Since our April FAQ on the “Paycheck Protection Program” (PPP), the government has released the PPP loan forgiveness application, and there have been other notable developments. This alert will highlight some of the key points relevant to small business owners. This information is believed accurate at the time of this writing, but new information becomes available on an almost daily basis. We assume some familiarity with the fundamentals of the PPP at this point, but please contact us with any questions. 

Additionally, borrowers who have applied for loans under the Small Business Administration’s (SBA) Economic Injury Disaster Loan (EIDL) program, which is separate from the PPP, are starting to see loan documentation from the SBA. Loans under the EIDL cannot be forgiven. In addition to the terms that borrowers would expect to see in a regular corporate loan agreement, EIDL loans have some unique government requirements. Please contact us if you are considering an EIDL and would like us to advise you.

“Safe Harbor” Created for the Required Business Necessity Certification

Recall that when submitting a PPP application, borrowers had to certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” While this language simply tracks the statutory requirement in the CARES Act which created the PPP, the SBA responding to reports of abuses later issued guidance suggesting that they were going to take a very close look at the facts surrounding a borrower’s certification. This had the effect of making many small business owners question whether it was worth the hassle to accept PPP funds.

Perhaps realizing that they had moved the goal posts too far, the SBA has provided additional new guidance stating that any PPP borrower, together with its affiliates, that has received less than $2 million will be deemed to have made the required certification in good faith. This effectively means that these borrowers will not have to worry about being second guessed by the government regarding whether they really needed the PPP funds. Borrowers who received $2 million or more, however, can expect to be audited by the SBA to confirm their certifications. Fortunately, if the SBA determines that a greater than $2 million borrower did not have an adequate basis for making the required certification and the borrower then repays the loan, the latest guidance states that the borrower will not face civil or criminal penalties.

All PPP borrowers are cautioned that the government can nevertheless be expected to vigorously pursue any fraud or other outright misconduct in connection with the PPP, notwithstanding this guidance.

Possible Loosening of the Time Period to Spend the PPP Loan Proceeds and the 75% Requirement

There is bipartisan support in Congress for extending the eight-week deadline that borrowers have to spend PPP loan proceeds in order to receive loan forgiveness. On May 28, the House of Representatives voted 417 to 1 on a bill to extend the eight-week period to 24 weeks or until the end of the year, whichever comes first (the year end date may be relevant for PPP loans funded in the future). The Senate is expected to take up the measure in the next few days. While it seems likely that the deadline will ultimately be extended, borrowers should continue to operate under the assumption that the eight-week limitation remains in effect until definitive changes are signed into law. Note that even under current rules there is some flexibility to pay for expenses after the eight-week period if they were actually incurred during this period. See below. The same House bill would also change the requirement that 75% of PPP loan proceeds be used for payroll expenses to 60%.

Taxability of Loan Forgiveness

Ordinarily, when a lender forgives all or part of loan, the borrower will have to treat the amount of loan forgiveness as taxable income and pay income tax on that amount. In this case, the CARES Act specifically provides that loan forgiveness under the PPP is not taxable to the borrower.

However, the Internal Revenue Service is not on the same page as the rest of the government and has publicly stated that while the forgiveness of the loan does not constitute income, taxpayers cannot deduct any expenses that they pay with PPP loan proceeds that are ultimately forgiven. In most cases, this has the same practical effect as taxing the amount of PPP loan forgiveness. While there is some theoretical support for the IRS’ position, it seems clearly to violate the intent and spirit of the CARES Act. There has been talk in Congress about new legislation to overrule the IRS, but as of this writing no definitive action has been taken.

Loan Forgiveness Application

On May 15, 2020, the SBA released its Loan Forgiveness Application for the PPP, and on May 22, 2020, the SBA released an “Interim Final Rule” providing more details on the loan forgiveness process. The application consists of four documents: (1) the PPP Loan Forgiveness Application Form, (2) the PPP Schedule A, (3) a worksheet for completing the Schedule A (which is not submitted with the application) and (4) an optional PPP Borrower Demographic Information Form. The application also lists various required documentation that borrowers should submit with the application and/or keep as backup. The application is submitted directly to the borrower’s lender who then has 60 days to review it. The SBA then has an additional 90 days to review the lender’s decision. Borrowers should take the time to review the application closely (see Loan Forgiveness Application), but certain noteworthy points are described below:

— Payroll Expenses. As a reminder, only permissible payroll and non-payroll expenses paid during the eight-week period starting on the date the PPP loan is disbursed to a borrower (the “Covered Period) are eligible for forgiveness (see here and here for discussion of permissible expenses), and at least 75% of PPP loan proceeds must be used for permissible payroll expenses. Instead of using the Covered Period, in the case of payroll expenses only (and only for borrowers with a biweekly or more frequent payroll), borrowers may, for administrative convenience, elect to start the eight-week period on the first day of the next regular pay period following loan disbursement. This eight-week period is referred to as the “Alternative Payroll Covered Period” in the application. Note that borrowers electing to use this alternative period must still use the regular Covered Period starting on the day of loan disbursement for all non-payroll expenses. It appears that borrowers who pay their employees on a semi-monthly or monthly basis may not use the Alternative Payroll Covered Period. Eligible payroll costs include payroll costs actually paid during the relevant eight-week period and/or “incurred” during this period.* Payroll costs are incurred on the day that an employee’s pay is earned. Payroll costs incurred during the last payroll period of the relevant eight-week period are eligible for forgiveness if paid on the next regular payroll date, even if outside the eight-week period.

— Timing of Payment of Non-payroll Expenses. All eligible non-payroll expenses (which cannot be more than 25% of PPP loan proceeds) must either be (1) paid during the regular Covered Period starting on the date of the PPP loan disbursement or (2) 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. 

— Business and Equipment Leases are Eligible Expenses. There was some uncertainty about whether PPP proceeds could be used to pay for non-real estate related releases, such as equipment leases and business automobile leases. The PPP loan forgiveness application confirms that loan proceeds can in fact be used to pay for these expenses, so long as they relate to leases entered into prior to February 15, 2020. Interest (but not principal payments) on business loans and mortgages remain eligible for forgiveness under the PPP, again so long as the related loan was in effect prior to February 15, 2020.

— Forgiveness Relief in the Case of Certain Employees Who Do Not Return to Work. To qualify for full forgiveness, borrowers must maintain their full-time equivalent employee (FTE) levels at pre-coronavirus levels. Probably recognizing that the CARES Act’s enhanced unemployment benefits creates a disincentive to return to work for some individuals, the SBA has declared that if a laid off employee declines to return to work when offered the opportunity (for the same salary/wages and hours) then that will not count against borrowers in determining loan forgiveness. The offer of re-employment must be made in writing, and the borrower must retain documentation of the rejection. Additionally, employees who during the eight-week period (1) are fired for cause, (2) voluntarily resign or (3) voluntarily request and receive a reduction in work hours will also not count against borrowers in determining PPP loan forgiveness.

Employees who reject offers to return to work may also jeopardize their eligibility for unemployment benefits, and SBA rules require companies seeking loan forgiveness to alert state unemployment offices within 30 days if workers reject offers to return to work.** Borrowers should consider informing employees of this requirement.

— FTE Reduction Safe Harbor. Borrowers who cut employees during the period February 14, 2020 through April 26, 2020, but then restored their FTE levels by no later than June 30, 2020 to at least their level on February 15, 2020 are not subject to any reduction in loan forgiveness.

— FTE Calculation. The application form states that the calculation of FTEs is based on a 40-hour work week, and for purposes of this calculation, no employee is given credit for working more than 40 hours per week. There is a simplified optional alternative calculation that borrowers can use that treats all employees who work 40 hours or more per week as 1.0 FTE and all employees who work less than 40 hours per week as 0.50 FTE. Any employee who was employed at any point during the eight-week period is included in the FTE calculation. Some borrowers who pay full-time employees on the basis of a less than 40-hour week (i.e., a 35 hour week) may feel that they are being penalized, but the way the math works, they should receive full loan forgiveness so long as they maintain employment levels and hours throughout the period (and otherwise qualify). However, these borrowers should not use the simplified optional FTE calculation method.

— Business Owners and Self-employed. In regard of their own pay or “owner compensation replacement” business owners (owner-employees and self-employed) can apply for forgiveness of up to the lesser of (1) eight weeks (8/52ths) of their actual 2019 compensation (cash compensation plus retirement and health contributions paid on their behalf for owner-employees only and Schedule C income for self-employed)*** or (2) $15,385.  To be eligible for forgiveness, this amount must have actually been paid out to the individual during the Covered Period. Individuals who are general partners are generally treated the same as the self-employed, with some adjustments. Business owners and self-employed are, of course, eligible for forgiveness for applicable payroll expenses of other employees and other permitted overhead expenses.

— Records. Borrowers must keep all PPP records including relevant backup for loan forgiveness for at least six years after the loan is forgiven or repaid. Borrowers must also allow the SBA to access these records at any time during the six-year period.


Scott KislinOf Counsel; (646) 680-9664 direct; (917) 696-5525 mobile; skislin@ndgallilaw.com

Nicole D. Galli; Managing Member; (215) 525-9583 direct (PHL); (646) 680-9661 direct (NYC); ndgalli@ndgallilaw.com

* So, there is some room to include a little more than eight weeks of payroll expenses in the forgiveness calculation (which among other things may be helpful for purposes of meeting the 75% test) by counting expenses actually paid during the relevant eight week period (even if incurred prior to the start of this period) plus expenses incurred during the period and paid by the next payroll date after the period ends.

** The SBA has said that information on how to report these workers to state unemployment insurance offices will be posted on the SBA website at a later date.

*** It does seem anomalous that owner-employees can include their own health insurance contributions in this calculation but not self-employed individuals who file Schedule Cs. But this is nevertheless the clear result from the application form and the regulations.

Paycheck Protection Program Update