This data has changed due to new legislation, please reach out to your advisor to get the latest on PPP forgiveness.

The Paycheck Protection Program (“PPP”) funding provided by the CARES Act has attracted much demand, to the extent that the first round of funding was depleted in just 14 days, and the second round of funding is now underway. As the next phase of the PPP journey unfolds, borrowers are turning their thoughts to the potential of the loan to be forgiven. This is an area that has ambiguities in the calculation that are similar to those seen in the application process, and we set out our understanding of the forgiveness calculation below as of the time of writing.

Segregation of Loan Proceeds

GHJ recommends keeping loan funding separate from all other cash accounts to avoid co-mingling of assets. The loan forgiveness calculation is heavily geared toward how the proceeds are used. Maintaining separate accounts will go a long way in supporting the application for forgiveness. See GHJ’s blog regarding establishing a clean audit trail to support PPP loan forgiveness here.

Documentation Requirements

A formal application for forgiveness must be submitted to the lender, which is an entirely separate process from the initial loan application. The documentation requirements appear much more stringent than the initial loan application and include a variety of government filings as well as access to records such as cancelled checks, payment receipts and bank account statements. It is expected that the scrutiny of forgiveness applications will be a lot higher than it was for the initial loan application itself. Recent Treasury comments suggest that for loans over $2 million, eligibility will be further scrutinized and forgiveness may be delayed until a review of the loan application and forgiveness application is completed.

Forgiveness Calculation

There is sufficient ambiguity in the wording of CARES Act Section 1106 (the section which outlines loan forgiveness) to cause uncertainty in borrowers as to how much of their loans may ultimately be forgiven. However, the basic mechanics of the calculation (as currently understood by GHJ) are outlined as follows:

  • The date of disbursement of PPP funds starts the clock on an eight-week window for monitoring expenses covered by PPP funds. Forgiveness is available for expenses during that period on:

    • Payroll Costs: Payroll costs has the same definition for forgiveness purposes as it did for the original PPP loan application. Salaries over $100,000 are excluded. Employers’ portion of healthcare, group insurance and state and local payroll taxes are included. Federal payroll taxes and employee’s portions are excluded, etc. There are then two mechanisms that reduce the amount of forgiveness available, as follows (see Cures below):

      • Full-Time Equivalent Employees: Forgiveness is reduced pro-rata where borrowers reduce their average number of full-time equivalent employees (FTEE). The average FTEE over the eight-week period is compared to a baseline FTEE, and borrowers can choose between two date ranges to calculate the baseline, either Jan. 1, 2020 to Feb. 29, 2020, or Feb. 15, 2019 to June 30, 2019. Selecting the date range with the lower FTEE should minimize any reduction in forgiveness. What constitutes “full time” is not defined, and until guidance is provided, using the standard full-time hours for the borrower is likely to be acceptable.

        For example, for a borrower that has a 40-hour work week as standard, two employees working 20 hours each would be considered one FTEE. As a high-level example, if FTEEs are reduced from 10 to eight (a 20-percent reduction) then 20 percent of the loan amount becomes ineligible for forgiveness.

      • Salaries: Forgiveness is impeded where salaries of employees earning $100,000 or less annually are reduced by more than 25 percent. This requires an analysis of each employee and compares the salary in the eight-week forgiveness period to the salary in the most recent quarter in which the employee was employed before Feb. 15, 2020. A dollar amount of reduction greater than 25 percent is not available for forgiveness.

        For example, an employee’s salary is reduced from $80,000 to $50,000 (a 37.5-percent reduction), which is in excess of the 25-percent limit by 12.5 percent. The amount ineligible for forgiveness is 12.5 percent x $80,000 = $10,000 (note it is not currently specified if this calculation would be on an annual or other basis). Salary reductions of employees earning in excess of $100,000 annually do not impact forgiveness.

    • Non-payroll: Forgiveness is also available for loan proceeds used to pay rent, utilities (defined to include electricity, gas, water, transportation, telephone and internet) and mortgage interest (in each case where the underlying agreement was in place before Feb. 15, 2020). Several definitions here are currently unclear, such as whether rent includes parking spaces, storage areas, etc.

  • A minimum of 75 percent of the total forgiveness requested must come from payroll costs. If this is not the case, forgiveness is reduced until payroll costs make up 75 percent of the forgiveness request.

  • The costs incurred could currently be interpreted as being on a cash or accrual basis and is one of the major areas expected to be address by SBA guidance on PPP forgiveness.

Forgiveness Window Details

Many borrowers have noted that the loan amount was calculated on 2.5 months of payroll, but the forgiveness window is only eight weeks, and therefore, they could never spend the full loan amount (and therefore could not generate full forgiveness) over the shorter period. However, if pre-PPP funding spending rates (number of FTEEs and salary levels) are maintained, then borrowers will spend approximately 75 percent of their loan amount over an eight-week period on payroll costs. The 75-percent/25-percent thresholds noted above are designed with this in mind, because 75 percent of 2.5 months is approximately eight weeks. The borrower then has 25 percent of the loan amount available to spend on non-payroll costs, also over the same eight-week period.

Impact of Salary Adjustments

It is also worth noting that forgiveness reductions for FTEE and salary adjustments has a duplicate impact. Borrowers who reduce either will have less dollars spent over the eight-week period than would otherwise be the case. In addition, that lower amount of payroll cost is then reduced by the FTEE and/or salary reduction noted above in calculating the borrower’s forgivable amount.

PPP and Debt Forgiveness

Additionally, there is a subtle difference between how PPP funds can be used in order to generate forgiveness compared to what the CARES Act permits the funds to be used on in any circumstances, (allowable uses) regardless of forgiveness.

Allowable uses permit the funds to be used toward interest on any debt, whereas forgiveness is granted only for interest on mortgage debt. In either case, PPP funds cannot be used toward debt principal (mortgage or otherwise). As noted above, there is likely to be significant oversight in monitoring how PPP funds are used, exaggerating the need for stringent segregation and documentation.


As noted above, forgiveness is penalized for borrowers that reduce their FTEEs and/or certain salaries. The CARES Act allows for that penalty to be removed (and therefore often referred to as a cure) for FTEEs and/or salaries that are reinstated by June 30, 2020. The duration of re-hired employees or re-instated salaries or any requirement on the nature of their roles is also unclear.

Reliance on PPP

For many companies, PPP is a welcome respite and source of liquidity. For others, it is critical to keep the doors open beyond the pandemic. For all companies, GHJ strongly encourages making business and cash flow decisions independent of PPP, especially forgiveness. In other words, make the decisions that are good for the business, and where possible, do not make decisions purely to maximize PPP forgiveness.


Forgiveness of the loan may generate taxable income at the state level in California, and the expenses met with forgiven funds are expected to be tax deductible.

However, at the federal-level forgiveness will not be taxable, and the corresponding expenses will also not be deductible. Both are tax neutral, albeit the result is achieved differently.

GHJ has been actively monitoring these issues. Please consult a member of our COVID-19 Resource Team if you have any questions about this or any other COVID-19-related items.

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David Sutton

David Sutton is GHJ’s Private Equity Practice Leader and serves clients across the U.S. that range from small family offices to established multi-disciplinary funds. He has more than 15 years of experience across finance, restructuring, and mergers and acquisitions. David’s deal experience includes…Learn More