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New Guidance on PPP Loan Forgiveness

The United States Small Business Administration (SBA) has new guidance for borrowers regarding the loan forgiveness under the Paycheck Protection Program (PPP). FAQs from the SBA were recently updated, and in conjunction with the U.S. Department of Treasury and the statues and regulations, they help further clarify the forgiveness requirements of the PPP loans.

General Guidance

Borrowers of PPP loans who submit their application for loan forgiveness within ten (10) months of the covered period are not required to make any payments until the forgiveness amount is remitted to the lender by the SBA. The covered period is either: (1) the 24-week (168-day) period beginning on the PPP loan disbursement date, or (2) if the Borrower received its PPP loan before June 5, 2020, the borrower may elect to use an 8-week (56-day) covered period. (We previously wrote about the PPP Flexibility Act which provides some major benefits to businesses that receive PPP loans. You can read the article here.

If a loan is fully forgiven, the borrower is not responsible for any payments. If the loan is not forgiven or is only partially forgiven, any portion of the loan amount that is not forgiven must be repaid on or before its maturity date. Interest accrues on the unforgiven portion of the loan between the time it was disbursed and the SBA’s remittance of any amount that was forgiven.

When filing the application for loan forgiveness, the SBA has stated that it will permit scanned copies of applications that comply with E-consent or E-signature requirements under the Electronic Signatures in Global and National Commerce Act. These electronic signature requirements are in addition to any additional requirements mandated by the lender under federal law.

Finally, borrowers who are sole proprietors, independent contractors and self-employed individuals (and who did not have any employees at the time of their PPP loan application) are automatically qualified to use Form 3508EZ for their loan forgiveness application.

Payroll Costs

The SBA FAQs clarify that payroll costs incurred during the covered period but paid after the end of the covered period are eligible for loan forgiveness. In addition, payroll costs incurred before the covered period but paid during the covered period are also eligible for loan forgiveness. Borrowers must use the correct pay periods and covered period when calculating payroll costs on their application for forgiveness. Borrowers should also be aware that employer expenses and contributions paid on behalf of an employee for group healthcare and retirement do qualify for forgiveness, while benefits or contributions paid by an employee do not.

Much of the FAQs focus on how to determine “owner compensation” for purposes of loan forgiveness. For owner-employees and self-employed individuals, the loan forgiveness amount is capped at $20,833 per individual in total across all businesses in which the individual has an ownership stake. This cap is lowered for borrowers who chose to use an 8-week coverage period to $15,385. For owner-employees of C-corps or S-corps, up to 2.5 months of their 2019 employee cash contribution is eligible for loan forgiveness. For self-employed Schedule C or Schedule F individuals, the compensation eligible for loan forgiveness is limited to 2.5 months of their 2019 net profit as reported to the IRS. The compensation of general partners that is eligible for loan forgiveness is limited to 2.5 months of their 2019 net earnings subject to self- employment tax as reported to the IRS. Members of limited liability companies must follow the applicable guidance based on how their business was organized for tax year 2019.

Nonpayroll Costs

Nonpayroll costs cannot be calculated using the alternative payroll covered period. Those costs incurred prior to the covered period but paid during the covering period and those costs incurred during the covered period but paid after the covered period are eligible for loan forgiveness. Depending on the date on which a mortgage or rental payment existed, it could be eligible for loan forgiveness. Similarly, the FAQs provided guidance on interest payments that are eligible for loan forgiveness. Although interest payments for loans that are secured by real or personal property are eligible for forgiveness, the interest on unsecured credit is not eligible for loan forgiveness.

Under the CARES Act, covered utility payments that are eligible for forgiveness include a “payment for a service for the distribution of …transportation.” The SBA clarified that this refers to transportation utility fees assessed by state and local governments. As for electricity, the entire electric bill, even where charges are invoiced separately, is eligible for loan forgiveness.


There are two types of reductions that the loan forgiveness application takes into consideration:

(1) a reduction in the number of full-time employees, and (2) a reduction in compensation of full-time employees. For a reduction in the number of full-time employees, if a borrower is able to show certain good-faith efforts with respect to its reduced number of full-time employees, the borrower can exclude such a reduction in the number of full-time employees.

The reduction in the salary or hourly wage of covered employees seems to have greater implications for purposes of loan forgiveness. Certain pay reductions during the applicable covered period can reduce the amount of loan forgiveness a borrower will receive. If a covered employee’s salary or hourly wage is reduced by more than 25% during the applicable covered period, the reduction over 25% will reduce the eligible loan forgiveness amount unless the borrower satisfies the Wage Reduction Safe Harbor. The Wage Reduction Safe Harbor is met where all salary or wage reductions are remedied by December 31, 2020.

Economic Injury Disaster Loan

For any PPP borrower who also qualified for an Economic Injury Disaster Loan (EIDL), the SBA will deduct the EIDL loan amount from any forgiveness amount remitted. A borrower that received an EIDL advance in excess of the amount of its PPP loan will not receive any forgiveness on the PPP loan.

If you have questions about this or any other business matter, please contact Grace Nguyen Bond at or 717-509-7226.

**This update is provided for informational purposes only and should not be construed as legal advice or as creating an attorney-client relationship where one does not already exist. This article was published on September 4, 2020. Please be aware that the laws and regulations related to the COVID-19 pandemic are being updated rapidly. Please check back or contact us for the most up-to-date information.**