Check out our COVID-19 Resource Center for the latest on government relief programs, product updates, and more.
Check out our COVID-19 Resource Center for the latest on government relief programs, product updates, and more.


PPP Loan Forgiveness Comes With Strings Attached

Vanessa Wu — May 18, 2020

Late last Friday, millions of businesses that have been anxiously waiting to hear how they can get their Paycheck Protection Program (PPP) loans forgiven finally got an answer…sort of. Three weeks after the original deadline, the Treasury Department and Small Business Administration (SBA) released a PPP loan forgiveness application, but no “instruction manual” to go along with it.

Update 5/25/20: Late on Friday, May 22, the government released two “interim final rules” (here and here) to guide borrowers and lenders with the loan forgiveness process.

The 11-page form gives a first look into how the government will assess loan forgiveness — and raises almost as many questions as it answers. More guidance is expected this week. In the meantime, we’ve summarized the essential rules to know and how to get your application in order, step-by-step.

Congress created PPP back in April to encourage companies with fewer than 500 employees to keep people on payroll through the economic turmoil caused by COVID-19. But business owners have discovered that the loan, which was billed as “100% forgivable” (aka free government money), actually comes with quite a few strings attached. 4.4 million loans totaling over $500 billion have already been approved.

What are the rules for PPP loan forgiveness?

Federal agencies have issued more than 41 pieces of guidance on PPP. The barrage of rule changes have left borrowers scrambling to figure out whether they still qualify, how and when to use the funds, and if the loan is even worth the trouble. Here’s what we know so far about loan forgiveness:

The Good

  • Loan forgiveness will not be reduced for borrowers who made a “good-faith, written offer” to rehire workers if the offer was declined. Many business owners have reported difficulties hiring back workers who are making more money from unemployment benefits or fear being exposed to the virus. Treasury designed the application so borrowers won’t be penalized for this scenario: No loan forgiveness reduction will apply to any employee who declines a good-faith, written offer to return to work, or for full-time employees who were fired for cause, voluntarily resign, or voluntarily request a reduction in hours. 
  • Payroll costs include those “paid” and “incurred but not paid out” during the forgiveness period. Borrowers may include payroll costs paid during the 8-weeks but incurred previously (although how far back is anybody’s guess). They may also include costs “incurred but not paid” until the next regular pay period. If you weren’t planning on paying out expenses like sales commissions until the end of the quarter, consider doing it sooner so they qualify for loan forgiveness.
  • PPP loans that are not forgiven become low-interest loans. Complete forgiveness doesn’t need to be the goal for every business. The loan has a low, 1 % interest rate over the course of two years, no payments necessary during the first six months, and no prepayment penalties. 

The Bad

  • PPP loans must be spent in the 8 weeks after funds are received to qualify for forgiveness, with up to a two-week delay for payroll timing. Because many state and local shutdowns are lasting longer than expected, politicians and industry groups have pushed for an extension to the 8-week loan forgiveness window to give businesses more flexibility. Unfortunately, the newly-released application doesn’t give borrowers much room to maneuver. They can only delay the start of their two-month forgiveness period up to two weeks after funds are received to align with their next payroll. Congressional leaders have pledged to extend the timeline, but for now the rule is “use it or lose it.”
  • 75% of the loan must be used to cover payroll costs. Many borrowers hoped that this requirement would be removed or lowered given that it doesn’t appear in the CARES Act, the law that created the PPP. No such luck. A recent Inspector General report noted that “tens of thousands of borrowers” won’t be able to meet this requirement and will have to repay the funds. Some have suggested that this could be why more than of 25% of small businesses never even bothered applying for PPP.
  • It’ll be a pain to calculate loan forgiveness reductions. The amount of a PPP loan that’s forgivable is reduced if business owners cut jobs or wages. With the new application, the Treasury has clarified that businesses will need to calculate an average “full-time equivalency” number for every employee — a painstakingly granular process. More on how this works in the calculation section below.

The Ugly (Fine Print)

  • Get ready to provide lots of supporting documentation — and keep it for six years. Yes, you read that correctly. The application states that businesses are required to retain all PPP applications and supporting documents for six years. It also warns that the “SBA may request additional information for the purposes of evaluating the Borrower’s eligibility for the PPP loan . . . [and] failure to provide information requested by SBA may result in a determination that the Borrow was ineligible.” So get those documents in order and into a safe place — more on that below.
  • Borrowers must certify again that they’re eligible for the loan and can prove their need. There’s lots of intimidating legalese in the application, which reflects growing scrutiny of successful businesses that obtained PPP loans. Borrowers from Shake Shack and Ruth’s Chris steakhouses to the LA Lakers have returned their loans under pressure. 
  • The application includes seven new certifications that borrowers must sign under penalty of civil and criminal penalties. Notably, the form asks whether borrowers received a loan of more than $2 million. SBA said it would provide safe harbor to all borrowers of less than $2 million, in terms of deeming their certifications to have been made in good faith. But the government plans to audit all loans over that amount, and borrowers will be required to show the money was necessary to keep their operations running and that they had limited access to other funding. 
  • It’s worth noting that today (May 18) is the last today for borrowers to return loans with no-questions-asked.

We’ll update this post as more guidance becomes available. Submit your questions on loan forgiveness here and we’ll answer as many as possible. Read on for the nitty gritty on calculating and documenting loan forgiveness.

What do I need to apply for loan forgiveness?

The PPP loan forgiveness application is long, dense, and written in legalese. Worse, it tends to jump around. For example, in order to fill in Line 1 of the application, you need to enter Line 10 of a separate form (PPP Schedule A), which in turn can only be calculated after filling out two worksheets. 

If that sounds confusing, don’t despair! While we await additional SBA guidance, here’s what you need to do to prepare your loan forgiveness application — in plain English:

  • Calculate eligible loan forgiveness amount, including:
    • Eligible payroll costs
    • Eligible non-payroll expenses
    • Full-time employee and wage reductions 
  • Create, gather, and/or maintain documentation for all of the above

How to calculate loan forgiveness amount

There are a few main components to calculating loan forgiveness:

  1. You will need to calculate eligible payroll costs. 
  2. You will need to calculate eligible non-payroll costs, capped at 25% of total loan forgiveness spend (or one-third of eligible payroll costs).
  3. You will need to calculate any wage reductions (if applicable).
  4. You will need to calculate your full-time employee (FTE) reduction quotient.

Once you have these four numbers — eligible payroll costs, eligible non-payroll costs, wage reductions, and FTE reduction quotient — you will be able to calculate your loan forgiveness as follows:

PPP Loan Forgiveness Amount = (Payroll Costs + Non-Payroll Costs – Wage Reductions) x FTE Reduction Quotient

Note that your PPP Loan Forgiveness Amount cannot exceed the amount of your original PPP Loan. Additionally, if you applied for and received an Economic Injury Disaster Loan (EIDL), then the SBA will deduct the amount of any EIDL advance from your PPP Loan Forgiveness Amount.

Calculating Eligible Payroll Costs

Step 1: Select the applicable time period. 

  • For the purposes of calculating eligible payroll costs, you may choose to use one of two applicable time periods: 
    • Option 1 – Covered Period: 8 weeks following your loan disbursement date, the date that you received your PPP loan from your lender, or 
    • Option 2 – Alternative Payroll Covered Period: 8 weeks beginning on the next regular pay period following your loan disbursement date, provided that you run payroll on a bi-weekly or more frequent basis. 
  • Please note that if you regularly run payroll on a semi-monthly or monthly basis, you will need to use the time period indicated in Option 1 – Covered Period.

Step 2: Calculate aggregate payroll costs.

  • Include employee compensation in the United States, cash tips, paid leave, employee portion of health insurance and retirement, employee portion of all federal, state, and local taxes, and any dismissal or separation payments.
  • Include the above payroll costs paid during the applicable time period.
  • Include the above payroll costs incurred but not paid until the next regular payroll date after the applicable time period. Please note that incurred payroll costs paid after that next payroll date after the applicable 8-week period (such as commissions paid on a delayed schedule) should not be included. Consider accelerating the timing of your payment of commissions and bonuses so that they qualify for loan forgiveness.

Step 3: Check for and remove any exclusions, such as:

  • Compensation for employees outside the United States
  • Compensation for independent contractors (1099s)
  • Employer portion of federal employment taxes, including FICA, Railroad Retirement Act taxes, and income taxes
  • Any sick and family leave wages that are eligible for tax credits under the Families First Coronavirus Response Act (FFCRA)

Step 4: Apply the $100,000 cap per employee.

  • Aggregate payroll cost per employee should be capped at $100,000 on an annualized basis.

Step 5: Add employer portion of state and local taxes as well as benefits.

  • Include health insurance premiums and employer contributions to health FSAs and retirement funds.
  • Include the employer portion of state and local taxes.

Step 6: Done — this will be your Eligible Payroll Costs

If you’re a Rippling customer, we’re creating a report to automatically calculate your eligible payroll costs — you’ll be notified when it’s available. 

If you’re not a Rippling customer or you would like to run your own calculations, we recommend the AICPA’s PPP loan forgiveness calculators.

Calculating Eligible Non-Payroll Costs

Step 1: Use the correct applicable time period. 

  • For the purposes of calculating eligible non-payroll expenses, you must use the 8 weeks following your loan disbursement date. 

Step 2: Calculate aggregate non-payroll costs.

  • Include covered mortgage obligations, rent obligations, and utility payments provided that such obligations or services began before February 15, 2020. Essentially, you can’t claim non-payroll costs for brand new expenses.

Step 3: Calculate your cap for non-payroll costs.

  • Non-payroll costs cannot be more than 25% of the total loan forgiveness amount. The easiest to calculate this cap is to divide your “Eligible Payroll Costs” by 3.
  • For example, if your Eligible Payroll Costs are $75,000, then your Non-Payroll Costs Cap will be $75,000 divided by 3, or $25,000.

Step 4: Compare Step 2 and Step 3, and take the smaller number.

  • Using the example in Step 3, if your Aggregate Non-Payroll Costs are $50,000, but your Non-Payroll Costs Cap is $25,000, then you may only claim $25,000 in Eligible Non-Payroll Costs for the purposes of loan forgiveness. 

Step 5: Done — this will be your Eligible Non-Payroll Costs. 

Please check out the AICPA PPP loan forgiveness calculators and worksheets if you require additional assistance in running these calculations. 

Calculating Your FTE Reduction Quotient

The PPP loan forgiveness rules state that you may only apply for 100% loan forgiveness if you have maintained the headcount of your employees. If you have reduced headcount, then the amount of loan forgiveness that you can apply for must be proportionally reduced. The PPP Loan Forgiveness Application calls this reduction ratio the “FTE Reduction Quotient.”

Step 1: Learn how to calculate your headcount (aka total full-time equivalent employees or “Total FTEs”) during an applicable time period.

  • First, calculate the average full-time equivalency (“Average FTE”) of each employee paid wages during the applicable time period. By using a “full-time equivalent” calculation, your part-time employees will count as fractions of full-time employees. You may calculate Average FTE in two ways:
    • Option 1 – Detailed Version: Calculate the average number of weekly hours worked during that time period, divide by by 40 hours, round to the nearest tenth, and cap at 1.0. 
      • For example, if you have a FTE who worked an average of 40 hours a week, then the Average FTE for that employee would be 1.0. If that same employee worked an average of 50 hours a week, the Average FTE would still be 1 because of the cap. However, if that employee worked an average 30 hours a week, then the Average FTE for that employee would be 0.8 (0.75 rounded up to the nearest tenth is 0.8).
    • Option 2 – Simplified Version: Assign an Average FTE of 1.0 for each employee who worked 40 hours or more per week and assign an Average FTE of 0.5 for each employee who worked less than 40 hours per week. In the simplified version, all employees essentially count either as full employees or half employees.
  • Second, add up the Average FTEs to arrive at your Total FTEs. 

Step 2: Check to see whether one of the “FTE Reduction Safe Harbors” applies.

  • Did you decrease your average Total FTEs between February 15, 2020 and April 26, 2020, but restore your average Total FTE levels by June 30, 2020?
  • Did your average Total FTEs remain the same or increase between January 1, 2020 and the last day of your applicable 8-week payroll period?
  • If you answered “yes” to either question, then you will not need to reduce your PPP loan forgiveness amount and your FTE Reduction Quotient will be “1.” You can skip Steps 3 to 5 below.

Step 3: Calculate your headcount (Total FTEs) during the applicable 8-week time period used to calculate your Eligible Payroll Costs

  • For the purposes of determining the Total FTE of this time period, you may count employees that you tried to rehire with a good faith, written offer, those employees who were fired for cause, voluntarily resigned, or voluntarily requested a reduction in hours, provided that these roles were not filled by new employees (aka “FTE Reduction Exceptions”).

Step 4: Calculate your headcount (Total FTEs) during your chosen reference period 

  • You may choose one of two reference periods: 
    • February 15, 2019 to June 30, 2019, or 
    • January 1, 2020 to February 29, 2020. 
  • Note that seasonal employers may also select a consecutive 12-week period between May 1, 2019 and September 15, 2019.

Step 5: Divide Step 3 by Step 4 and cap at 1.0.

Step 6: Done — this will be your FTE Reduction Quotient

Calculating Your Wage Reductions (if applicable)

Wage reductions only apply if:

  • You have employees who make less than $100,000 in annualized earnings;
  • You reduced wages by more than 25% as compared to wages from January 1, 2020 to March 31, 2020; and,
  • You do not restore wages by the last day of your 8-week time period or June 30, 2020.

If all of the conditions above apply to your business, then you will need to subtract those wage reductions from your loan forgiveness totals. Please review the bottom of Page 7 of the PPP Loan Forgiveness Application for a worksheet on how to calculate the “Salary/Hourly Wage Reduction.” This Forbes article provides a very detailed breakdown with examples of these complex wage reduction calculations.

How to collect supporting documentation

What do I need to submit with the PPP Loan Forgiveness Application?

  • PPP Loan Forgiveness Calculation Form
  • PPP Schedule A
  • Payroll documents, including: 
    • (a) bank accountment statements or third-party payroll service reports, 
    • (b) tax forms or equivalent third-party payroll service reports, 
    • (c) documents showing employer contributions to employee health insurance and retirement plans
  • FTE documents

What documents do I need to keep and for how long?

You will need to maintain records of your applications and documents supporting the representations made in those applications for six years. We suggest that you get a head start on gathering these documents, digitizing them, and storing them in a safe place. Maintaining good record keeping practices will be important should the SBA challenge your loan eligibility or loan forgiveness application, or request additional information from you.

Specifically, you will need to maintain records of:

  • All documents submitted with or supporting your PPP Loan Application, including:
    • PPP Loan Application
    • Documents submitted with your PPP Loan Application
    • Documents supporting borrower’s certifications as to necessity and eligibility
    • Documents showing compliance with PPP requirements
  • All documents submitted with or supporting your PPP Loan Forgiveness Application, including:
    • PPP Loan Forgiveness Application
    • Documents submitted with your PPP Loan Forgiveness Application
    • Schedule A Worksheet or equivalents
    • Documents supporting the listing of each individual employee in PPP Schedule A Worksheet Table 1 and Table 2
    • Documents supporting the PPP Schedule A Worksheet “FTE Reduction Safe Harbor,” including documents regarding any full-time employee job offers and refusals, firings for cause, voluntary resignations, and written requests by any employee for reductions in work schedule. 

Vanessa Wu is the General Counsel of Rippling where she does lawyerly things.


COVID-19 Resource Center

The Rippling TeamApr 13, 2020