13 min read

7 Things We Don’t Know About PPP Loan Forgiveness

7 Things We Don’t Know About PPP Loan Forgiveness

I know, you’ve read the bill and you completely understand it. Well, there is a lot there that seems straightforward, so I get it. Highlights from Captain Obvious would include:

  • 8-week Forgiveness Period begins upon PPP funding
  • 75% of the forgivable debt must be from “payroll costs”
  • The balance of the loan is a 2-year term, 1% loan, which can be converted to longer term

So, yeah..….we got this. Or do we? So, let me say for sure the interim rule on forgiveness has not been issued yet and will hopefully address what I talk about next. I intend to send this article to the Senate SBA grassroots committee we serve on, so let’s hope this will help.

Now, let’s dive into everything we DON’T know about forgiveness. At least seven things, to be exact:


#1: What does the bill mean when it says “costs incurred and payments made” within the 8-week covered period, will be forgiven?

The requirement that only “costs incurred and payments made” within the 8-week period will be forgiven may seem innocuous, but it has the potential to create a host of problems.

There are two possible interpretations of this critical phrase. The first is to focus on the use of “and” rather than “or” in the phrase, and assume this requires any expense to be BOTH incurred AND paid within the 8-week period. This, as you could imagine, would cause some problems. Say a borrower gets their PPP loan on April 15th – under this interpretation, they wouldn’t be able to use the funds to pay payroll attributable to March, because though the costs weren’t “incurred” during the 8-week period beginning with the receipt of the proceeds. Or, at the other end of the date range – the same borrower wouldn’t be able to prepay June rent at the end of May, before the expiration of the 8-week period, because the rent wasn’t incurred until after the period had expired.

The other interpretation is more favorable, but perhaps unreasonably so. Here, we focus on the fact that the language does not require any particular expense to be both paid and incurred, but rather accommodates BOTH “costs incurred” AND “payments made” during the 8-week period. In this case, the application gets far more expansive. Presumably, an April borrower could have May rent forgiven that wasn’t paid until June, because the cost was incurred prior to the end of the 8-week period. Similarly, the same borrower could pay amounts attributable to costs incurred before and after the period, and both would be eligible for forgiveness because the amounts were paid within the covered period. And while allowing for prepayment of expenses may appear illogical, remember that the CARES Act specifically bars prepayment of mortgage interest during the covered period, but only mortgage interest.

Unless I just really overthink things, we’re going to need some clarity on this. Or, as we’ll discuss in #7, maybe no one will be checking the borrower’s math.

Our Take

Option 2 seems the intent of the lawmakers. A reasonable allowance for forgiven expenses.


#2. How do the two “covered periods” relate?

Section 1102 of the CARES Act provides that PPP loans are only available during the “covered period” of February 15 – June 30, 2020, and during that time, may only be used to pay payroll costs, mortgage interest, rent, utilities, and interest on other debt.

Then, Section 1106 provides that only amounts spent during the “covered period” are eligible for forgiveness. But for these purposes, the covered period is the 8-week period following the receipt of the loan proceeds.

Now, this may be a moot point given that the PPP funds from the first round are already gone, but let’s hope Congress can actually do something right and let’s assuming a second or even third wave of funds becomes available. What happens to a borrower who receives a PPP loan on June 1st? The covered period for use of the funds ends on June 30th, but the covered period for forgiveness will end at in the last days of July. Will payments made post-June 30th be eligible for forgiveness? This will need addressing, particularly for round 2 borrowers.

Our Take

Each borrower should expect and be given an 8-week forgiveness period, regardless of when they finally get the money, thereby requiring the loan period be extended.


#3. Can a business pay interest on non-mortgage debt during the covered period and have it forgiven?

If you read the entire text of the CARES Act (you did not, it’s 880 pages), you’ll notice something curious: when listing “allowable uses” of PPP loan proceeds, in addition to payroll costs, mortgage interest, rent, and utilities, Section 1102 of the CARES Act allows a borrower to use the funds to pay “interest on any other debt obligations that were incurred before the covered period.”

But when you flip to Section 1106 of the Act, which details the items eligible for forgiveness, that final item is absent. To make matters worse, the Interim Rule issued by the SBA does not include debt interest either, which smells like a showdown might be coming on this part of the bill.

So, it appears Congress will allow a borrower to use the funds to pay interest on a non-mortgage debt during the covered period but won’t allow a borrower to have that amount forgiven. Is that intentional? If so, why? Borrowers will need clarity quickly. And the SBA ultimately may not agree.

Our Take

The Administrator already tipped their hand on this. Make it official, non-mortgage debt will not be needed as a forgiveness element with the 75/25 rule already in place. 


#4:  What are we doing about federal income tax withholding and payroll taxes?

Here we go again. The CARES Act states that payroll costs do not include “…taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code during the covered period.” These taxes include federal income tax withholding on employee wages as well as the employer’s and employees’ share of Social Security and Medicare taxes.

This exclusion caused mass confusion during the application process, with some banks lending based on an employer’s NET 2019 payroll, with others lending based on GROSS payroll PLUS the employer’s share of payroll taxes. It’s hard to blame the banks, however, as the paragraph made little sense when determining loan proceeds; after all, why would we reduce 2019 payroll costs for withholding and payroll taxes incurred in April, May, and June of 2020?

Eventually, the SBA reached the logical conclusion that in determining loan proceeds, this paragraph is to be ignored. In other words, the computation is based on gross payroll, unreduced by federal income tax withholding and the employees’ share of payroll taxes, and not increased by the employer’s share of payroll taxes. Fair enough. But this message got to many of us long after more than half of the 349 billion was already loaned. I assure you most loans granted before then, and many even after, had the Employers portion of the payroll taxes in the loan calc.  Can you blame them? Hang in there, we’re not done with the confusion yet.

But what now? Payroll costs for the covered 8-week period are defined in the same manner as payroll costs for the purposes of computing proceeds — does this mean that the intention of Congress was that while amounts could be loaned based on 2019 gross payroll, only net payroll during the covered period should be forgiven, thereby preventing the government from effectively paying itself the required payroll taxes for eight weeks?

That may have been the intent, but based on the SBA FAQ as it stands today, in computing forgiveness, payroll costs will also be gross. A footnote to the FAQ provides:

The definition of “payroll costs” excludes “taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986 during the covered period,” defined as February 15, 2020, to June 30, 2020. As described above, the SBA interprets this statutory exclusion to mean that payroll costs are calculated on a gross basis, without subtracting federal taxes that are imposed on the employee or withheld from employee wages…Further, because the reference period for determining a borrower’s maximum loan amount will largely or entirely precede the period from February 15, 2020, to June 30, 2020, and the period during which borrowers will be subject to the restrictions on allowable uses of the loans may extend beyond that period, for purposes of the determination of allowable uses of loans and the amount of loan forgiveness, this statutory exclusion will apply with respect to such taxes imposed or withheld at any time, not only during such period.

That’s great and all, but I’d prefer something a bit more concrete than a footnote. Make it happen, SBA.

Our Take

Gross payroll plus employer paid payroll taxes are actual payroll expenses. Let them be fairly counted.


#5: Can someone explain how we determine the required reduction in forgiveness amount if a business cuts employees?

As we’ve seen, computing the amount of a PPP loan that will be eligible for forgiveness is no simple task. But understand – once that amount is determined, it is not set in stone. To the contrary, the forgiveness will be reduced if a business either cuts employees or slashes salary during certain time periods.

In this question, we’ll address the employee reduction problem. The CARES Act provides that the amount of loan forgiveness is reduced by multiplying the amount eligible for forgiveness by the quotient obtained by dividing:

  • The average number of full-time equivalent employees (FTE) per month employed by the eligible recipient during the covered period; by
  • At the election of the borrower, either:
  1. The average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019; or
  2. The average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on January 1, 2020 and ending on February 29, 2020.

If your employees dropped off from one of these time periods and now– and they likely did – you’ve still got a chance for full forgiveness. If a business reduces employees from February 15 through April 27, 2020, but eliminates that reduction by June 30, 2020, the reduced forgiveness is restored.

So if you’re scoring at home:

  • A business must measure its FTEs for each pay period during the 8-week covered period. Let’s say its 20.
  • It must then measure its FTEs for the period February 15 – June 30, 2019 or January 1 – February 29, 2020. Let’s say it’s 30 in both cases.

At this point, if the business were otherwise eligible for $100,000 of forgiveness, that amount would be reduced to $66,667 ($100,000 * 20/30).

But…the business must then measure:

  • Its FTEs from February 15 – April 27, 2020. Let’s say this is 25, and
  • Its FTEs on February 15, 2020. Let’s say this was 32.

Based on my read of the CARES Act, this 7-person reduction between February 15 and April 27, 2020 will be ignored if no later than June 30, 2020, the business has restored the employee levels to what they were on February 15, 2020 (32).

There’s a lot to unpack here. First, a lot of people, including myself, first read the reduction formula as containing an error, interpreting it as requiring a reduction in forgiveness even if a business remained fully staffed. Upon reading #535, however, it finally clicked for me, and I think the language, while clumsy, is correct. But still, open to interpretation?

Next, the formula requires a business to determine its FTEs for each pay period falling within one of the many different months that are part of the formula, but provides no guidance on how to quantify FTEs. Presumably, it will require the standard approach of dividing the number of working hours for a pay period into the total hours worked.

Once you’ve got FTEs dialed, a business must compute the “average” FTE during the periods:

  1. The 8-week covered period beginning with receipt of the loan proceeds;
  2. February 15 – June 30, 2019 or January 1 – February 29, 2020; and
  3. February 15 – April 27, 2020; and
  4. February 15, 2020, and
  5. Presumably from now until June 30, 2020.

If your FTEs in period 1 is less than 2 (whichever is lower), you’ve got a reduction in your forgiveness…UNLESS during period 5, you restore any reduction in employees that occurred during period 3 relative to date 4.

I can’t be the only person that finds this formula to be incomprehensible. Why is forgiveness reduced if our staffing drops during the covered period relative to 2019 or the beginning of 2020, but restored if we replace employees lost during the period February 15 to April 27, 2020? What do you do in this fact pattern?

  • X Co. had 20 average FTEs in 2019 and from January 1- February 29, 2020.
  • X Co. had 10 average FTEs between April 10, 2020 – the day it received PPP loan proceeds – and June 10, 2020, a period 8 weeks later.
  • X Co. had 17 employees on February 15, 2020.
  • During the period February 15 – April 27, 2020, X Co. had 12 average FTEs.
  • On May 15th, X Co. rehires 3 people and is now at 15 FTEs.

What is the reduction in the forgiveness? Is it 10/20? Is there any restoration of the forgiveness? X Co. lost 5 employees between February 15 and April 27, 2020, but replaced 3 before June 30th. Is there any restoration of reduced forgiveness, or is restoration only allowable if ALL of the reduction is restored? And what if X Co. rehires all 5 people lost between February 15th and May 31st, but then drops another 10 in June?

And what are the limits on rehiring people? Can you rehire for a completely different position? For example, can a restaurant that fired 10 people during the covered period hire 10 painters/construction workers to renovate the place? Do temporary employees count? Can a business owner hire their spouse or children to bump up payroll costs and headcount?

I give up. You should too. It may appear clear, but that’s usually because we interpret what we read the way we want to. This area is the most needed clarification in the upcoming rule from the SBA. Please get this simplified and straight for all business owners.

Our Take

Make a simple one-page chart that simplifies the math/criteria. If not, banks will screw this up.


#6: How does the reduction in forgiveness caused by salary reduction work?

The amount of loan forgiveness is also reduced by the amount of any reduction in total salary or wages of any employee during the covered 8-week period who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay of more than $100,000. The reduction in forgiveness amount is required if the reduction in wages over the 8-week period is in excess of 25% of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period.

Wait a second…I’m not the smartest guy around, but I am familiar with the workings of the Gregorian calendar. A quarter is 12 or 13 weeks, depending on your purpose. The 8-week period is, well…8 weeks. This rule appears to be saying that if during the 8-week covered period you get paid less than 75% of what you did during the previous calendar quarter prior to the covered period, your forgiveness amount is reduced. But 8 is only 67% of 12; so if employee A earned $12,000 for twelve weeks in the previous calendar and $8,000 during the 8-week covered period, is the business required to reduce its forgivable amount by $1,000, the excess of the reduction ($4,000) over 25% of the $12,000 salary ($3,000)?

This obviously makes no sense. You know what else makes no sense? The CARES Act says the reduction is not required if it relates to any employee who, DURING ANY SINGLE PAY PERIOD in 2019, has annualized salary in excess of $100,000. So if an employee got a bonus during one pay period in 2019 that, when annualized, exceeds $100,000 in total pay, are they immune to this calculation?

For the love of humanity, we need help here.

Our Take

Cap income at the 100k per employee but not over dissect the associated forgiveness elements. Let those over 100k remain exempt from the 25% reduction calculation.


#7: Who is actually in charge?

There was a serious “gold rush” feel to the PPP application process. Knowing that the loans were “first-come, first-served” and hearing that they would effectively become a tax-free grant led many to apply without fully understanding the procedural aspects of forgiveness.

Forgiveness is NOT guaranteed. Aside from having to meet the computational guidelines discussed above and below, the CARES Act provides that a borrower must submit to the lender an application, which must include a host of certifications and documentation verifying payments made. The CARES Act states that any borrower who fails to provide a complete application is not eligible for forgiveness.

The lender then has 60 days to make a decision on forgiveness. And while the CARES Act states that as long as the lender receives the required documentation and certifications from the borrower, the lender will not be subject to SBA enforcement action or penalties if it chooses to forgive the loan, one has to wonder how the forgiveness decision will play out in practice? As we saw with the application process, in the absence of guidance, every lender will come up with their own interpretation of key terms and computational formula, and just as was the case with the determination of maximum proceeds, some borrowers will win and some will lose.

Want proof? I just received a note from a client who was told by his bank – AFTER borrowing the PPP loan – that if the client did not use 75% of the loan proceeds on payroll costs during the covered period, NONE OF THE LOAN would be forgiven. Show me where the CARES Act or subsequent SBA guidance says that?

The only saving grace is that in all likelihood, the banks won’t be able to forgive these loans fast enough; they generally don’t want 1% loans sitting on their books. But that raises another question: since the banks DON’T want these on their books, what will they do with loans that can’t be forgiven. Earlier today, another contact sent me a note from a bank that stated that any PPP loan funds not used within 8 weeks for allowable purposes must be immediately returned to the bank.

Our Take

Don’t increase underwriting at this point. Reassure the banks they remain off the hook from underwriting errors. You all wrote the law, so we gotta live with the best judgment we have seen so far, which frankly, isn’t all that bad.


If you’ve stuck with me this long (you likely have not), you appreciate the severity of the situation. We don’t know what costs are forgiven. We don’t know what will determine which costs are allowed — is it incurred, paid, or both? We don’t understand the time frames. We don’t know if we can deduct the expenses paid with forgiven dollars. We have no idea how to compute the reduction in forgiveness related to lost employees or reduced salaries, or how to restore that reduction if it occurs. And lastly, NONE of it may matter, because the banks are going to make the rules, and they don’t know what the hell they’re doing.

Other than that, we’ve got this all figured out.

– Mark Gilbert, ATN CEO