On May 15, 2020 the SBA released the Loan Forgiveness Application Instructions for Borrowers, which included the much awaited guidance on various forgiveness questions, and also left some unanswered questions. This blog will summarize the major points raised by the document and the practical impact on borrowers, and incorporates the revised rules introduced through the PPP Flexibility Act signed on June 5, 2020. For separate details of the PPP Flexibility Act, click here.


As outlined in the CARES Act, the forgiveness application allows borrowers to apply for forgiveness for costs incurred in certain buckets:

  • Payroll
  • Rent
  • Interest on mortgages and personal property debt
  • Utilities

It should be emphasized that the application is just that; an application. Although the form outlines a mechanical process to arrive at the dollar amount eligible for forgiveness, borrowers should approach the exercise as being one in that they have to justify the amount certified for forgiveness and in doing so, take the appropriate care, pay attention to detail and include relevant documentary support that is outlined in the application.

Loan Forgiveness Application

Below is a summary of the major items covered by the forgiveness application and provides contrast with what was previously understood by the general borrower community.


  • New: Borrowers who use a weekly or bi-weekly payroll roster can elect to use an “Alternative Payroll Covered Period.” This allows the borrower to begin their forgiveness period on the date of first payroll following loan disbursement, rather than the day of disbursement as outlined in the Act. It should be noted that if the alternative period is elected, then it applies to all payroll-related calculations in the forgiveness application. Further, regardless if the period is elected, it does not apply to non-payroll amounts. It is unclear if borrowers can change their payroll frequency to allow them to become eligible for this election.

    Action: Borrowers should evaluate the impact on their forgiveness calculation of using the Alternative Payroll Covered Period if it is available to them.

  • New: Many borrowers were interested in whether the forgiveness amounts would be prepared on a cash basis or accrual basis, driven by the language in the CARES Act which references “incurred and paid.” The application largely builds on this language by establishing definitions for “paid” and “incurred” and eliminating any double count between the two. “Paid” means the date that paychecks are distributed, or the date an Automated Clearing House (ACH) is initiated. “Incurred” means the date that employees’ pay is earned. Amounts incurred can be included for forgiveness if they are paid in the next regular payroll date, even if outside the forgiveness window. This presents a strategic opportunity for borrowers to include disbursements related to irregular payments such as healthcare, retirement contributions, etc. that would then qualify for forgiveness (to the extent it is “incurred” during the forgiveness-week window) but which are paid outside the window. Borrowers should make disbursement decisions that best fit the wider needs of their business over the medium term and not solely driven by achieving forgiveness. This also presents an opportunity for borrowers to ultimately include greater more in payroll costs than the length of the forgiveness window, being the first cash payment (which includes amounts related to before the forgiveness window) and the accrual portion at the end of the window, if subsequently paid in the following payroll/billing cycle.

    Action: Borrowers should review their disbursements for payroll and non-payroll costs where the cost accrues during the forgiveness window and the payment is outside the window. The timing of payments should then be revisited to determine if changing the timing of disbursements will generate forgiveness within the borrower’s liquidity risk limits.

  • New: Borrowers who received greater than $2 million must acknowledge this on the form. In making this requirement, the SBA also confirmed that the $2 million threshold for auditing loans will apply to the amounts received. Borrower’s eager to return funds to bring them below $2 million will not find that they become excluded from the population the SBA intends to audit – but it remains unclear who will be audited, what will be involved, what the timeframe will be and what the implications of findings might be.

  • New: Employer-owners and partners in a partnership appear to have their total payroll costs (compensation plus ancillary amounts such as healthcare, retirement benefits, state and local taxes and others) capped at $100K pro-rated for the period. This is in contrast with non-owner employees whereby the $100K cap applies to compensation only, with ancillary amounts enabling the total to exceed $100K. Owner employee compensation is also subject to a cap of the equivalent of their pro-rated average 2019 compensation.

  • New: Full-time equivalents are to be based on a 40-hour work week, and cannot be greater than one for any individual. This means that employees working over 40 hours count as one FTE and the fractional overage is dropped. Therefore hours over 40 do not offset other reductions in FTE elsewhere. However, overtime dollars continue to be included in the payroll cost.

  • New: Borrowers can elect to calculate full-time equivalents by simply counting “one” for all employees working 40 hours or more and 0.5 for all other employees. This provides a simpler calculation and is likely beneficial for borrowers who have a large number of employees regularly working less than 20 hours. However, this would have to be a consistent state across the base comparison period and the average over the forgiveness window. Therefore, it is likely that most borrowers will need to accurately calculate full-time equivalents under both methods in order to make the most appropriate election.

    Action: Borrowers should calculate their full-time equivalents under the original and newly prescribed methods and choose to use the method that minimizes any reduction in forgiveness.

  • New: Reductions in full-time equivalents are excused for employees who were terminated for cause, voluntarily resigned or voluntarily requested and received a reduction in their hours but only if the employee was not replaced.

  • Clarified: Safe Harbor applies for any reduction in full-time equivalency and/or salary reductions, as provided in the CARES Act. To achieve this, borrowers must reinstate full-time equivalents and/or salaries by Dec. 31, 2020 (previously June 30, 2020) and, in that case, would not suffer a reduction in forgiveness for reductions in full-time equivalents or salaries. However, it is not yet clear if borrowers electing to use the eight-week forgiveness window (compared to the 24 weeks provided by the PPP Flexibility Act) will use a different date than Dec. 31, 2020 for the FTE and Salary Safe Harbor. Finally, the PPP Flexibility Act introduces good faith certifications from borrowers in order to qualify for the Safe Harbor, rather than a purely mathematical calculation.

  • Clarified: Reductions for changes in full-time equivalents, and/or salary reductions, will be applied to the amount of forgiveness requested, not the full loan amount. This was expected and in line with the language in the CARES Act.

  • Clarified: Seasonal employers can use a consecutive 12-week window between May 1, 2019 and Sept. 15, 2019 when computing the full time equivalency.

  • Clarified: Safe Harbor applies for any reduction in full-time equivalency and/or salary reductions, as provided in the CARES Act. To achieve this, borrowers must reinstate full-time equivalents and/or salaries by June 30, 2020 and, in that case, would suffer a reduction in forgiveness for reductions in full-time equivalents or salaries. It is interesting to note that since the second tranche of PPP funds were announced, the Safe Harbor date of June 30 has not been extended. This means that some borrowers will be part way through their eight-week window when they have to achieve restored headcount/salaries in order to meet the Safe Harbor provisions.

  • To Be Determined: Many borrowers have paid, or are considering paying, bonuses for hazard pay or as a gesture for resilience and perseverance to their employees. Neither the CARES Act nor the recent guidance appears to disallow these amounts from forgiveness, and such bonuses should be considered to be part of payroll costs that are eligible for forgiveness. However, it should be noted that the $100K compensation cap applies on a pro-rata basis and therefore any bonuses paid in the forgiveness period will be grossed up to the annual equivalent, and will be excluded to the extent above $100K annually.


  • New: In a mechanism similar to payroll costs, borrowers can include non-payroll amounts paid during the forgiveness window, plus amounts incurred during the forgiveness period that are paid on or before the regular billing date, even if the regular billing date is outside the forgiveness period (and with each amount only being counted once). For amounts that are paid (for example) quarterly, borrowers are faced with a choice between paying in line with their normal billing period and potentially delaying their forgiveness application until that time or settling the amount early and proceeding with their forgiveness application. As previously mentioned, GHJ recommends caution in accelerating cash disbursements with the sole objective of achieving forgiveness. A thorough analysis of liquidity should be conducted before bringing costs forward for this purpose. Due to the relatively low interest on the loan, and the fact that interest associated with forgiven principal is also forgiven, there may be a reduced financial incentive in bringing cash disbursements forward in such an uncertain economic environment.

    Action: Review post-forgiveness window payment profiles to determine if changing payment timing can generate additional forgiveness.

  • Clarified: Business rent and lease payments includes amounts related to both real and personal property. Similarly, mortgage interest also includes amounts related to both real and personal property. This expands the dollar amount that borrowers can include in their forgiveness calculations but will still be subjected to the 60/40-percent balance between payroll and non-payroll amounts (previously 75/25) However, the PPP Flexibility Act wording suggests this is now a cliff edge, meaning that borrowers who do not achieve the 60 percent, may not be eligible for any forgiveness.

  • Clarified: Borrowers are not required to report all amounts in each category – only the amounts that are to be considered for forgiveness. Accordingly, borrowers can limit the non-payroll amounts to achieve the 60/40-percent balance between payroll and non-payroll amounts.

  • To Be Determined: The guidance does not set out the definitions of rent, utilities and other non-payroll costs. For example, it is not clear if rent includes storage costs, CAM charges or other elements of rent. Similarly, “transportation” costs, which are listed in the CARES Act, are also yet to be defined.


  • The application form is to be submitted to the lender (or lenders servicing agent). The CARES Act suggests it is the lender that will make the forgiveness decision. However, it remains to be seen to what extent the SBA will oversee or insert themselves into that process or whether lenders will utilize some set of common standards for the inevitable variations in calculations that will be submitted by borrowers.

  • Amounts paid or incurred between related parties are not clarified (other than owner-employees as noted above). For example the treatment of related-party rents, ability to include or change the amounts related to family members on payroll and others. GHJ continue to caution borrowers against “gaming the system,” or taking actions that could be perceived as such.

  • There is no clarity provided on the audit of loans and forgiveness applications or the timetable, requirements and expectations of borrowers in that process.

    Action: Borrowers considering returning funds to avoid the $2 million audit threshold should reconsider doing so, as it is now unlikely that doing so would avoid a potential audit of the PPP loan.

If you have any questions on the above, GHJ’s COVID-19 Response Team has as an experienced team of consultants specializing in COVID-related laws and programs and can provide the tools your business needs to help it recover from this business disruption. We are here to assist organizations to succeed in these very challenging times.

Sutton David main

David Sutton

David Sutton is GHJ’s Transaction Advisory Services Practice Leader and Private Equity Practice Leader. He serves clients across the U.S. that range from small family offices to established multi-disciplinary funds and has more than 20 years of experience across finance, restructuring and mergers…Learn More