would become a loan. Caution: The SBA regulations state that if a borrower/business knowingly uses PPP Loan proceeds for unauthorized purposes, the borrower/business may be subject to additional liability, such as charges for fraud.

Example B: PPP Loan was $105,000.00. $70,000.00 was used for eligible payroll costs, $32,000.00 was spent on eligible non-payroll costs and $3,000.00 was not spent.

Test: $70,000.00 ÷ .75 = $93,333.33 (potential $93,333.33

forgiveness amount), then – 70,000.00

$23,333.33

$23,333.33 is the maximum amount that could be spent on non-payroll costs, but borrower actually spent $32,000.00 on non-payroll costs. Loan forgiveness amount is $93,333.33 ($70,000.00 payroll costs + $23,333.33 maximum amount allowed to be spent on non-payroll costs). $8,666.67 ($32,000.00 – $23,333.33) of the amount spent on non-payroll costs + $3,000.00 of unspent PPP Loan funds results in a remaining loan of $11,666.67 that must be repaid.

Example C: PPP Loan amount is $180,000.00. Payroll costs total $142,000.00 and non-payroll costs total $30,000.000. $8,000.00 of PPP Loan not spent.

Test: $142,000.00 ÷ .75 = $188,333.33(potential $188,333.33

forgiveness amount), then -142,000.00

$ 46,333.33

Since only $30,000.00 was spent on non-payroll costs (and borrower could have spent up to $46,333.33 on non-payroll costs), all amounts spent are forgivable. However, loan amount of $180,000.00 is maximum forgivable amount and only $172,000.00 spent. Therefore, $172,000.00 is forgivable and $8,000.00 unspent funds becomes a loan to be repaid.

RECOMMENDATION: WHEN IN THE LAST 2 WEEKS OF THE EIGHT-WEEK PERIOD, DO SOME PRELIMINARY CALCULATIONS TO MAKE SURE 75%/25% TEST IS GOING TO BE MET. IF IT APPEARS THAT MORE THAN 25% IS GOING TO BE SPENT ON NON-PAYROLL COSTS, CONSIDER PAYING HAZARD PAY BONUSES TO EMPLOYEES (WHO HAVE ANNUALIZED INCOME LESS THAN $100,000.00) TO GET INTO COMPLIANCE WITH THE 75%/25% RULE AND TEST. THE BONUSES WILL ALSO HELP MEET THE SALARY/WAGES REDUCTION TEST DISCUSSED LATER.

There are two (2) other tests that must be met in order to prevent a reduction of the amount of the PPP Loan that will be forgiven. Even if the business only uses PPP Loan proceeds for eligible payroll costs and eligible operating/overhead costs, and the amount spent on payroll costs exceed 75% of the PPP Loan proceeds used and the amount spent on permissible operating/overhead costs are less than 25% of the PPP Loan proceeds used, the total of these amounts to be forgiven can be reduced if the borrower’s full‑time equivalent employee headcount decreased or salaries and wages of any employees that make less than $100,000.00 decreased by 25% or more during the eight‑week covered period. These tests as designed by the SBA are extremely cumbersome and absurdly complicated. The Application does not provide sample formulas nor spreadsheets to do the test calculations and, therefore, each borrower (and lender) will have to design and use formulas and spreadsheets for the calculations.

2. Average Full Time Equivalent Employee Rule and Test. The amount of the loan forgiveness will be reduced if there is a reduction in the average number of full‑time equivalent (“FTE”) employees during the Covered Period or Alternative Payroll Covered Period when compared to a reference period selected by the borrower. In general, a reduction in full-time equivalent (“FTE”) employees reduces the amount of loan forgiveness by the same percentage as the percentage reduction in FTE employees during the eight-week period. The reference period is either: (a) the average number of FTE employees the business had from February 15, 2019 to June 30, 2019 or (b) the average number of FTE employees the business had from January 1, 2020 to February 29, 2020, or (c) for seasonable employees only, the average number of FTE employees for any 12-week consecutive period between May 1, 2019, and September 15, 2019. The borrower picks which of the optional reference periods to use on the Application

Calculating Borrower’s Number of Full-Time Equivalent (FTE) Employees. The words “full-time equivalent employee” is not defined in the CARES Act. However, the latest SBA regulations state a full‑time employee is any employee who works 40 hours or more per week. For purposes of this test, each employee that works 40 or more hours per week constitutes one (1.0) FTE employee. Any employee that works less than 40 hours per week is a percentage to the nearest tenth less than one (1.0) FTE employee. Each employer/borrower is required to compare the average number of FTEs for the eight-week period to the average number of FTEs for one of the optional reference periods. For purposes of this calculation, the employer/borrower must divide the average number of hours paid for each employee per week by 40 to determine an FTE number for each employee.

Example: An employee that works an average of 40 hours per week, when divided by 40, results in a quotient or FTE # of one (1.0). An employee who works and is paid on average 48 hours per week would also be considered an FTE employee of one (1.0), because no employee can be an FTE employee greater than one (1.0) FTE employee. If an employee worked and was paid 30 hours per week on average, that employee would be an FTE employee of .75 (30 ÷ 40 = .75). An employee that worked and was paid for 29 hours per week on average would be an FTE employee of .73 (29 ÷ 40 = .725 rounded up to the nearest tenth = .73). An employee that was paid for 16 hours per week on average would be an FTE employee of .40 (16 ÷ 40 = .40). The borrower/employer must do this calculation for each employee or the Application and SBA regulations provide an option for administrative convenience that allows the employer/borrower to elect to use a full-time equivalency of .50 for each part-time employee (i.e., each employee working/being paid for less than 40 hours per week on average). However, the borrower must select one of these two methods of calculating for part-time employees and must apply this method consistently to all part-time employees in both the eight-week period and the optional reference period to which the comparison is going to be made for the FTE employee test.

The borrower/employer is required to provide the aggregate total of FTE employees for both the selected reference period and the eight-week Covered Period (or eight-week Alternative Payroll Covered Period) by adding together all of the employee-level FTE calculations. The borrower/employee must then divide the aggregate total of all the FTE numbers by the total number of employees to come up with the average number of FTE employees for both the selected reference period and the eight-week Covered Period. The borrower/employee must then divide the average FTE employees during the eight-week Covered Period (or eight-week Alternative Payroll Covered Period) by the average FTE employees during the selected reference period, which will result in a percentage. This percentage is then multiplied by the total dollar amount of the PPP loan that qualifies for forgiveness, to determine if there is a reduction. Accordingly, the formula or test reads as follows:

Reduction in FTE Employee Test

Multiply the total dollar amount of the PPP Loan that qualifies for forgiveness by the following fraction:

Numerator: average number of full‑time equivalent employees
(FTEs) employed by the business during the eight‑week period;

divided by:

Denominator: the lesser of (i) the average number of full‑time equivalent employees (FTEs) employed by the business during the period from February 15, 2019 through June 30, 2019, or (ii) the average number of FTEs employed by the business during the period from January 1, 2020 through February 29, 2020.

Total dollar amount of PPP Loan that qualifies for forgiveness

Average Number of FTEs for the 8‑Week covered period

Option 1:
Average number of FTEs from February 15, 2019 to June 30, 2019
Option 2:
Average number of FTEs from January 1, 2020 to February 29, 2020
For Seasonal Employers:
Average number of FTEs for any 12 consecutive weeks from May 1, 2019 to September 15, 2019

Example:

8-Week Covered Period or Alternative Payroll Covered Period				Reference Period January 1, 2020 to February. 29, 2020
	Average # of Hours Paid Per Week		FTE #	Average # of Hours Paid Per Week		FTE #
Employee A	45	÷ 40	1.00	45	÷ 40	1.00
Employee B	40	÷ 40	1.00	42	÷ 40	1.00
Employee C	34	÷ 40	.85	40	÷ 40	1.00
Employee D	29	÷ 40	.73	40	÷ 40	1.00
Employee E	22	÷ 40	.55	35	÷ 40	.88
Employee F	20	÷ 40	.50	30	÷ 40	.75
Employee G	16	÷ 40	.40	16	÷ 40	.40
	Aggregate Total FTE = 5.03			Aggregate Total FTE = 6.03

Average FTE Employees		5.03 ÷ 7 Employees = .72 Average FTEs		Average FTE Employees	6.03 ÷ 7 Employees = .86 Average FTEs

Formula Total PPP Loan .72 (average FTEs during Covered Period)

amount that qualifies x .86 (average FTEs during Reference Period)

for forgiveness

($150,000.00)

($150,000.00) x .8372 (83.72%)

New Amount

qualifying for forgiveness = $125,580.00

The loan forgiveness amount is reduced by $24,420.00 ($150,000.00 – $125,580.00 = $24,420.00 reduction). Stated another way, because there was a 16.28% reduction in average FTEs during the eight-week Covered Period when compared to the average FTEs during the reference period selected (January 1, 2020 to February 29, 2020), the loan forgiveness amount of $150,000.00 was reduced by 16.28% (100% – 83.72% = 16.28% reduction) so $125,580.00 is the new forgivable loan amount).

As a reminder, instead of doing a calculation for each employee by dividing by 40 and rounding the total to the nearest tenth, the borrower/employer has the option to simply assign an FTE number of 1.0 to any employee whose average number of hours paid per week were 40 or more and assigning an FTE number of .50 for every employee who worked an average number of hours per week less than 40. An employer may want to do this if the employer has a large number or percentage of part-time employees that worked less than 20 hours per week during the Covered Period. An employer/borrower may also want to use this method if it is too difficult to review their payroll records during the reference period selected to determine the exact number of average hours worked by each employee. The employer/borrower may want to run spreadsheets using each calculation method to see if there is a significant difference in the reduction percentage because, if the dollar amount of PPP Loan forgiveness at issue is significant, even a small percentage difference can translate into several thousand of PPP Loan dollars not being forgiven.

The Application confusingly combines the FTE employee reduction test with the salary/wages reduction test (discussed below) on the worksheet charts provided as part of the Application. Even though the FTE employee reduction test is calculated using all employees, the salaries/wages reduction test is calculated only with employees making less than $100,000.00 annualized per year. Accordingly, on the Application, borrowers have an FTE chart for employees making less than $100,000.00 annualized and a separate chart for FTE employees making $100,000.00 or more annualized.

FTE Reduction Exceptions. The SBA created two (2) exceptions that were not provided for by the CARES Act. First, the employer/borrower does not need to count for the FTE reduction test any employee that was laid off or had work hours reduced, if the borrower offered to rehire the same employee for the same salary/wage or the same number of hours or to restore the reduced hours, but the employee declined the offer. In calculating the FTE reduction test, an employer/borrower is allowed to exclude from the calculations any employee that was laid off or had their work hours reduced if: (1) the borrower made a good faith written offer to rehire such employee (or restore reduced hours) during the Covered Period (or the Alternative Payroll Covered Period); (2) the offer was at the same salary or wages and the same number of hours as earned by such employee in the last pay period prior to being laid off or having a reduction in hours; (3) the offer was rejected by the employee; (4) the employer/borrower maintained records documenting the offer and its rejection; and (5) the borrower/employer informed the applicable state unemployment insurance office of such employee’s rejection of the offer of reemployment within 30 days of the employee’s rejection of the offer. The second exception allows a borrower to exclude an employee from the FTE employee calculations who was (a) fired for cause; (b) voluntarily resigned; or (c) voluntarily requested and received a reduction in hours during the eight-week period.

FTE Reduction Safe Harbor Exemption. The regulations also create a safe harbor exemption from the FTE employee reduction test. If a borrower/employee reduced FTE employees between February 15, 2020, and April 26, 2020, as long as the employer/borrower eliminates any reductions in FTE employees occurring during that period by June 30, 2020, or earlier, the borrower is exempt from any reduction in the loan forgiveness amount that would otherwise be required due to reductions in FTE employees. Accordingly, as long as an employer/borrower restores all FTEs employees to their full average weekly hours that they had as of February 15, 2020, and does so no later than June 30, 2020, the Application ignores all the comparison calculations as to FTEs between the eight-week period and the selected reference period and there is no reduction in the amount of PPP Loan forgiveness. However, the regulations specifically note that this safe harbor exemption “does not change or affect the requirement that at least 75% of the loan forgiveness amount must be attributable to payroll costs.” The rule of thumb is to get as many employees back on the payroll during the eight-week period as possible and paid at their full salary/wages and hours as possible and, also, make sure that, by June 30, 2020, all employees are working the same average hours per week and receiving 100% of their average salaries/wages they received as of February 15, 2020.

Maintain Level of Salary/Wages Rule and Test. Generally, a reduction in an employee’s salary or wages in excess of 25% will generally result in a reduction in the loan forgiveness amount, unless certain exceptions or the safe harbor applies. The tests have to be run on each employee whose annualized income is less than $100,000.00. The Application sets forth an absurdly complicated formula and multiple steps. In addition, the formulas and test are different for salaried employees versus hourly employees, but the tests are combined on the Application.

For salaried employees, a comparison is made between the average annual salary each employee (who made less than $100,000.00) made in the 1^st quarter of 2020 to the average annual salary paid to each Applicable Employee during the eight weeks. Employees with annual salary in excess of $100,000.00 in 2019 are ignored for this test. For each Applicable Employee, take that employee’s total salary paid during the eight‑week period and divide it by 8 to get a weekly average, then multiply by 52 to get the average annual salary during the Covered Period (or Alternative Payroll Covered Period). Compare it to that employee’s average annual salary for the 1^st quarter of 2020 (January 1, 2020 to March 31, 2020). That is, take the employee’s total salary for the 1^st quarter of 2020, then multiply it by 4 to get the average annual salary for the 1^st quarter of 2020. Then divide the average annual salary for each employee during the eight-week period by the average annual salary for that employee for the 1^st quarter of 2020 and if the result is .75 (75%) or more there is no reduction (zero) in the loan forgiveness amount for that employee.

STEP 1:

Average annual salary ÷ Average annual salary = .75

for Covered Period for 1^st Quarter 2020 or greater

If the answer/result is equal to or greater than .75 (75%), then the test is satisfied as to that employee, zero (-0-) reduction is recorded for that employee on the Application. If the answer/result is less than .75 (75%), further calculations are required for each such employee and go to STEP 2.

STEP 2: Salary Wage Reduction Test—Safe Harbor

For any Applicable Employee whose average annual salary during the eight-week period was less than .75 (75%) of that employee’s average annual salary between January 1, 2020, and March 31, 2020, for each such Applicable Employee, you then do a calculation to see if the safe harbor is met. The determination of whether the safe harbor applies is as follows:

You enter the annualized salary of each employee as of February 15, 2020.
You calculate the average annual salary for each employee between February 15, 2020, and April 26, 2020. This time period is approximately 10 weeks, so take the total cash compensation paid to each employee between February 15, 2020, and April 26, 2020, and divide by 10 to get the average weekly compensation. Then, multiply the amount by 52 to determine the average annual salary for the 10-week time period.
If the average annual salary between February 15, 2020, and April 26, 2020, is greater than the annualized salary as of February 15, 2020, then the salary/hourly wage reduction test is satisfied and there is zero (-0-) reduction in loan forgiveness amount for this employee.
However, if the annualized salary between February 15, 2020, and April 26, 2020, is less than the average annual salary as of February 15, 2020, then calculate the average annual salary of the employee as of June 30, 2020. While the Application refers to the “average” annual salary of each employee as of June 30, 2020, the Regulations clearly state that if an employee’s salary was reduced between February 15, 2020, and April 26, 2020, but the reduction in salary is eliminated by June 30, 2020, or earlier, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in salaries and wages. In other words, in order to meet the safe harbor exemption, the employer need only restore an employee’s salary to the level it was before February 15, 2020, no later than June 30, 2020, and all of the cumbersome calculations can be avoided.
If an employee’s average annual salary during the eight-week period is less than 75% of the average annual salary paid to the employee in the first quarter of 2020 (the Step 1 calculation) and that employee’s average annual salary was not restored to said full salary by June 30, 2020 (the Step 2 safe harbor calculation), you have to go to Step 3 and calculate the actual amount of the reduction in loan forgiveness for that employee.

STEP 3: Determining the Forgiveness Reduction Amount for Salaried Employees

Exclude from this test all salaried employees making more than $100,000.00 in 2019;
Identify all salaried employees earning less than $100,000 (these are “Applicable Employees”);
Make a five (5) column chart or spreadsheet with the names of all identified Applicable Employees listed down the left side who were less than .75 (75%) in Step 1 above and did not meet the safe harbor exception in Step 2 above (salary level was not restored to 100% by June 30, 2020);
In the 1^st column, for each Applicable Employee, put the average annual salary paid to that employee over the 1^st quarter of 2020 (Total of 1^st quarter salary x 4);
In the 2^nd column, for each Applicable Employee, multiply the total in the 1^st column by 75%;
In the 3^rd column, for each Applicable Employee, put the average annual salary paid to the employee during the eight‑week PPP Loan period [(Total salary, bonuses and other cash compensation paid during the eight weeks ÷ 8) x 52];
Compute the dollar difference between 75% of what each Applicable Employee received in 2020 1^st quarter average annual salary (Column #2) by subtracting the amount of average annual salary the employee actually received for the eight‑week period (Column #3) and the resulting amount goes in the 4^th column (Note: if the employee received more average annual salary in the eight‑week PPP Loan period then the 75% amount in Column #2, then just enter -0- in Column #4; you cannot enter a negative number. This employee should have met the tests of Step 1 and/or Step 2 and not be on this chart.);
If there is a positive dollar amount in Column #4 then:

For Salary Employees: multiply the amount in Column #4 by 8 and then divide this amount by 52. This dollar amount becomes the dollar amount entered in Column #5 and on the Application worksheet as the amount of PPP Loan forgiveness reduction related to that employee.

Add up all the dollar amounts for the more than 25% reduction amounts for all of the Applicable Employees during the eight‑week period itemized in Column #5 and this aggregate dollar amount decreases the amount of the PPP Loan that is forgivable.

Example Worksheet:

	COLUMN #1	COLUMN #2	COLUMN #3	COLUMN #4	COLUMN #5
	AVERAGE ANNUAL SALARY PAID IN 1^ST QUARTER	75% OF 1^ST QUARTER AVERAGE ANNUAL SALARY	AVERAGE ANNUAL SALARY PAID IN 8‑WEEK COVERED PERIOD	DOLLAR AMOUNT OF SALARY REDUCED BY MORE THAN 25%	MULTIPLY COLUMN #4 BY 8 AND THEN DIVIDE BY 52 TO GET REDUCTION IN LOAN FORGIVENESS
Employee A	$52,000.00	$39,000.00	$41,600.00	-0-	-0-
Employee B	$52,000.00	$39,000.00	$32,500.00	$6,500.00	$1,000.00
Employee C	$20,000.00	$15,000.00	$13,375.00	$1,625.00	$250.00
Employee D	$60,000.00	$45,000.00	$40,000.00	$5,000.00	$769.23
					$2,019.23

Example: Assume Employee A made a total of $13,000.00 during the 1^st quarter of 2020 (January 1 – March 31). Multiply that amount by 4 to get an average annual salary of $52,000.00 (Column #1). 75% of $52,000.00 is $39,000.00 (Column #2). Assume Employee A was paid a total of $6,400.00 during the 8 weeks of the PPP Loan. Divide $6,400.00 by 8 ($800/week average) and then multiply by 52 ($800 x 52) to get an average annual salary of $41,600.00 for the eight-week period. Because $41,600.00 is greater than $39,000.00 (which is 75% of the average annual salary for the 1^st quarter of 2020), there is no reduction in the loan forgiveness for Employee A. Employee A was paid an average annual salary during the PPP Loan eight-week Covered Period that was 80% of the average annual salary during the 1^st quarter of 2020 ($41,600.00 ÷ $52,000.00 = 80%). Employee A would have satisfied the Step 1 Test and should not have been listed on this worksheet. Employee B made the same amount as Employee A in the 1^st quarter of 2020. However, because of stay at home orders and the employee’s inability to work from home during the eight‑week PPP Loan period, Employee B was only paid a total of $5,000.00. Take $5,000.00 divided by 8 = $625.00 per week and then multiply by 52 to get $32,500.00 as the average annual salary for Employee B during the eight-week PPP Loan period (Column #3). Accordingly, Employee B was paid only 62.50% of average annual salary/wages over the 8 weeks when compared to the 1^st quarter of 2020 ($32,500.00 ÷ $52,000.00 = 62.50%). Employee B’s total average salary decreased by more than 25% (it reduced by 37.50%). To simplify the calculation, again take 75% of the annual average 1^st quarter pay for Employee B of $39,000.00 (Column #2) and subtract the total average annual salary paid to Employee B over the eight‑week PPP Loan period of $32,500.00 (Column #3) to get the $6,500.00 amount (Column #4). Now it gets even more complicated. The $6,500.00 in Column #4 is based on annual average salary comparisons. In order to determine the amount of the PPP Loan reduction and forgiveness for Employee B, this annual amount needs to be converted to an eight-week amount to correspond with the eight-week PPP Loan period. The SBA uses the following formula for salaried workers to determine the actual amount of reduction in the loan forgiveness amount.

If the employee is a salaried worker, you multiply the total dollar amount that exceeds 25% (in our example, $6,500.00 in Column #4) by 8 and then divide by 52 [($6,500.00 x 8 = $52,000.00), then ÷ by 52 = $1,000.00)]. The amount of reduction in loan forgiveness related to this employee is $1,000.00 (Column #5). Then, add up all reduction amounts for all Applicable Employees in Column #5. This is the total amount of the reduction in loan forgiveness. In the above example, the reduction in loan forgiveness totals $2,019.23.

For hourly employees, the Application puts forth a different formula for calculating the amount of potential reduction in loan forgiveness. For hourly employees, a comparison is made between the average hourly wage for each employee during the eight-week period to the average hourly wage of each employee (who made less than $100,000.00 annualized) during the 1^st quarter of 2020 (January 1, 2020 to March 31, 2020).

STEP 1:

Average hourly wage for ÷ Average hourly wage between = .75 or

Covered Period January 1, 2020 and March 31, greater

2020

If the answer/result is equal to or greater than .75 (75%), then the test is satisfied as to that employee, and zero (-0-) reduction is recorded for that employee on the Application. If the answer/result is less than .75 (75%), further calculations are required for each employee and go to Step 2.

STEP 2: Hourly Employee Wage Reduction Test—Safe Harbor

For any Applicable Employee whose average hourly wage during the eight-week period was less than .75 (75%) of that employee’s average hourly wage between January 1, 2020, and March 31, 2020, for each such Applicable Employee, you then do a calculation to see if the safe harbor is met. The determination of whether the safe harbor applies is as follows:

You enter the average hourly wage of each employee as of February 15, 2020.
You calculate the average hourly wage for each employee between February 15, 2020, and April 26, 2020. This time period is approximately 10 weeks, so take the total cash compensation paid to each employee between February 15, 2020, and April 26, 2020, and divide by the number of hours worked during that 10-week period to get the average hourly wage.
If the average hourly wage between February 15, 2020, and April 26, 2020, is greater than the average hourly wage as of February 15, 2020, then the hourly wage reduction test is satisfied and there is zero (-0-) reduction in loan forgiveness amount for this employee.
However, if the average hourly wage between February 15, 2020, and April 26, 2020, is less than the average hourly wage as of February 15, 2020, then determine the average hourly wage of the employee as of June 30, 2020. While the Application refers to the “average” hourly wage of each employee as of June 30, 2020, the Regulations clearly state that if an employee’s hourly wages was reduced between February 15, 2020, and April 26, 2020, but the reduction in hourly wage is eliminated by June 30, 2020, or earlier, the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in wages. In other words, in order to meet the safe harbor exemption, the employer need only restore an employee’s hourly wage to the level it was before February 15, 2020, no later than June 30, 2020, and all of the cumbersome calculations can be avoided.
If an employee’s average hourly wage during the eight-week period is less than 75% of the average hourly wage paid to the employee in the first quarter of 2020 (the Step 1 calculation) and that employee’s average hourly wage was not restored to said full hourly wage by June 30, 2020 (the Step 2 safe harbor calculation), you have to go to Step 3 and calculate the actual amount of the reduction in loan forgiveness for that employee.

STEP 3: Determining the Forgiveness Reduction Amount for Hourly Wage

Employees

Exclude from this test all employees making more than $100,000.00 in 2019;
Identify all employees earning less than $100,000 (these are “Applicable Employees”);
Make a five (5) column chart or spreadsheet with the names of all identified Applicable Employees listed down the left side who were less than .75 (75%) in Step 1 above and did not meet the safe harbor exception in Step 2 above (hourly wage level was not restored to 100% by June 30, 2020);
In the 1^st column, for each Applicable Employee, put the average hourly wage paid to that employee over the 1^st quarter of 2020 (Total wages and cash compensation paid divided by total number of hours worked);
In the 2^nd column, for each Applicable Employee, multiply the total in the 1^st column by 75%;
In the 3^rd column, for each Applicable Employee, put the average hourly wage paid to the employee during the eight‑week PPP Loan period [(Total wages, bonuses and other cash compensation paid during the eight weeks ÷ total number of hours worked];
Compute the dollar difference between 75% of what each Applicable Employee received in 2020 1^st quarter average hourly wage (Column #2) by subtracting the amount of average hourly wage the employee actually received for the eight‑week period (Column #3) and the resulting amount goes in the 4^th column (Note: if the employee received a higher average wage in the eight‑week PPP Loan period then the 75% amount in Column #2, then just enter -0- in Column #4; you cannot enter a negative number. This employee should have met the tests of Step 1 and/or Step 2 and not be on this chart.);
If there is a positive dollar amount in Column #4 then:

For Hourly Workers: multiply the amount in Column #4 by the average number of hours worked per week by that employee in the 1^st quarter of 2020 and then multiply this amount by 8. This dollar amount becomes the dollar amount entered on the Application worksheet as the amount of PPP Loan forgiveness reduction related to that employee.

1. Add up all the dollar amounts for the more than 25% reduction amounts for all of the Applicable Employees during the eight‑week period itemized in Column #5 and this aggregate dollar amount decreases the amount of the PPP Loan that is forgivable.

Example Worksheet:

	COLUMN #1	COLUMN #2	COLUMN #3	COLUMN #4	COLUMN #5
	AVERAGE HOURLY WAGE PAID IN 1^ST QUARTER	75% OF 1^ST QUARTER AVERAGE HOURLY WAGE	AVERAGE HOURLY WAGE PAID IN 8‑WEEK COVERED PERIOD	DOLLAR AMOUNT OF HOURLY WAGES REDUCED BY MORE THAN 25%	MULTIPLY COLUMN #4 BY AVERAGE # OF HOURS WORKED IN 1^ST QUARTER OF 2020 AND THEN MULTIPLY BY 8 TO GET REDUCTION IN LOAN FORGIVENESS
Employee A	$20.00	$15.00	$16.00	-0-	-0-
Employee B	$20.00	$15.00	$12.00	$3.00	$960.00
Employee C	$15.00	$11.50	$10.00	$1.50	$480.00
Employee D	$11.00	$9.50	$9.00	$.50	$160.00
					$1,600.00

Example: Assume Employee A made an average of $20.00 per hour during the 1^st quarter of 2020 (January 1 – March 31) (Column #1). 75% of $20.00 is $15.00 (Column #2). Assume Employee A was paid $16.00 per hour during the 8 weeks of the PPP Loan (Column #3). Because $16.00 is greater than $15.00 (which is 75% of the average hourly wage for the 1^st quarter of 2020), there is no reduction in the loan forgiveness for Employee A. Employee A met the Step 1 Test and should not be on the chart. Employee B made the same average hourly wage as Employee A in the 1^st quarter of 2020. However, because of a reduction in wages during the eight‑week PPP Loan period, made an average of $12.00 per hour (Column #3). Accordingly, Employee B was paid only 60% of average hourly wage over the 8 weeks when compared to the 1^st quarter of 2020 ($12.00 ÷ $20.00 = 60%). Employee B’s average hourly wage decreased by more than 25% (it reduced by 40%). To simplify the calculation, again take 75% of the average 1^st quarter hourly wage for Employee B of $15.00 (Column #2) and subtract the average hourly wage paid to Employee B over the eight‑week PPP Loan period of $12.00 (Column #3) to get the $3.00 amount (Column #4). Now it gets even more complicated. Take the $3.00 in Column #4, multiply Column #4 by average number of hours worked in 1^st quarter of 2020 and then multiply by 8. For this example, assume all employees worked an average of 40 hours per week in the 1^st quarter of 2020. For Employee B, multiply the $3.00 in Column #4 by 40 and then multiply this total by 8 to get the dollar reduction amount in loan forgiveness related to this employee. [$3.00 x 40 = $120.00 x 8 = $960.00 (Column #5).] Then add up all reduction amounts for all Applicable Employees in Column #5. This is the total amount of the reduction in loan forgiveness. In the above example, the reduction in loan forgiveness totals $1,600.00.

In short, the safe harbor simply requires that the employee’s average annual salary AND AVERAGE HOURLY wages be 100% restored by June 30, 2020, and the safe harbor is met.

Recommendation: Make sure all employees are back to work and working their full number of hours per week that they worked AS of FEBRUARY 15, 2020 (in order to meet the full-time employee equivalent safe harbor) and make sure all employees are paid their full salaries AND HOURLY wages as of June 30, 2020 (in order to meet the salary/hourly wage reduction test safe harbor). As long as you meet the safe harbors, you will not have to go through the overly complicated ABOVE calculations for FTEs and salary/wage reduction tests.

SUPPORTING DOCUMENTATION FOR APPLICATION FOR LOAN
FORGIVENESS.

A borrower seeking loan forgiveness is required to submit an Application for loan forgiveness to the Lender. The Application developed by the SBA provides the borrower must submit the following supporting documentation to the Lender with the Application requesting loan forgiveness:

Documentation for eligible payroll costs paid with PPP Loan funds:

(a) Bank account statements (preferably bank account statements or an account history for the PPP Loan bank account)

(b) Payroll summaries or third-party payroll service provider reports documenting the amount of cash compensation (wages, salaries, commissions, bonuses, etc.) paid to employees

(i) payroll tax filings reported or that will be reported to the IRS (typically Form 941); and

(ii) state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported or that will be reported to the state

(d) For employer contributions to employee retirement plans and employer contributions for employee health insurance:

(i) Payment receipts or invoices;

(ii) Canceled checks or ACH transaction receipts showing payment

(e) For owner/partner compensation replacement, just like employee cash compensation, provide copies of:

(i) Bank account statements or account history (preferably for the PPP bank account);

(ii) Canceled checks or ACH transaction receipts.

Documentation verifying eligible non-payroll costs (business operating costs) paid with PPP Loan funds include:

(a) Business mortgage insurance payments;

(i) Lender amortization schedule or copy of the Promissory Note;

(ii) Lender monthly account statements from February 2020 through one month after the end of the eight-week Covered Period;

(iii) Payment receipts or canceled checks or ACH transaction receipts verifying payments;

(b) Business rent and equipment lease payments

(i) Copy of the Lease Agreement;

(ii) Monthly account statements from February 2020 through one month after the end of the eight-week Covered Period;

(iii) Copies of receipts or canceled checks or ACH transfer receipts verifying payments;

(i) Invoices from February 2020 through those paid during the eight-week Covered Period;

(ii) Monthly account statements/invoices

(iii) Receipts or canceled checks or ACH transfer receipts showing payment;

Documentation to verify the full-time equivalent employee (FTE) calculations. Include documentation showing:

(a) The average number of FTE employees on payroll per month employed by the borrower between February 15, 2019, and June 30, 2019; or

(b) The average number of FTE employees on payroll per month employed by the employer between January 1, 2020, and February 29, 2020; or

(c) In case of a seasonable employer, the average number of FTE employees on payroll for 12 consecutive weeks any time between May 1, 2019 and September 15, 2019.

Such documentation may include:

(i) Payroll summaries or equivalent third-party payroll service provider reports;

(ii) Payroll tax filings reported or that will be reported to the IRS (typically Form 941);

(iii) state quarterly business and individual employee wage reporting and unemployment insurance tax filings reported or that will be reported to the state.

Again, it is strongly recommended borrowers place all of the PPP Loan proceeds in a separate bank account in order to provide additional documentation evidencing PPP Loan proceeds were used and disbursed for eligible purposes. Also, attach the above documentation to spreadsheets and charts to itemize all payroll costs and non‑payroll costs paid from the PPP Loan funds. Sample spreadsheets are attached.

SAMPLE SPREADSHEET NO. 1

* This Guideline was prepared by Kurt L. Sundberg, Esq. of the law firm Marsh Law, LLP. This Guideline is based on the SBA Application for Loan Forgiveness and limited SBA regulations issued to date. The Application and regulations do not answer all issues and questions regarding use of PPP Loan funds and calculating, applying for and obtaining approval of PPP Loan forgiveness. While this Guideline generally covers many important areas of PPP Loan use and application for forgiveness, it does not cover all issues and cannot cover many different scenarios specific to particular types of businesses and lenders’ review of those Applications. Accordingly, this Guideline and sample forms should be considered for informational purposes only and businesses and lenders should work directly with their legal counsel for legal advice and directly with their accountant for tax advice when disbursing PPP Loan funds and applying for PPP Loan forgiveness.

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Paycheck Protection Program Loans (PPP Loans)

A guideline for small businesses and lenders on use of funds, and calculating, documenting, and applying for the amount of loan forgiveness for Paycheck Protection Program Loans (“PPP Loans”)

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