It’s Finally Here: Guidance on PPP Loan Forgiveness

June 2020

The Small Business Administration (SBA) released guidance on May 22, 2020 specifically related to the loan forgiveness piece of the Payroll Protection Program (PPP) loan. Although we received a glimpse of this guidance in the most recently released loan forgiveness application there were some new developments that we will clarify below.

Compensation Caps for Owner-Employees and Self-Employed Individuals

In general, compensation under a PPP loan is capped for each individual at $15,385 which is based upon a salary limit of $100,000 prorated for eight weeks of the year. However, owners and self-employed individuals have a further cap in that their compensation cannot be more than the lesser of either $15,385 or their 2019 payroll compensation/owner compensation replacement. No forgiveness for retirement or health insurance contributions is available for self-employed individuals and general partners as these expenses are paid out of their net self-employment income (which is considered the owner compensation replacement).

Full-Time Equivalent Simplified Method

Each borrower is required to maintain a count of employees using a full-time equivalent (FTE) calculation for purposes of determining loan forgiveness eligibility. This calculation is based upon equating each employee’s hours to a base metric of a 40-hour work week. To assist in this calculation, a simplified method was provided because many employers may not capture employee hours for a full-time equivalent calculation. The simplified method provides for any employee working on average 40 hours or more to be considered an FTE employee of 1.0. An employer may elect all part-time employees (those working on average less than 40 hours) to be considered an FTE of 0.50. Under this method, each employee you pay must be counted for as either 1.0 or 0.50.

If an employer maintains hours-worked data, the employer could use a factor that is more accurate to hours worked. For example, an employee that works on average 30 hours per week can be determined to be a .75 for the FTE computation. Whichever method is chosen, the employer must be consistent in using that method for every employee.

Reduction in Employees’ Salaries or Wages

In general, a reduction in an employee’s salary or wages in excess of 25% will result in a reduction in the loan forgiveness amount, unless an exception applies. The guidance specifically states:

“For each new employee in 2020 and each existing employee who was not paid more than the annualized equivalent of $100,000 in any pay period in 2019, the borrower must reduce the total loan forgiveness amount by the total dollar amount of the salary or wage reductions that are in excess of 25% of the base salary or wages between January 1, 2020 and March 31, 2020 unless those wages were restored by June 30, 2020”. 

For example, a borrower reduced a full-time employee’s weekly salary from $1,000 per week during the reference period to $700 per week during the covered period. The employee continued to work on a full-time basis during the covered period with an FTE of 1.0. In this case, the first $250 (25% of $1,000) is exempted from the reduction. Borrowers seeking forgiveness would list $400 as the salary/hourly wage reduction for that employee (the extra $50 weekly reduction multiplied by eight weeks).

Please note this calculation is performed on a per employee basis and cannot be performed in the aggregate. For hourly wage employees, the reduction in wages is computed based upon the changes in hourly rates only and therefore changes in hours worked by hourly employees would not result in a wage reduction.

Loan Forgiveness Process

The loan forgiveness process begins by submitting a completed SBA Form 3508 or a lender equivalent form to the lender who processed the PPP loan for you. This form is detailed so maintaining a PPP loan tracker will be essential to assist in your compilation of the items requested on the application. The lender has 60 days from receipt of your completed application to issue a decision to the SBA on whether any, all, or a portion of your loan is subject to forgiveness. The SBA then has 90 days after receiving the lender’s decision to remit payment to the lender related to the forgiveness. However, the SBA can request further review of the loan or loan application at any time and this may lengthen the timeframe.

As some loans may be reviewed by the SBA prior to the lender’s decision on the loan forgiveness, the lender will not approve the application for loan forgiveness until after the SBA has completed its review and therefore the timeframes may vary.

To assist you in planning, tracking, and maintaining your PPP funds, we have provided a PPP loan tracker workbook that has been recently updated based upon the final guidance released.


Please contact RBI member Cray Kaiser if you need further information or assistance in tracking your PPP loan funds.

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