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Paycheck Protection Program and strategies for forgiveness: Your frequently asked questions

June 1, 2020 Article 10 min read
Laura Claeys Kellie Ray

Questions about the Paycheck Protection Program? From certification to determining full-time employees to how benefits count toward the calculation of payroll costs, we’ve answered your burning questions.

Younger man sitting on couch reading an FAQ about the Paycheck Protection Program.On May 15, we hosted our webinar, Paycheck Protection Program: Strategies for forgiveness, with experts from our real estate and construction, not-for-profit, and strategy and operations practices. During the webinar, we discussed various aspects of the program, including accruals, certifications, forgiveness, payroll impacts, and tax planning.

We’ve compiled a list of the most frequently asked questions along with our answers below. These responses are based on guidance issued through May 22, 2020, and could change as Congress contemplates proposed changes to the program and more FAQ and Interim Final Rule documents are published to the Department of Treasury’s PPP resource center. We’ve categorized them by general topic for ease and accessibility.


How is the date of receipt of loan proceeds determined?

  • The eight-week period begins when the funds are deposited in your account. If the funds are not accessible until Monday but you got notification that the loan was being funded on the previous Friday — write that down and use Monday (since that is when you could start spending it.)

What do I do when my payroll periods don’t line up exactly with the eight weeks?

  • Eight-week covered period: Previously, there was speculation that the SBA may allow PPP recipients to utilize an alternative covered period in situations where employers are still subject to government shutdown orders. This isn’t the case. The eight-week covered period stands as originally defined (with the exception of the alternative covered payroll period described below). The clock is ticking on spending as soon as recipients receive the PPP funds.
  • Alternative covered payroll period: The instructions provide a simplified approach for employers with a biweekly or more frequent payroll cycle. These employers may elect to begin their covered payroll period with the first day of the first pay period that starts after they received their PPP loan, and then count the eight-week period from that point. This means that pay periods might extend past the “traditional” eight-week period. The clarifications provided allow for that, as long as payroll incurred during the eight-week period is paid by the next payroll cycle.

Payroll & covered costs

What benefits count toward calculation of payroll costs (and which ones don’t)?

  • “Payroll” is defined in Sections III 2f and 2g of the interim final rule. There are additional clarifications to the definition of “payroll” in the April 17, 2020 FAQs. Payroll costs include:
    • Compensation to employees (whose principal place of residence is the United States) in the  form of salary, wages, commissions, or similar compensation.
    • Cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips).
    • Payment for vacation, parental, family, medical, or sick leave.
    • Allowance for separation or dismissal.
    • Payment for the provision of employee benefits consisting of group healthcare coverage, including insurance premiums and retirement.
    • Payment of state and local taxes assessed on compensation of employees.
    • For an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment or similar compensation.
  • Compensation is capped at an annualized limit of $100,000. [or $15,385 for the eight-week period ($100,000/52 weeks times 8 weeks)]. The April 17, 2020 FAQs make it clear that, for the purposes of calculating payroll costs, borrowers should use gross [not net] compensation. Furthermore, all the employee fringe benefits listed in the preceding sentences aren’t counted toward the $100,000 annual salary cap.
  • Payroll costs incurred but not paid during the borrower’s last pay period of the covered period (or alternative payroll covered period) are eligible for forgiveness if paid on or before the next regular payroll date.

How are bonuses and commissions treated when calculating payroll costs?

  • The SBA released details in an Interim Final Rule on May 22 that bonus and hazard pay incurred and paid during the covered period (or alternative covered period) are permitted up to the amount of the $100,000 annualized compensation amount, or $15,385 per employee.

Does the PPP limit the definition of “rent” to the rental of real property?

  • No. The Loan Forgiveness Application issued May 15, 2020, includes interest and lease payments for personal property in the definition of “covered rent.”


Are costs eligible for forgiveness based on the cash or accrual basis — specifically, payroll accrued during the eight-week period or payroll actually paid over that time?

  • According to the forgiveness application issued by the SBA on May 15, 2020, the costs are primarily on an accrual basis, provided that the expenses are paid within a relatively short time frame after the eight-week period. See the definitions on page 2 of the forgiveness application under payroll and nonpayroll costs. The wording from the application is included below:
    • “Payroll costs are eligible for forgiveness to the extent they are incurred and paid during the covered period (or alternative payroll covered period). This means, the employee must have provided the service that relates to the payroll costs during the covered period and the pay distribution must have been made. There is an exception for payroll costs incurred but not paid during the last pay period of the covered period. These costs may be included in covered costs as long as they are paid on or before the next regular payroll date.
    • Nonpayroll costs are covered if they are paid during the covered period or incurred during the covered period and paid before the next regular billing date, even if that payment occurs after the covered period.”

Full-time equivalent

How many hours qualify as an FTE?

  • Our webinar indicated the best guess was 30 hours for an FTE, based on other SBA guidance. As luck would have it, when the forgiveness application was released on May 15, the SBA clarified 40 hours would be the qualification point for an FTE in the PPP calculations. Please see the instructions on page 7 of the forgiveness application for guidance on how to compute FTEs.
  • The loan forgiveness application provides the following calculation to determine the average FTE during the covered period or the alternative covered period.
    • “For each employee, enter the average number of hours paid per week, divide by 40 and round the total to the nearest tenth. The maximum for each employee is capped at 1.0.
    • A simplified method assigns 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours at the election of the Borrower. We expected the SBA to use 30 hours per week as the standard, so this is a change from previous guidance.”

What if FTE count goes down due to retirements, job changes, or other non-COVID-19-related reasons that were beyond the employer’s control?

  • Employees separated from employment for cause, voluntary resignation, or voluntary schedule reduction aren’t counted in the FTE calculation, and they don’t cause an employer to suffer a reduction in loan forgiveness. If employees reject an offer to return to work the borrower, in general will not be penalized subject to proper documentation.


If payroll costs don’t reach 75% of loan amount, is forgiveness prorated, or is it an all-or-nothing threshold?

  • The forgiveness application released on May 15 and the guidance published in the May 22 Interim Final Rule on loan forgiveness in the provides detailed instructions on how to determine the maximum forgiveness amount (amount spent) and then possible reductions for items such as salary reductions, FTE reductions, and spending on payroll below 75%. Spending less than 75% on payroll doesn’t preclude any forgiveness, but it will reduce the amount of forgiveness available. Working through the application steps is a great exercise to see where you stand.

Do fluctuations in overtime pay affect the payroll amount calculation?

  • Overtime pay is treated the same as regular payroll — it’s included for purposes of payroll costs. If an individual’s hours exceed 40 hours, hence the need for overtime, they are still treated as 1 FTE.

What if reductions in pay were due to reduced hours worked by hourly employees?

  • This situation is likely to occur given the stay-at-home orders imposed in many states. To address this, the application looks at average salary/hourly wages compared to previous periods. Remember, only salary reductions in excess of 25% will reduce your forgiveness amount.
  • This reduction factor will be based on changes in individual employees’ average annual salary or hourly wage in excess of 25% during the covered period, as compared to the average annual salary or hourly wage during the period Jan. 1, 2020 through March 31, 2020. This is important guidance because the Act originally defined the reduction as a comparison in total wages the employee earned in these two periods.

Can I spend 100% of my PPP loan on payroll?

  • Of course! If you’re spending 100% of the loan on payroll, you’ll still need to perform the FTE and salary reduction exercises to see if your forgiveness must be reduced. Many organizations may experience this, since the loan amount was based on 2.5 months of average payroll (and often used 2019 wages to determine that monthly amount) and the forgiveness calculation looks at spending during the specified eight weeks (or two months). Unless there were payroll cost increases in the eight-week period, or additional FTEs put on the payroll, you still may have a reduction in the forgiveness. This is where working the math for your particular situation is very important.


Will the $2 million audit threshold apply if the initial loan amount was $2 million or more but some amount was repaid, so that the total forgiveness sought is less than $2 million?

  • Yes, the $2 million threshold is based on the original loan funded, as we understand it today. If the organization felt it was eligible for the loan, we recommend preparing documentation now that summarizes the thought process, the economic uncertainty that existed, and any other factors that were considered (see answer to next question below) — regardless of the ultimate loan size.

Will I have to provide cash flow analyses or show that I could not get financing elsewhere in order to “prove” I needed my loan?

  • Not necessarily. The CARES Act specifically indicated that borrowers didn’t need to consider other sources of liquidity before taking the loan. Subsequent guidance brought that topic back into consideration. We have continued to recommend that each organization, regardless of loan amount, document the discussions that were held when deciding to apply for the loan. Such items might include:
    • Cash position
    • Layoffs
    • Furloughs
    • Status of contracts, customer operations, customer financial condition
    • Cash flow
    • Future contracts
    • Cost containment measures
    • Economic factors in the geographies in which you operate
  • The loan program was “first come, first served,” so most applicants have rushed to determine the need to apply. It’s critical to document all of these conversations and considerations while memories are still fresh. While a lender may not ask for this information when you apply for forgiveness, the SBA might later (especially if the loan is over $2 million). So, do yourself a favor and write the data points down now.


If some portion of the loan proceeds is unspent at the end of the eight-week period, is there any requirement for immediate repayment?

  • The current guidance is no. If there are amounts that aren’t forgiven, this balance would convert to a loan payable under the terms and conditions of the loan agreement signed when the loan was initially funded with the lender.
  • Interest accrues at a rate of 1% annually for the term of the loan (two years). The interest applies to the amount of the loan, which isn’t forgiven. If the entire amount of the loan is forgiven, no interest payments are required by the borrower.


What is the tax treatment for PPP loan amounts, both the forgiven amounts and any balance that is repaid?

  • The CARES Act made it very clear that any amounts forgiven wouldn’t be taxable income (although it will be income for your financial reporting purposes).
    • The CARES Act states in 1106(i) that, “any amount which (but for this subsection) would be includible in gross income of the eligible recipient by reason of forgiveness … shall be excluded from gross income.”
  • The IRS further clarified in Notice 2020-32 that although the loan forgiveness wouldn’t be taxable, expenses paid with loan proceeds that are later forgiven will NOT be deductible (which therefore increases taxable income). This item is being litigated currently and may change, but current guidance is your expenses (payroll costs, interest, rent, and utilities) paid for with loan proceeds that are later forgiven will not currently be deductible. As a result, you should plan for this situation when determining your expected taxable income for 2020.

We hope this helps answer your questions. If you need additional guidance, please give us a call.

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