May 21, 2020


On Friday, May 15th, the Small Business Administration (the “SBA”) released an application for borrowers of the Paycheck Protection Program (“PPP”) loan to use to determine the amount of the loan that may be “forgiven” by their lender. As you may be aware, PPP loans are based upon 2.5 times the company’s average monthly payroll over the previous 12 months, and are generally forgiven based on the same expenses, plus certain interest, rent and utility expenditures that are made in the first eight weeks following the date that the loan proceeds are received. Loan forgiveness is subject to dozens of additional rules, many of which are ambiguous or unclear at this point.

The SBA’s newly released application and instructions are not without issue, however they resolve a number of calculations and substantive questions that borrowers have been hoping to have answered. Below is a list of answers to commonly asked questions regarding the PPP loan Application.

  1. Payroll. Payroll expenses do not have to be both “paid and incurred” in the exact eight-week period (56 days) that begins on the day that the first loan proceeds are received.
  • The Application allows the borrower to choose to use the 56-day period following the receipt of the first PPP loan disbursement, which is referred to as the “Covered Period,” or to select the “Alternative Payroll Covered Period,” to coincide with the payroll schedule of the borrower, if it is bi-weekly or if payroll is more frequent.
  • The Alternative Payroll Covered Period, if elected, will begin on the first day of the borrower’s first pay period following the date that it receives its first PPP loan disbursement, and will end on the 56th day thereafter. This assumes that all borrowers pay their employees in full on the last day of each pay period.
  • Employers that pay employees monthly should adjust their procedures to pay every two weeks so that they can qualify to use the Alternative Payroll Covered Period.
  1. Rent and Interest on Non-Real Estate Secured Loans and Leases. Rent and interest paid on leases, and interest paid on loans that are secured by security agreements (like equipment) will qualify for forgiveness if they are based upon loans and leases that were in effect on February 15, 2020.
  • A borrower that elects to use the Alternative Payroll Covered Period must still keep track of rent, interest. and utilities for the “Covered Period” (the first 56 days after the receipt of the first PPP loan amount).
  1. Interest Rent and Utilities Paid in Arrears. Interest, rent, and “utilities” that are incurred during the eight-week repayment measurement period and paid shortly thereafter in the normal course of business will also qualify to be forgiven.
  • The above does not apply to health insurance or retirement plan contributions, because they are considered to be “payroll costs” under the applicable terminology.
  1. The 75/25 Rule Is Not An “All or Nothing” Requirement. There has been significant confusion regarding whether loan forgiveness will be limited if 75% of the loan amount is not spent on payroll, health insurance and pension expenses. The Application provides clarification.
  • The new instructions make it clear that the borrower must first determine its payroll, health insurance, and retirement plan expenses (which we will call the “Payroll Amount”) when determining loan forgiveness. If the Payroll Amount is less than 75% of the PPP loan, the sum of the other forgivable expenses (“rent, utilities, and interest”) may not exceed 33.33% of the Payroll Amount. The total amount of loan forgiveness would then be the sum of Payroll Amount, and 33.33% of the Payroll Amount.

For example, if the PPP loan is $100,000, and only $70,000 is spent on payroll, health insurance, and retirement plan expenses, then the borrower must calculate 33.33% of $70,000, which is $23,333. Thus, the maximum amount forgiven based on interest, rent, and utilities will be $23,333, so that the total loan forgiveness would be $93,333.

If the borrower has a Payroll Amount of greater than 75% of the total loan, the borrower does not need to consider this calculation, and the entire loan is eligible for forgiveness so long as all expenses are forgivable.

  1. Reduction Ratios for Reduced Workforce and Compensation. The Application indicates how to apply the related calculations with respect to reduction of loan forgiveness when there is a reduction in workforce or large salary reductions for non-highly compensated employees. One clarification is that the amounts that would be forgiven for rent, interest, and utilities are also reduced if there is a reduction in the number of employees under the test.
  1. When Are Pension Expenses “Paid and Incurred? The Instructions indicate that the total amount paid by the borrower for employer contributions to employee retirement plans will be entered in the calculation worksheet.
  • Subsequent SBA regulations or FAQs should confirm that normal and ongoing expenses for health insurance and retirement plans can be included for the full eight weeks in which they are incurred, as long as they are paid within the normal course of business.

If you have questions regarding the Paycheck Protection Program, or for assistance in ensuring that you are taking full advantage of the Paycheck Protection Program forgiveness process contact the attorneys at Rock Fusco & Connelly, LLC. We can be reached via email at info@rfclaw.com, or by phone at (312) 494-1000.