PPP Loan Forgiveness Essentials | Forgiveness Reductions | Ohio Tax CPA

What You Need to Know About PPP Loan Forgiveness

Published on by Matt Rosen, Cheryl Ganim, in Assurance, COVID-19, Tax Services

What You Need to Know About PPP Loan Forgiveness

The Small Business Administration (SBA) has released the application to obtain forgiveness of PPP loans, and in doing so has provided answers to many of the questions that our team and so many loan recipients have had, as we try to forecast the forgiveness and make business decisions. The full application can be found on the SBA website here, however, we have highlighted some of the most significant items clarified in the instructions below.

Payroll Schedules

While the application confirms that an 8-week (56-day) period from the date funds are received is the covered period for expenses to qualify for forgiveness, it provides an alternative period for payroll costs to provide administrative assistance in tracking expenses. The alternative period will now allow a business to calculate payroll costs, if they have bi-weekly (or more frequent payroll), for the 8-week period starting the first day of its first payroll period following the receipt of the loan. If the Alternative Payroll Covered Period is utilized, presumably the loan recipient will have two covered periods within which to track expenses:

  1. The Covered period for Other Allowable Expenses (and Expenses not allowed for the purposes of PPP loan forgiveness, and;
  2. The Alternative Payroll Covered Period.

Below is the exact language from the instructions for the Alternative Payroll Covered Period:

For administrative convenience, Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date (the “Alternative Payroll Covered Period”). For example, if the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20. Borrowers who elect to use the Alternative Payroll Covered Period must apply the Alternative Payroll Covered Period wherever there is a reference in this application to “the Covered Period or the Alternative Payroll Covered Period.” However, Borrowers must apply the Covered Period (not the Alternative Payroll Covered Period) wherever there is a reference in this application to “the Covered Period” only.

Cash versus Accrual Basis

The initial guidance on covered costs left significant uncertainty on the basis of accounting to be used in determining the qualifying expenses. The instructions have provided clarification on these questions.

Eligible Payroll Costs

The instructions provide that eligible payroll costs are those payroll costs that are paid during the 8-week period (or alternative payroll covered period) as well as payroll costs that are incurred during the 8-week period (or alternative payroll covered period) as long as they are paid by the next regular payroll date. Effectively, these changes provide for cash basis treatment with an adjustment for costs incurred at the end of the period. Depending on specific dates of payrolls, this could result in qualifying expenses that cover more than 8-weeks.

The instructions are clear than the payroll expenses for any individual employee should not exceed $15,385, which is 8-weeks of compensation meeting the cap of $100,000 on annualized pay.

Eligible Non-payroll Costs

These costs (e.g. utilities, rent, and mortgage interest) also are provided significant flexibility in that they too are calculated based on costs “paid during the Covered Period or incurred during the Covered Period and paid on or before the next regular billing date, even if the billing date is after the Covered Period.” Similar to the payroll costs above, this effectively provides cash basis treatment with an adjustment at the end of the covered period for those expenses incurred. Depending on specific dates of expenses, this could result in qualifying expenses that cover more than 8-weeks.

The instructions also provide further details on the qualified rent expenses, explicitly stating this applies to “business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020.” This provides the possibility of claiming expenses for items such as equipment leases and other personal property.

Forgiveness Reductions

There are two calculations that could impact-full loan forgiveness:

  1. Average Full-Time Equivalent (FTE) – Actual loan forgiveness may be reduced if the Borrower’s average weekly number of FTE employees during the Covered Period or the Alternative Payroll Covered Period was less than during the Borrower’s chosen reference period (either (i) February 15, 2019, to June 30, 2019; (ii) January 1, 2020, to February 29, 2020; or (iii) in the case of seasonal employers, either of the preceding periods or a consecutive twelve-week period between May 1, 2019, and September 15, 2019). The Borrower is exempt from such a reduction if the FTE Reduction Safe Harbor applies.
  2. FTE Reduction Exception – Reductions in FTEs can cause the total forgiveness to be reduced if not corrected by June 30, 2020. However, there are certain reductions in the FTE number which can be added-back and not result in a reduced forgiveness amount. In all of these cases, include these FTEs only if the position was not filled by a new employee. We recommend that all Exception items are documented in writing in your files. Those exceptions are:
    1. Any positions for which the Borrower made a good-faith, written offer to rehire an employee during the Covered Period or the Alternative Payroll Covered Period which was rejected by the employee.
    2. Any employees who during the Covered Period or the Alternative Payroll Covered Period
      • were fired for cause
      • voluntarily resigned, or
      • voluntarily requested and received a reduction of their hours
  3. FTE Reduction Safe Harbor – The Borrower is exempt from the reduction in loan forgiveness based on FTE employees if:
    1. The Borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and
    2. The Borrower then restored its FTE employee levels by not later than June 30, 2020 to its FTE employee levels in the Borrower’s pay period that included February 15, 2020.

Full-Time Equivalent (FTE)

The instructions provide that FTEs are to be calculated based on a 40-hour work week, thus a business will total the number of hours paid per week, divide by 40 and round to the nearest tenth. An important clarification is that the maximum for each employee is capped at 1.0. Employees who work overtime during the covered period will count as one (1) FTE. The previous guidance advised to use 30 hours as the basis for an FTE, so this change will result in updates to prior projections. Additionally, the borrower may elect a simplified method by assigning one FTE to all employees who work more than 40 hours and 0.5 to all who work less than 40 hours.

We expect that the simplified method may be advantageous to those businesses which have kept part-time employees on payroll but with an overall reduction to hours in the covered period. For example, under the simplified method hourly employees working on average 35 hours in the reference period would count equal to hourly employees working on average 25 hours in the covered period, as they would all count as 0.5 FTEs, thus not resulting in a reduction in FTEs.

Salary/Hourly Wage Reduction

Similar to a reduction in FTE’s, reduction in certain salary and wages during the covered period as compared to the period from January 1, 2020 – March 31, 2020. can cause the total eligible forgiveness amount to be reduced. The initial guidance was left many unanswered questions, however, the instructions provide significant clarification on this matter. The reductions to salary and hourly wages are calculated for each employee and result in a reduction to the overall forgiveness amount if:

  1. The salary on an annual basis, or hourly wage rate, are reduced 25% during the covered period (using the average during the period if there were changes).
  2. The reductions to payroll are not corrected by June 30, 2020.

This significantly simplifies the calculation from previous guidance and most notably is only based on pay rates for hourly employees (not actual total pay) and simply a reduction in hours does not result in a second reduction to the forgiveness (they may still result in a reduction to FTEs).

Compensation to Owners

Total amount paid to owner-employees/self-employed individual/general partners are reported separately on the application form and although eligible as payroll costs (subject to the $100,000 limitation), the wages are excluded from the 25% wages reduction calculation as well as the FTE computations. If owners were included in the original FTE count for your chosen measurement period, this may need to be corrected in this application.

75% Payroll Requirement

Treasury rules after the passage of the act implemented a requirement that no more than 25% of the loan forgiveness amount may be attributed to non-payroll costs. The instructions clarify how to apply the limitation. The final eligible forgiveness is the lesser of:

  1. The loan amount
  2. The total amount of qualified expenses less any adjustments to forgiveness for reductions in FTE’s or wages
  3. The total eligible payroll costs divided by 0.75

Due to the limitation being applied separate from the other adjustments to forgiveness, this may result in a more favorable outcome than prior projections depending on the assumptions that were being made.


Documentation supporting the forgiveness application must be maintained in your files for six years after the date the loan is forgiven or repaid in full.

Unresolved Questions

Although the above items are very welcome guidance and help immensely, there are some areas we believe still have significant uncertainty, and we will continue to look for future guidance. Some of these areas include:

Certification for Retaining of Employees – The forgiveness instructions require a certification that the amount requested for forgiveness “was used to pay costs that are eligible for forgiveness (payroll costs to retain employees; business mortgage interest payments; business rent or lease payments; or business utility payments).” What remains uncertain is the criteria to support the certification that the funds were used to “retain employees,” especially in businesses with less severe financial or operational impacts. While the SBA provided a safe harbor for loans under $2 million in supporting the need certification for the loan request, it is unclear if the same will be provided for the forgiveness certification.

Details on Eligible Transportation Costs – The instructions provide that “transportation costs” are an eligible utility cost, however, we continue to await guidance on what types of transportation costs qualify for the purposes of the calculation.

Self-Rental Payments – Clarification has yet to be provided on the ability to include rental payments that are made to a related party, a common question for many small businesses that have set up separate entities to hold their buildings and property.

Application Timing – We continue to await guidance on the timing of applying for forgiveness. We note that the loan application itself states the form expires on October 31, 2020, however, no explicit guidance has been released on if this is a filing deadline or if there are other requirements on when the application needs to be submitted.

Additional Resources

While the application provides some much-needed guidance on the accounting for the funds under the PPP program, the resulting treatment will not be consistent from entity to entity. Given the fact-specific considerations, we recommend reaching out to your Barnes Dennig Accounting Team Member for assistance.

Visit Barnes Dennig’s COVID-19 Resource Center for a comprehensive list of resources. Please contact our COVID-19 Advisory Team or any of our leadership team at Barnes Dennig to discuss.

Barnes Dennig COVID-19 Advisory Team


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