Executive Summary

  • Borrowers can elect an Alternative Payroll Covered Period that starts with their first regular payroll after loan funding
  • Eligible expenses include those paid within the 8-weeks and those incurred in the 8-week period and paid by the next regular due date/payroll date
  • Owner/employees and those with self-employment income are capped at the lower of $15,385 or 8-weeks’ worth of their 2019 compensation
  • Instructions are given for computing full-time equivalent employee headcount
  • Rules for the salary/wage reduction test and the headcount test are clarified


On Friday, May 15, the Small Business Administration (SBA) issued the much-anticipated application form for requesting forgiveness of Paycheck Protection Program (PPP) loans. The instructions that were issued along with the form go a long way towards answering the many questions that borrowers have regarding forgiveness, but there are still some unresolved issues.


The PPP program was created as part of the CARES Act. While structured as a loan, it works as a grant in that the debt will be forgiven if the funds are spent in the right ways – mostly on payroll expenses, but also rent, utilities, and certain interest payments – during the 8 weeks after the loan is funded. The Act set out the general rules of the program, but many unanswered questions have remained about how to measure the expenditures that must be reported on the eventual application for loan forgiveness.


A key clarification in the instructions is the provision for an optional "Alternative Payroll Covered Period" to compute eligible payroll costs. The "Covered Period" for the PPP loan begins the first day funds are received from the bank and ends 8 weeks (56 days) later. This period does not always line up with borrowers’ regular pay periods. The alternative period begins on the first day of the borrower’s first pay period after funds are received, which will likely make reporting easier for many borrowers.


One of the main questions borrowers had was whether eligible payroll costs are included on a cash basis or accrual basis. The instructions clarify that it is both – a borrower gets to include wages actually paid during the Covered Period (or the Alternative Payroll Covered Period) and is also eligible for forgiveness on payroll incurred but not paid during the borrower’s last pay period in the relevant period as long as those wages are paid on or before the next regular pay date. This will make it unnecessary for borrowers to move up their last payroll of the Covered/Alternative Period in order to have those wages included.


A similar rule applies to nonpayroll eligible costs (rents, utilities, certain interest payments). The instructions state that borrowers cannot prepay interest, but there does not appear to be any prohibition on including payments of overdue nonpayroll costs that are paid in the Covered Period.


A new wrinkle appears for owner/employees - the borrower has to certify that the forgiveness calculation does not include any payroll costs for an owner/employee, self-employed person, or partner that exceeds 8 weeks’ worth of that person’s 2019 compensation. So, for example, if an owner/employee took a low salary in 2019, they will be stuck at that level in the forgiveness calculation.


The computation of full-time equivalent headcount is also clarified in the instructions. Full-time equivalency (FTE) is based on a 40-hour week. For each employee, the average number of hours worked per week is divided by 40 and the result is rounded to the nearest tenth. Each employee is capped at 1, so working over 40 hours does not change the FTE count. An optional simplified method assigns 1 to each employee working 40 hours or more and .5 to each employee working less than 40 hours.


Worksheets are provided to compute the salary/wage reduction test and the FTE reduction test. The instructions thankfully clarify that employees that are terminated before the Covered/Alternative Period are not considered in the salary/wage reduction test. The 75% threshold of that test (comparing wages in the Covered/Alternative Period to wages in the first quarter of 2020) is computed using average salary/wages of each subject employee, not the total wages of the employee as described in the Act.


The instructions end with a listing of documents that must be submitted to the bank with the forgiveness application as well as a list of documents that do not need to be submitted but must be kept by the borrower for 6 years after the date of loan forgiveness. There is also a PPP borrower demographic information form that may be submitted if desired; this form is optional. 


An important caveat is that the rules around the PPP have been changing frequently and may continue to do so. There is currently legislation pending in Washington that would change the PPP system significantly, including moving the 8-week period to account for businesses that have not been able to open. Unfortunately, there is no way to predict whether any of those potential changes will end up being enacted. Watch for future developments and contact us at learnmore@BoulayGroup.com or 952.893.9320.