By Philip W. Spencer

Notes on the Paycheck Protection Program

The CARES Act gave the Small Business Administration (“SBA”) and Department of the Treasury the authority to manage the Paycheck Protection Program. The Program’s requirements have changed rapidly, and recent reports from Washington indicate Congress may make major changes to its core features. Given the rapid pace of change, some calculators or step-by-step guides designed to help borrowers determine PPP eligibility or forgiveness may not incorporate the latest guidance.

Many borrowers may wait too long to delve into the nuances of the forgiveness requirements, and that will cause them to miss opportunities to maximize loan forgiveness. Savvy borrowers should assess new guidance as it is released. In the past, the SBA has often released new guidance and instructions first through a new “Frequently Asked Question” on its website, but it may also issue “Interim Final Rules,” a formal rule that is published in the federal records.  On short notice, the SBA can issue guidance that dramatically changes the attractiveness of certain options available to borrowers.

Recent Guidance Helpful, But Incomplete

The SBA and Treasury recently shed a significant amount of light on the Paycheck Protection Program’s forgiveness process.  This direction was a welcome sign for the millions of business owners that have been approved for a combined $511 billion in PPP loans. First, the SBA extended the deadline for the existing “return of funds” safe harbor and released a new safe harbor protecting many borrowers from scrutiny related to the “necessity” of their loans. On May 15th, the Forgiveness Application also emerged. It was a bit overdue; the CARES Act required that the SBA release detailed rules on forgiveness by late April.[1] While the SBA did not relax the 75% payroll requirement for amounts forgiven or extend the 8-week period for measuring forgivable expenses, it did create other borrower benefits.

The “Necessity” Certification Created Uncertainty

The PPP loan application required that borrowers certify that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.”[2] A false certification would make the entire loan unforgivable and expose the certifying party to civil and criminal penalties.  But the certification created its own uncertainty: borrowers could not figure out how to clearly assess and prove “necessity.”  This grey zone led some experts to recommend that the borrower draft a memo describing the borrower’s finances and the assumptions it made to determine necessity.[3] Of course, the SBA might be able to review that memo later. The issues surrounding necessity probably prevented some borrowers from applying to the Program.

The First Solution: The Return of Funds Safe Harbor

The SBA addressed these concerns by announcing that it would not question the necessity certification for each borrower that paid back their loan by May 7th.[4] In other words, the SBA presumed that any borrower who quickly paid their loan off had made the economic necessity certification in good faith. This short time frame to return funds (the deadline was about a month after the first PPP applications were submitted) did not afford much help to many borrowers, so the SBA extended this deadline to May 14th.[5] As May 14th approached and more questions arose about the necessity certification, the SBA extended the deadline to May 18.[6] This second extension provided some time for some borrowers to consider a new safe harbor.

A Better Solution: $2 Million Necessity Safe Harbor

On May 13th, the SBA announced that any borrower who borrowed less than $2 million in PPP funds “will be deemed to have made the required certification concerning the necessity of the loan request in good faith.”[7] While this assumption doesn’t shield borrowers from all the consequences of taking funds they don’t need, it will put many borrowers at ease. If a qualifying borrower is audited by the SBA, it likely won’t need to prove that the loan was necessary. The SBA adopted this safe harbor to “promote economic certainty” and noted that borrowers of larger amounts may “still have an adequate basis for making the required good-faith certification.”[8] Even if a larger borrower lacked an adequate basis to make the necessity certification when it filed its Application, the SBA has stated that it will not pursue an enforcement action or refer the case to other agencies (like the Department of Justice), as long as the borrower repays the loan after the SBA requests repayment.[9] Lenders should be happy, too: the SBA’s findings on whether the borrower made the certification in good faith will not affect the SBA’s loan guarantee.[10]

While this guidance should comfort many smaller borrowers, remember that the SBA may audit any loan and request information from the borrower (in addition to the information provided with the forgiveness application) during the process.[11] The SBA may still find some relationship between a lack of necessity and the likelihood that the loan was used for unauthorized purposes, the subject of another required borrower certification. If the SBA believes a borrower did not need the loan, it may also decide the chances are higher that the borrower used the proceeds for unauthorized purposes, and thus intensify its audit. Other government agencies or third parties could also pursue borrowers for false certifications. All these possibilities may lead cautious borrowers to preserve any support they have for their necessary determination.

Overview of the Forgiveness Application

After borrowers review the Paycheck Protection Program Loan Forgiveness Application, two things will become abundantly clear: (1) many borrowers will need a calculator or professional help to fill out the Application; and (2) certain aspects of the forgiveness process will require additional clarification from the SBA. While just completing the Application once requires several sets of calculations, some borrowers will find they need to fill portions out several times to obtain the maximum forgiveness amount.  These attempts might be necessary to experiment with the newly-added alternative payroll periods and optional FTE calculation methods.   Now, borrowers can also seek forgiveness for certain “payroll costs” and all “nonpayroll costs” if they were “incurred” during the 8-week forgiveness “Covered Period.” The borrower must pay incurred costs by the next regular payroll date or regular billing date.[12]

The Application itself has three sections, which should be completed in reverse order: the main portion of the Forgiveness Application requires the completion of Schedule A, which requires the completion of the Schedule A Worksheet. The Schedule A Worksheet directs borrowers to aggregate payroll costs and calculate any applicable “Salary/Hourly Wage Reductions” and “Full-Time Equivalency (FTE) Reductions.”  The Worksheet also helps the borrower determine whether the “FTE Reduction Safe Harbor” applies, which can eliminate the Full-Time Equivalency Reduction if the borrower rehires enough employees before the end of June.  The Schedule A Worksheet tables split employees by type, employees that earned at least $100K annualized for any pay period in 2019 (just one pay period will put employees in this category) and those that did not. Borrowers then use Schedule A to calculate forgivable payroll costs (net of the two possible Reductions). Finally, the main Application helps the borrower determine the total forgiveness amount. The average borrower will probably spend most of their time navigating the portions of the Application on forgivable payroll costs and the FTE and Salary/Wage Reductions.

Alternative 8-Week Forgiveness Period for Payroll Costs

Before the Application’s release, the SBA indicated that the “Covered Period” (the 8-week period for measuring forgivable expenses) started when the borrower received the loan proceeds.[13] But the Application includes a new “Alternative Payroll Covered Period” for payroll costs that may be more convenient for some borrowers.[14] This alternative allows borrowers to delay the 8-week Covered Period’s beginning until the start of their first pay period after the loan proceeds are disbursed. In other words, if the borrower receives the loan proceeds on Monday, and a new pay period starts that Wednesday, it can start counting forgivable payroll costs on Wednesday. Only borrowers with a biweekly (or more frequent) payroll schedule may use the Alternative Payroll Covered Period, and they may only use it for payroll costs. Other forgivable expenses must be paid or incurred during the regular Covered Period.[15]

The Full-Time Equivalency (FTE) Reduction

The Program penalizes borrowers for reductions in force and salary/wage cuts since the start of the epidemic, and one of these penalties is the Full-Time Equivalency (“FTE”) Reduction. To implement this Reduction, the SBA developed “Average FTE,” a metric that captures the total number of employee positions the employer supported over a given time. It measures the hours worked by each employee and compares those hours to a hypothetical full-time employee schedule.  Each employee gets a coefficient between 0 and 1, and the sum provides the FTE measure for that time period. The SBA’s FTE calculation method differs slightly (at least superficially) from the CARES Act.  The directions provided by the SBA are probably easier for the borrower to implement.

The FTE Reduction portion of the Application and the recent forgiveness Interim Final Rule yield a few insights beyond those available on the face of the Application:

  • The “simplified method” may penalize many employers that implemented small hours reductions for full-time employees, but for some with many employees at less than half-time, it might result in a smaller reduction from the forgiveness amount.
  • Under both the regular and simplified methods, no employee FTE can be counted as greater than “1.0.” For purposes of the FTE Reduction, the borrower will never get credit for engaging an employee for more than 40 hours.
  • To qualify for the rehire exclusion, the borrower must also notify the state’s unemployment insurance office of the employee’s rejection within 30 days.[16] Prior guidance highlighted the implications of a rejected offer for an employee’s unemployment eligibility, but it didn’t impose this reporting requirement on the employer. As employers seek to maximize forgiveness amounts and millions of Americans consider career or employer changes, this requirement could have significant implications.
  • The Forgiveness Application’s Salary/Wage Reduction only applies to salary and wage reductions not reflected by a reduction in hours captured by the FTE Reduction. If a borrower decreases an employee’s hours, it must generally include that decrease in the FTE Reduction, but it can ignore the resulting decrease in total wages if the employee’s hourly wage did not change.[17] The CARES Act did not explain the interplay between the two Reductions, so the SBA and Treasury exercised their rule-making authority to fill this gap.

In the forgiveness Interim Final Rule released after the Application, the SBA and Treasury also made their case for deciding that “full-time equivalent” (for determining “full-time equivalent employees”) meant “40 hours” for the FTE Reduction. The CARES Act did not define this term. The SBA and Treasury rejected a 30-hour standard, which would have provided smaller FTE Reductions for borrowers.[18]

Nonpayroll Costs–Extensions & Renewals During 8-Week Period

Certain mortgage interest, rent, and utility expenses are also forgivable, but even if the costs are paid or incurred appropriately, they must be related to certain qualified leases, debts, or utilities services. For mortgage interest, the underlying debt must be incurred before February 15, 2020.  For rent payments, the payment must be an obligation of the buyer under a lease agreement in force before February 15, 2020.  For utility payments, the payment must be for a service that began before February 15, 2020. The wording chosen for these requirements indicates that, if a lease was extended (or renewed) or a mortgage was refinanced after February 15th, the rent or interest paid on those obligations may be ineligible for forgiveness.  A change in utility providers after February 15th may also render later payments ineligible under the plain language of the law and its guidance.  The SBA has not issued additional guidance to address this issue or soften what may be a harsh outcome for some borrowers.

The Forgiveness Application’s New Certifications

The Forgiveness Application includes another full page of certifications for the borrower’s representative, some of which are like the certifications in the initial loan application. The CARES Act did not explicitly require several of the Forgiveness Application certifications,[19] but they appear to be consistent with the Act. These additional certifications include:

  • A certification that the borrower has submitted all documentation required for verifying forgivable expenses to its PPP lender. While lenders do have their own set of SBA PPP requirements, this certification prevents borrowers from blindly relying on lender assurances.
  • An acknowledgment that if any loan proceeds are “knowingly used for unauthorized purposes,” the federal government may pursue criminal or civil fraud charges and recovery of certain loan amounts.
  • A certification that the tax documents submitted to the lender “are consistent” with those that the borrower has already submitted or will submit to tax authorities.
  • An agreement to provide additional documents related to the borrower’s eligibility and loan forgiveness at the SBA’s request. If a borrower refuses these requests, the SBA may determine that the borrower does not qualify for the loan or is not entitled to forgiveness.[20]

As the certifications suggest, misstatements can have severe consequences, so borrowers should read and consider each certification carefully.

Other Insights from the Interim Final Rule on Forgiveness

The sections above contain guidance from the SBA’s new Interim Final Rule on forgiveness. In addition to those highlights, the Rule included other helpful clarifications. First, borrowers may incur payroll costs for employees still on the payroll but not working, and those costs will be forgivable. The borrower should recognize these costs as incurred using its own schedule, which would typically provide that the date incurred is the date the employee would have worked.[21] The Program will also count salary, commissions, and wages paid to furloughed employees; hazard pay; and bonuses as forgivable payroll costs. This is the SBA’s interpretation of the CARES Act’s broad definition of “payroll costs,” which includes “salary, wages, commission, or similar compensation.”[22]

The Program’s requirements continue to change rapidly. These changes and other useful information can normally be found on the SBA and Department of the Treasury’s websites, and  When it’s time to apply for forgiveness, borrowers and their lenders will need to be familiar with the Application, the SBA’s PPP FAQs, the Interim Final Rules, and other resources to understand the Program’s requirements. Borrowers with a strong understanding of these requirements will stand a better chance of maximizing forgiveness and be better prepared to ask the right questions about the forgiveness process.


Philip Spencer, an associate attorney with Decker Jones, is a member of the firm’s Corporate Practice Group and focuses on mergers & acquisitions and general corporate law.

[1] Section 1106(k) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Pub. L. No. 116-136 (March 27, 2020) (cited as the “CARES Act”).

[2] Paycheck Protection Program Borrower Application Form (SBA Form 2483 v.3), at 2,

[3] Daniel Graham, et al., PPP Loan Standard of Necessity Hinges on Documentation, Law 360 (May 6, 2020).

[4] Paycheck Protection Program Loans: Frequently Asked Questions, at FAQ # 31,–faq-lenders-borrowers (additional citations will only reference the FAQ, e.g. “FAQ #43”).

[5] FAQ #43.

[6] FAQ #47.

[7] FAQ #46.

[8] FAQ #46.

[9] FAQ #46.

[10] FAQ #46.

[11] Paycheck Protection Program Loan Forgiveness Application (SBA Form 3508), at 4,–paycheck-protection-program-loan-forgiveness-application (cited as “PPP Loan Forgiveness Application”).

[12] PPP Loan Forgiveness Application, at 1.

[13] FAQ #20.

[14] PPP Loan Forgiveness Application, at 1.

[15] PPP Loan Forgiveness Application, at 1.

[16] Business Loan Program Temporary Changes; Paycheck Protection Program – Requirements – Loan Forgiveness (unpublished), at 14,–ppp-interim-final-rule-requirements-loan-forgiveness (cited as “Forgiveness Interim Final Rule”).

[17] Forgiveness Interim Final Rule, at 20.

[18] Forgiveness Interim Final Rule, at 17.

[19] CARES Act, § 1106(e)(3).

[20] PPP Loan Forgiveness Application, at 4.

[21] Forgiveness Interim Final Rule, at 9.

[22] CARES Act, § 1102(a)(2)(36)(A)(viii); Forgiveness Interim Final Rule, at 11.