Paycheck Protection Program Update – SBA Issues Guidance on Loan Forgiveness and Loan Review Procedures

May 28, 2020 | Insights

Current through guidance issued on May 22, 2020

By Lindsey Berwick & John Wittenberg


On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, providing emergency economic stimulus to small businesses and certain eligible recipients in response to the economic distress caused by the COVID-19 pandemic, was signed into law. The CARES Act made available, through the Keeping American Workers Paid and Employed Act, $349 billion in loans under the Paycheck Protection Program (PPP) (under SBA 7(a) loan program).

On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement (PPPHCE) Act, which, among other things, amends and supplements the CARES Act by increasing funding to small businesses, states, municipalities, and hospitals, including an additional $310 billion to the PPP, was signed into law. The PPPHCE Act did not generally alter the PPP loan eligibility requirements, application process, or loan forgiveness rules, and it did not change SBA affiliation rules that apply to PPP loan applicants.

On May 15, 2020, the Small Business Administration (SBA) published the Paycheck Protection Program Loan Forgiveness Application. Following the publication of the Application, on May 22, 2020, the SBA and Treasury Department issued two interim final rules concerning PPP loan forgiveness. One of the interim final rules outlines the requirements for having PPP loans forgiven. The other rule provides direction on lenders’ duties during the forgiveness period, along with the SBA process and procedures for reviewing loans. Below is a summary of the key provisions of these rules and other relevant guidance issued by the SBA and Treasury with respect to PPP loan forgiveness.

Authorized Use of PPP Loan Proceeds

As a brief reminder, PPP loan proceeds may only be used for the following: 

  • Payroll costs (capped at $100,000 on an annualized basis for each employee);
  • Costs related to the continuation of group health care benefits during periods of paid sick, family, or medical leave, and insurance premiums;
  • Payments of interest on any mortgage obligation (principal payments are excluded) incurred before February 15, 2020;
  • Rent payments, under lease agreements that were in effect before February 15, 2020;
  • Utilities, for which service began before February 15, 2020;
  • Servicing interest on other debt obligations incurred before February 15, 2020; and
  • Refinancing an SBA Economic Injury Disaster Loan made between January 31, 2020, and April 3, 2020.

PPP Loan Forgiveness Application

Loan forgiveness is not automatic; borrowers must request it through their PPP lender. In order to apply for forgiveness, the borrower must complete and submit to its lender an Application (See Jackson Walker’s alert “Paycheck Protection Program Loan Forgiveness Update” issued May 18, 2020). The Application has an expiration date of October 31, 2020, suggesting that October 31 is the deadline for borrowers to submit applications to their lenders. However, the CARES Act and guidance issued to date have not established a formal deadline. It is advisable that borrowers apply as soon as practicable in order to lessen the interest carry associated with their PPP loan and the possibility of additional guidance that may negatively impact their Application. Borrowers should also continue to monitor developments in this area as the SBA and Treasury may issue additional guidance that establishes an outside date by which the Application must be filed.

The Application form details the required documentation; specifically, documentation each borrower (a) must submit with the Application, (b) is required to maintain and make available upon request, and (c) may voluntarily submit with the Application.

Costs and Payments Eligible for Forgiveness

  • Costs and Payments. Borrowers are eligible for forgiveness for the following costs and payments made and during the covered period:
    1. Payroll costs;
    2. Interest payments on any business mortgage obligation on real or personal property incurred before February 15, 2020 (but not any prepayment of principal or advance payments of interest);
    3. Payments of business rent obligations on real or personal property under a lease agreement in force before February 15, 2020; and
    4. Business utility payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020.

The CARES Act defines the term “payroll costs” broadly to include compensation in the form of salary, wages, commissions, or similar compensation, and includes bonuses (proration not mandated) and hazard pay.[1] In addition, if the borrower pays furloughed employees their salary, wages, or commissions during the covered period, those payments are eligible for forgiveness as long as they do not exceed an annual salary of $100,000, as prorated for the covered period.

  • Payroll Costs Eligible for Forgiveness
    • Covered Period/Alterative Payroll Covered Period. Payroll costs paid or incurred during the eight consecutive week (56-day) period are eligible for forgiveness. Borrowers may seek forgiveness for the eight weeks beginning on either:
      1. Covered Period: The first date on which the borrower received PPP loan proceeds (“PPP Loan Disbursement Date“). If the borrower received multiple disbursements of its PPP loan proceeds, then the PPP Loan Disbursement Date is the date the borrower first received a disbursement of its PPP loan proceeds.
      2. Alternative Payroll Covered Period: Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the 8-week (56-day) period that begins on the first day of the borrower’s first pay period following the PPP Loan Disbursement Date.
    • “Paid” Date – Payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction. Payroll costs incurred during the borrower’s last pay period of the covered period or the alternative payroll covered period are eligible for forgiveness if paid on or before the next regular payroll date; otherwise, payroll costs must be paid during the covered period (or alternative payroll covered period) to be eligible for forgiveness.
    • “Incurred” Date – Payroll costs are generally incurred on the day the employee’s pay is earned (i.e., on the day the employee worked). 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).
  • Limitations on Payroll Costs Eligible for Forgiveness for Owner-Employees and Self-Employed Individuals. The amount of loan forgiveness requested for owner-employees and self-employed individuals’ payroll compensation can be no more than the lesser of 8/52 of 2019 compensation (i.e., approximately 15.38% of 2019 compensation) or $15,385 per individual in total across all businesses.
  • Nonpayroll Costs Eligible for Forgiveness. A nonpayroll cost is eligible for forgiveness if it was:
    • paid during the covered period; or
    • incurred during the covered period and paid on or before the next regular billing date, even if the billing date is after the covered period.
  • Limitations on Nonpayroll Costs Eligible for Forgiveness. Eligible nonpayroll costs cannot exceed 25% of the total forgiveness amount (at least 75% of the forgiveness amount must be attributable to payroll costs).

Reductions in Loan Forgiveness – Reduction in FTEs or Salary/Wages

Subject to a statutory exemption for borrowers who have rehired employees and restored salary/wage levels by June 30, 2020, reductions in the borrower’s loan forgiveness amount are based on reduction of the following during the covered period:

    1. full-time equivalent (FTE) employees[2]; or
    2. employee salary and wages.
  • Reduction in FTEs
    • Amount of Reduction; Statutory Exemption. If the average number of FTE employees during the covered period or the alternative payroll covered period is less than during the reference period (described below), the total eligible expenses available for forgiveness is reduced proportionally by the percentage reduction in FTE employees. However, the borrower is exempt from the reduction in loan forgiveness based on FTE employees if the borrower eliminates any reductions in FTE employees occurring between February 15, 2020, and April 26, 2020, by June 30, 2020, or earlier.
    • Reference Period. The borrower must select a reference period from one of the following:
      1. February 15, 2019, through June 30, 2019;
      2. January 1, 2020, through February 29, 2020; or
      3. in the case of seasonal employers, either of the two preceding methods or a consecutive 12-week period between May 1, 2019, and September 15, 2019.
    • FTE Reduction Exemption. The SBA and Treasury have adopted a regulatory exemption that permits the borrower to exclude any reduction in FTE employee headcount that is attributable to an individual employee in calculating the loan forgiveness amount if:
      1. the borrower made a good faith, written offer to rehire such employee (or, if applicable, restore the reduced hours of such employee) during the covered period or the alternative payroll covered period;
      2. the offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the separation or reduction in hours;
      3. the offer was rejected by such employee;
      4. the borrower has maintained records documenting the offer and its rejection; and
      5. the borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection of the offer.

The SBA has indicated it will provide additional guidance on how borrowers should report employees who reject rehiring offers to the applicable state unemployment offices.

    • Exclusion of Certain FTEs. The borrower may exclude any reduction in FTE employee headcount resulting from any employee that:
      1. was fired for cause;
      2. voluntarily resigned; or
      3. voluntarily requested and received a reduction of their hours.
    • Calculation of FTEs. For purposes of forgiveness, borrowers must document the average number of FTE employees during the covered period (or the alternative payroll covered period) and the reference period selected by the borrower. The calculation is as follows:
      1. for employees paid for an average of 40 or more hours per week, 1.0; and
      2. for employees paid for fewer than an average of 40 hours per week, at the borrower’s option either (a) the ratio of the average number of hours per week to 40 (e.g., for 30 hours, 0.75), or (b) 0.5, provided that the same method is used for all part-time employees.

For example, if a borrower has 10.0 FTEs during the reference period but only 8.0 FTEs during the covered period, then only 80% of otherwise eligible expenses may be forgiven since the percentage of FTEs was reduced by 20%.

  • Reduction in Employees’ Salary or Wages[3]
    • Reduction of Compensation. For each new employee in 2020 and each existing employee who was not paid more than the annualized equivalent of $100,000 in any pay period in 2019, the borrower must reduce the total forgiveness amount by the total dollar amount of the salary or wage reductions that are (a) in excess of 25 percent of base salary or wages between January 1, 2020, and March 31, 2020, (the reference period) and (b) not attributable to an FTE reduction, subject to exceptions for borrowers who restore reduced salaries or wages.
    • Salary/Wage Reduction Exemption. If the borrower reduced salaries and wages between February 15, 2020, and April 26, 2020, but eliminates such reductions by June 30, 2020, or earlier, the borrower is exempt from any reduction in the loan forgiveness amount.

For example, if a borrower reduced an FTE’s salary from $1,000/week during the reference period to $700/week during the covered period, then the first $250 (i.e., 25% of $1,000) is exempt from the reduction, and a total of $400 (i.e., the additional $50 x 8 weeks) would be the reduction amount attributable to that employee.

Loan Forgiveness Process & Loan Review Process

  • Loan Forgiveness Process. The following is a brief summary of the loan forgiveness process:
    • Borrower must complete and submit the Application.
    • Lender reviews the Application and makes a decision regarding loan forgiveness.
    • Lender has 60 days from receipt of the Application to issue a decision on forgiveness to the SBA (not to the borrower).
    • The SBA will, subject to any SBA review of the loan or loan application (see below), remit the appropriate forgiveness amount to the lender, plus any interest accrued through the date of payment, not later than 90 days after the lender issues its decision to the SBA.
    • The SBA will deduct EIDL Advance Amounts from the forgiveness amount remitted to lender.
    • If the SBA determines that the borrower was ineligible for the PPP loan based on the provisions of the CARES Act, SBA rules or guidance available at the time of the borrower’s loan application, or the terms of the borrower’s loan application, the loan will not be eligible for loan forgiveness.
    • The lender, not the SBA, is responsible for notifying the borrower of the forgiveness amount.
    • If only a portion of the loan is forgiven, or if the SBA denies the forgiveness request, any remaining balance due on the loan must be repaid prior to maturity (i.e., two years from the origination date).
  • SBA Loan Review. The following is the process when the SBA reviews a PPP loan:
    • Loans Subject to Review. The SBA will review all loans in excess of $2 million. Notwithstanding the $2 million review threshold, all PPP loans are subject to review as the SBA deems appropriate at any time – there is no dollar threshold or time limit to such review (i.e., PPP loans less than $2 million are subject to review notwithstanding FAQ 46).
    • Representations and Warranties Subject to Review. The SBA may review the following:
      1. Borrower Eligibility;
      2. Loan Amount and Use of Proceeds; and
      3. Loan Forgiveness Amount.
  • Borrower’s Right to Respond. If loan documentation submitted to the SBA by the lender or any other information indicates that the borrower may be ineligible for a PPP loan or may be ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower, the SBA will require the lender to contact the borrower in writing to request additional information. The SBA may also request information directly from the borrower. The lender will provide any additional information provided to it by the borrower to the SBA. The SBA will consider all information provided by the borrower in response to such an inquiry. Important Note – Failure to respond to SBA’s inquiry may result in a determination that the borrower was ineligible for a PPP loan or ineligible to receive the loan amount or loan forgiveness amount claimed by the borrower.
  • Ineligibility – PPP Loan. If the borrower is ineligible for the PPP loan, the SBA will direct the lender to deny the loan forgiveness application.
  • Ineligibility – PPP Loan Amount or Loan Forgiveness Amount. If the borrower is ineligible for the loan amount or loan forgiveness amount claimed by the borrower, the SBA will direct the lender to deny the loan forgiveness application in whole or in part, as appropriate.
  • Improper Use of Loan Proceeds. If PPP loan proceeds are knowingly used for payment of obligations that are not permitted by the CARES Act and the PPP, the owners and officers of the borrower may be subject to civil and criminal liability for fraud.
  • Additional Remedies. The SBA may also seek repayment of the outstanding PPP loan balance or pursue other available remedies if the borrower is ineligible for the loan, loan amount or forgiveness amount.
  • Appeal Rights. The SBA will issue a separate interim final rule to address the appeal process.

More to Come

As we have noted in prior articles, the facts, laws, and regulations regarding COVID-19 are developing rapidly and frequently changing, including guidance involving the PPP. Since the date of publication, there may be new or additional information not referenced in this update. JW will continue to provide up-to-date insights and virtual events regarding COVID-19 concerns. Our most recent insights, as well as information about recorded and upcoming virtual events, are available at

This update is not intended to provide legal advice, and no legal or business decision should be based on its contents. Please consult with your legal counsel for guidance.

JW Contacts

For specific assistance or more information concerning these loan programs, please contact John Wittenberg or Lindsey Berwick.

[1] Payroll costs consist of compensation to employees (whose principal place of residence is the United States) in the form of salary, wages, commissions, or similar compensation; cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); payment for vacation, parental, family, medical, or sick leave; allowance for separation or dismissal; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; payment of state and local taxes assessed on compensation of employees; and for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation.
[2] FTE employee means an employee who works 40 hours or more, on average, each week.
[3] This reduction calculation is performed on a per employee basis, not in the aggregate.

Related Resources:

Please note: This article and any resources presented on the JW Coronavirus Insights & Resources site are for informational purposes only, do not constitute legal or medical advice, and are not a substitute for legal advice from qualified counsel. The laws of other states and nations may be entirely different from what is described. Your use of these materials does not create an attorney-client relationship between you and Jackson Walker. The facts and results of each case will vary, and no particular result can be guaranteed.

In This Story

John D. Wittenberg, Jr.
Partner, San Antonio