Asking for Forgiveness: Further Revised PPP Loan Forgiveness Applications and Guidance (Updated 08/12/2021)

Below are 10 important things to know about the Paycheck Protection Program (“PPP”) Loan Forgiveness ‎Applications and the detailed instructions for the further revised and updated applications posted on July 30, 2021, ‎as well as other forgiveness procedures as updated by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, ‎and Venues Act (the “Economic Aid Act” or “PPP2 Act”). This is the continuation of the guidance that we expected after the enactment of the Consolidated Appropriations Act, 2021 ‎‎(“2021 Appropriations Act”) on December 27, 2020.

The PPP2 Act and 2021 Appropriations Act included several ‎changes to the forgiveness documents and process, which affected existing forms and the processes. The ‎most important of these changes were the tax deductibility of expenses, the forgiveness of loans of ‎‎$150,000 or less, the expansion of eligible costs, and the borrower’s ability to select its covered period ‎within a timing window between 8 and 24 weeks. In addition, the Economic Aid Act sets aside over $284 billion for ‎PPP loans, both for new First Draw PPP Loans and Second Draw PPP Loans. See our articles “What to Know about the Paycheck Protection Program, Round Two – First Draw PPP Loans” and “10 Things to Know about Second Draw PPP Loans as Updated for the Economic Aid Act and the ARP Act.” Lending on PPP loans ended on May 31, 2021.

Around July 28, 2021, an Interim Final Rule on COVID Reduction Score, Direct Borrower Forgiveness Process and Appeals Deferment was posted (the “July 2021 IFR”). The July 2021 IFR discussed a streamlined process for borrowers with PPP loans of $150,000 or less, and on July 28, 2021, the SBA also announced that it will launch a new streamlined application portal on August 4 allowing borrowers to apply for forgiveness directly with the agency instead of going through their lenders. However, lenders are required to opt in to this program, and those with pending forgiveness applications cannot use the portal. In addition to the technology platform, the SBA announced that it is creating a PPP customer service team to answer questions and directly assist borrowers with their forgiveness applications. Borrowers that need assistance or have questions should call 877-552-2692, Monday–Friday, 8 a.m.–8 p.m. EST.

As of July 30, 2021, there were three applications and instructions: (a) PPP Loan Forgiveness Application Form 3508S Revised July 30, 2021 (“Form 3508S”); (b) PPP Loan Forgiveness Application Form 3508EZ Revised July 30, 2021 (“Form 3508EZ”); and (c) PPP Loan Forgiveness Application Form 3508 Revised July 30, 2021 (“Form 3508”). Also the form—Paycheck Protection Program Borrower’s Disclosure of Certain Controlling Interest (“Form 3508D”), discussed below in Item 10, was revised as of July 30, 2021. The July 30, 2021 changes to the forms included: (i) extending the expiration date to January 31, 2022; and (ii) for Form 3508S, adding wording for use of the new SBA portal, if so directed by the lender.

Also on January 19, 2021, the Small Business Administration (the “SBA”) in consultation with the Department of Treasury (“Treasury”) posted the Interim Final Rule on Loan Forgiveness Requirements and Loan Review Procedures as Amended by Economic Aid Act (“2021 Forgiveness IFR”). The 2021 Forgiveness IFR incorporates and restates the prior interim final rules relating to loan forgiveness and makes revisions to conform the prior interim final rules[1] to the amendments made by the Economic Aid Act. In addition and on an ongoing basis, the SBA posts Frequently Asked Questions (most recently updated July 29, 2021) (“FAQs”) and Frequently Asked Questions on Loan Forgiveness (most recently updated 10/13/2020) (“Forgiveness FAQs”). The SBA has stated that the 2021 Forgiveness IFR should be interpreted consistently with the FAQs and the Forgiveness FAQs; however, the Economic Aid Act overrides any conflicting guidance in the FAQs and Forgiveness FAQs, and the SBA will be revising the FAQs and Forgiveness FAQs to conform to the Economic Aid Act “as quickly as feasible.” Please note that section 1106 of the CARES Act is now codified as section 7A of the Small Business Act. On March 3, 2021, the SBA issued additional guidance on forgiveness in the Interim Final Rule on Loan Amount Calculating and Eligibility (“March 2021 IFR”). On March 12, 2021, the SBA updated the FAQs. On March 18, 2021, the SBA posted Interim Final Rule on Paycheck Protection Program as Amended by American Rescue Plan Act (“Eligibility IFR”), which also addressed some forgiveness items. And as mentioned above, the July 2021 IFR also deals with forgiveness items.

The forms, 2021 Forgiveness IFR, and other guidance are generally effective when posted, and the rules in the 2021 Forgiveness IFR apply to loans that were made in 2020 but for which the SBA has not yet remitted forgiveness to the lender. Please note that we expect further changes to the forgiveness loan applications

For borrowers with First Draw PPP Loans in excess of $2 million: around October 26, 2020, the SBA asked PPP lenders to request certain information from First Draw PPP Loan borrowers with loans at or over $2 million. The SBA has posted these questionnaires on the Treasury website, and it has posted additional guidance. Please note that Second Draw PPP Loans borrowers will be deemed to have made the required certification concerning necessity and the loan amounts for First Draw PPP Loans and Second Draw PPP Loans will not be aggregated. The SBA discontinued use of these forms in early July 2021. Please see our articles: (a) “First Draw Loans at or Over $2 million – SBA Discontinues Use of Necessity Questionnaires and What Is Next”; and (b) “First Draw PPP Loans $2 Million and Up and the PPP Necessity Questionnaires.”

This article summarizes 10 things to know about the revised and updated PPP loan forgiveness applications:

1. Covered Period
2. Timeline For Submitting Application and Deferral
3. Eligible Payroll Costs
4. Nonpayroll Costs
5. Form Eligibility
6. Forgiveness Calculation
7. Forgiveness Reductions Based on Head Count, Sale Harbors, and Rehiring Forgiveness Guidance
8. Forgiveness Reductions Based on Salary or Wages
9. Documents
10. Form 3508D—Borrower’s Disclosure of Certain Controlling Interests

1. COVERED PERIOD:

The covered period is the period beginning on the date the lender disburses the PPP loan and ending on the date selected by the borrower that is at least 8 weeks following the date of loan disbursement and not more than 24 weeks after the date of loan disbursement (the “Covered Period”). Please note that the option to elect an alternative covered period was removed because the Economic Aid Act provided borrowers flexibility to choose the end of their Covered Period. The Covered Periods for a First Draw PPP Loan and a Second Draw PPP Loan cannot overlap; the borrower must use all proceeds for the First Draw PPP Loan for eligible expenses before disbursement of the Second Draw PPP Loan.

2. TIMELINE FOR SUBMITTING APPLICATION AND DEFERRAL:

A borrower may submit a loan forgiveness application any time on or before the maturity of the loan if the borrower has used all of the loan proceeds for which the borrower is requesting forgiveness, except that a borrower applying for forgiveness of a Second Draw PPP Loan that is more than $150,000 must submit the loan forgiveness application for its First Draw PPP Loan before or simultaneously with the loan forgiveness application for its Second Draw PPP Loan.

If the borrower does not apply for loan forgiveness within 10 months after the last day of the maximum Covered Period of 24 weeks, or if the SBA determines that the loan is not eligible for forgiveness (in whole or in part), the PPP loan is no longer deferred and the borrower must begin paying principal and interest. If this occurs, the lender must notify the borrower of the date the first payment is due.

The July 2021 IFR also states that a timely appeal by a borrower of a final SBA loan review decision extends the deferment period of the PPP loan until OHA’s decision becomes final under 13 CFR 134.1211. See “What to Know About PPP Appeals and Next Steps.”

3. ELIGIBLE PAYROLL COSTS:

• Paid or Incurred: Borrowers are generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the Covered Period (“payroll costs”). Payroll costs are considered paid on the day that paychecks are distributed or the borrower originates an ACH credit transaction. Payroll costs incurred but not paid during the borrower’s last pay period of the Covered Period are eligible for forgiveness if paid on or before the next regular payroll date; otherwise, payroll costs must be paid during the Covered Period to be eligible for forgiveness. Payroll costs generally are incurred on the day the employee’s pay is earned (i.e., on the day the employee worked). For employees who are not performing work but are still on the borrower’s payroll, payroll costs are incurred based on the schedule established by the borrower (typically, each day that the employee would have performed work). For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed $100,000, as prorated for the Covered Period. Count payroll costs that were both paid and incurred only once. Payroll costs should only include employees whose principal place of residence is in the United States.

1. • Furloughed employees: if a borrower pays furloughed employees their salary, wages, commissions, hazard pay, or bonuses during the Cover Period, those payments are eligible for forgiveness so long as they do not exceed an annual salary of $100,000 as prorated for the period during which the payments are made or the obligations to make the payments is incurred.

• Cash Compensation:
  • For purposes of calculating cash compensation, the applications and Forgiveness FAQs provide that borrowers should use the gross amount before deduction for taxes, employee benefits payments, and similar payments.
  • Payroll costs consist of compensation to employees (whose principal place of residence is the United States and only those employees who were employed by the borrower at any point during the Covered Period) 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 of vacation, parental, family, medical, or sick leave (not including leave covered by the Families First Coronavirus Response Act), and allowances for dismissal or separation paid or incurred during the Covered Period. The qualified wages taken into account in determining the following are not included: (a) the Employer Retention Credit under section 2301 of the CARES Act, as amended by sections 206 and 207 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020; (b) the Employee Retention Credit under section 3134 of the Internal Revenue Code of 1986, as enacted by the American Rescue Plan; and (c) the disaster credit under section 303 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020. For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the Covered Period. For example, for an 8-week Covered Period, the maximum is $15,385, for a 24-week Covered Period, the maximum is $46,154.
  • Employee Benefits: The total amount paid by the borrower for: (a) employer contributions for employee group health, life, disability, vision, or dental insurance, including insurance premiums, and retirement and including employer contributions to a self-insured, employer group health plan, but excluding any pre-tax or after-tax contributions by employees; (b) employer state and local taxes paid by the borrower and assessed on compensation of employees (e.g., state unemployment insurance tax), excluding any taxes withheld from employee earnings; and (c) for an independent contractor or sole proprietor, wages, commissions, income, or net earnings from self-employment, or similar compensation.
  • • C-corporation owner-employees (with an ownership stake of 5% or more) are capped by the prorated amount of their 2019 or 2020 (use whichever year was used to calculate the borrower’s loan amount) employee cash compensation and employer retirement and health, life, disability, vision, and dental insurance contributions made on their behalf.
    • S-corporation owner-employees (with an ownership stake of 5% or more) are capped by the prorated amount of their 2019 or 2020 (use whichever year was used to calculate the borrower’s loan amount) employee cash compensation and employer retirement and health, life, disability, vision, and dental insurance contributions made on their behalf; however, employer health, life, disability, vision, and dental insurance contributions made on their behalf cannot be separately added, as those payments are already included in their employee cash compensation.
    • Schedule C or Ffilers are capped by the prorated amount of their owner compensation replacement (calculated based on 2019 or 2020 net profit) or proprietor expenses (calculated based on 2019 or 2020 gross income). For self-employed borrowers with no employees that file Form 1040, Schedule C, who used gross income to calculate the loan amount, proprietor expenses equal gross income. For self-employed borrowers with employees that file Form 1040, Schedule C, who used gross income to calculate the loan amount, proprietor expenses equal the difference between gross income and employee payroll costs. For self-employed borrowers that file Form 1040, Schedule F and have no employees, gross income may be used instead of net profit. For self-employed borrowers that file Schedule F and have employees, the difference between gross income and employee payroll costs may be used instead of net profit. For self-employed individuals that file Form 1040, Schedule F and have employees, the difference between gross income and employee payroll costs may be used. For self-employed individuals, including Schedule C or F filers, retirement and health, life, disability, vision, or dental insurance contributions are included in their net self-employment income and therefore cannot be separately added to their payroll calculation.
    • General partners are capped by the prorated amount of their 2019 or 2020 net earnings from self-employment (reduced by claimed section 179 expense deduction, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235. For general partners, retirement and health, life, disability, vision, or dental insurance contributions are included in their net self-employment income and therefore cannot be separately added to their payroll calculation.
    • Limited liability company (“LLC”) members are subject to the rules based on their LLC’s tax filing status in the reference year used to determine their loan amount.
    • Fishing boat owners may not include as payroll costs in their application for loan forgiveness any compensation paid to a crewmember who received his or her own PPP loan and is seeking forgiveness for amounts of compensation the crewmember received for performing services described in Section 3121(b)(20) of the Internal Revenue Code with respect to that owner’s fishing boat.

    4. NONPAYROLL COSTS:

    • In General: Nonpayroll costs eligible for forgiveness consist of: (a) covered mortgage obligations: interest payments on any business mortgage obligation on real or personal property that was incurred before February 15, 2020 (but not any prepayment or payment of principal); (b) covered rent obligations: payments on business rent obligations on real or personal property under a lease agreement in force before February 15, 2020; (c) covered utility payments: business utility payments for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020; (d) covered operations expenditures (see definition below); (e) covered property damage costs (see definition below); (f)covered supplier costs (see definition below); and (g) covered worker protection expenditures (see definition below). An eligible nonpayroll cost must be either 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. Eligible nonpayroll costs cannot exceed 40% of the loan forgiveness amount. Count nonpayroll costs that were both paid and incurred only once. Covered operations expenditures, covered property damage costs, covered supplier costs, and covered worker protection expenditures were added as part of the Economic Aid Act and as such, a borrower may only receive forgiveness of these costs if the SBA had not yet remitted a forgiveness payment on the borrower’s loan to the borrower’s PPP lender as of December 27, 2020 (the date of the Economic Aid Act’s enactment). Nonpayroll costs that were both paid and incurred should only be counted once.
      • Eligibility of Tenant/Sub-Tenant and Home-Based Business Amounts: Amounts attributable to the business operation of a tenant or sub-tenant of the PPP borrower or, in the context of a home-based business, household expenses are not eligible for forgiveness. Examples are provided in the 2021 Forgiveness IFR: regarding subletting, limiting mortgage interest to the percent share of fair market value of the space not leased out to the other business, prorating rent and utility payments based on 2019 tax filings, and limiting covered expenses to the share that were deductible on 2019 tax filings. For new businesses, the borrower may use expected 2020 tax filings.
      • Related Party Items:
        • Rent Payments: Rent payments to a related party are eligible for loan forgiveness, as long as (1) the amount of the loan forgiveness requested for rent or lease payments to a related party is no more than the amount of mortgage interest owed on the property during the Covered Period that is attributable to the space being rented by the business, and (2) the lease and the mortgage were entered into prior to February 15, 2020. The SBA also noted that in this context, the related party itself would not also be eligible to request forgiveness for this amount. Any ownership in common between the business and the property owner is a related party for these purposes. The borrower must provide its lender with mortgage interest documentation to substantiate these payments.
        • Mortgage Interest Payments: While rent or lease payments to a related party might be eligible for forgiveness, mortgage interest payments to a related party are not eligible for forgiveness.

        5. FORM ELIGIBILITY:

        • Form 3508S: A borrower may use Form 3508S only if the borrower received a PPP loan of $150,000 or less for an individual First or Second Draw PPP Loan. If a borrower is not eligible to use this form, the borrower must apply for forgiveness using Form 3508 or Form 3508EZ (or lender’s equivalent form). Each PPP loan must use a separate loan forgiveness application form. A borrower cannot use one form to apply for forgiveness of both a First and Second Draw PPP Loan. As of July 30, 2021, if eligible, and as directed by the lender, the borrower can apply for forgiveness by completing the Form 3508S electronically in the SBA’s Paycheck Protection Platform (“SBA Platform”) or by completing and submitting the form (or lender’s equivalent form) either electronically or in paper form to the lender (or the lender that is servicing the loan).
        • Form 3508EZ: A borrower may use the Form 3508EZ if the PPP loan amount is more than $150,000 and the borrower can check one of the two boxes described in the bulleted list below. If the loan amount is $150,000 or less, the SBA requests the borrower use Form 3508S. All other borrowers must use the Form 3508 or lender equivalent. The two boxes are:
          • Borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period compared to the most recent full quarter before the Covered Period (for purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000); AND the borrower did not reduce the number of employees or the average paid hours of employees between January 1, 2020 and the end of the Covered Period (ignoring reductions: (i) that arose from an inability to rehire individuals who were employees on February 15, 2020 if the borrower was unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020 (or, for a PPP loan made after December 27, 2020, the last day of the Covered Period); and (ii) in an employee’s hours that the borrower offered to restore and the employee refused).
          • Borrower did not reduce annual salary or hourly wages of any employee by more than 25% during the Covered Period compared to the most recent full quarter before the Covered Period (for purposes of this statement, “employees” means only those employees that did not receive, during any single period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000); AND the borrower was unable to operate during the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 (or, for a PPP loan made after December 27, 2020, requirements established or guidance issued between March 1, 2020 and the last day of the Covered Period) by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration (includes both direct and indirect compliance with COVID-19 requirements and guidance, such as state and local government shutdown orders that are based in part on guidance from the three federal agencies [based on the Interim Final Rule posted June 22, 2020]), related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.

          6. FORGIVENESS CALCULATION:

          Employee Retention Credit Update: The 2021 Appropriations Act also amended the provisions of the ERC. Prior to that act, PPP recipients were not eligible for the ERC. The 2021 Appropriations Act permits an employer that received a PPP loan to be eligible to claim an ERC, effective retroactive to the original effective date of the CARES Act. On March 1, 2021, the IRS issued guidance addressing the ERC as it applies to qualified wages paid after March 12, 2020, and before January 1, 2021, and addressing the interaction with PPP loans. This guidance is only for 2020. An eligible employer is permitted to elect not to take into account certain qualified wages for purposes of the ERC. However, a PPP borrower is deemed to have made an election for those qualified wages included in the amount reported as payroll costs on the loan forgiveness application. As such, PPP borrowers should carefully evaluate and calculate which qualified wages should be included as payroll costs on the loan forgiveness application in order to maximize the ERC, if the borrower meets the other ERC requirements. In other words, an employer that receives a PPP loan may claim the ERC available to it for the calendar quarter, subject to the restriction that the qualified wages may not be counted both for the ERC and as payroll costs that are paid during the Covered Period to the extent the payroll costs qualify the eligible employer for forgiveness under the PPP. In addition, on August 10, 2021, the IRS issued a safe harbor that allows an employer to exclude certain amounts received from other coronavirus economic relief programs in determining whether it qualifies for the ERC based on a decline in gross receipts, and the forgiveness of a PPP loan is one of those amounts. Rev. Proc. 2021-33.

          • Form 3508S: Form 3508S requires fewer calculations and less documentation. Borrowers list the PPP loan amount, the amount of loan spent on payroll costs, and the requested loan forgiveness amount. The borrower is not required to show the calculations used to determine their loan forgiveness amount. However, the SBA may request information and documents to review those calculations as part of its loan review or audit process. If the application is being submitted for a First Draw PPP Loan approved on or before August 8, 2020 and the borrower is required to submit a Form 3508D disclosure of a controlling interest, that disclosure must be submitted to the lender or the SBA Platform not later than 30 days after submission of the loan forgiveness application. If the loan forgiveness application is being submitted for a Second Draw PPP Loan, and the borrower did not previously submit to the lender documentation supporting the revenue reduction certification on the loan application, additional steps may be required. A COVID Revenue Reduction Score (“Score”) will be assigned to the PPP loan to determine if the borrower is required to provide additional documentation to support the revenue reduction certification. An independent third-party SBA contractor has developed the Score based on a variety of inputs including industry, geography, and business size, and the Score uses current data on economic recovery and return of businesses to operational status.If the borrower is applying for forgiveness through the SBA Platform, the borrower will be automatically prompted for documentation when the Score associated with the PPP loan requires it. If the borrower is applying for forgiveness through the lender, the borrower will be advised by the lender when the Score requires the borrower to provide documentation supporting the revenue reduction certification, if not previously submitted.If the lender has directed the borrower to complete the forgiveness application electronically through the SBA Platform, the borrower must first successfully register for an account with the SBA Platform. If the SBA Platform cannot validate the borrower’s identity (if, for example, there has been an unreported change of ownership), the borrower will not be able to use the SBA Platform and instead must submit the forgiveness application directly to the lender. If the borrower is submitting the forgiveness application through the SBA Platform, the borrower must complete all required fields, initial all representations and certifications, sign the form, and, if required, upload revenue reduction documentation to complete submission of the application in the SBA Platform. The forgiveness application must be completed, signed, submitted, and accepted by the SBA Platform in order to continue the deferment of the loan. The borrower is to receive a confirmation when the SBA Platform has accepted the forgiveness application. If the borrower does not receive a confirmation, the loan will no longer be deferred beginning 10 months after the end of the Covered Period, unless the borrower submits a forgiveness application to the lender before the end of the deferment period. After the forgiveness application is accepted by the SBA Platform, the lender will be notified by the SBA Platform. The lender has 60 days from the date of notice to review the forgiveness application and supporting documentation (if applicable) and issue a forgiveness decision to SBA through the SBA Platform. Upon issuance of the lender’s forgiveness decision, SBA has 90 days, subject to any review of the loan or loan application, to make a forgiveness remittance to the lender, if appropriate. By submitting the forgiveness application through the SBA Platform (if applicable), the borrower is authorizing SBA to share all information and documentation the borrower has submitted with the lender. If the borrower has already submitted a forgiveness application to the lender, the borrower should not submit a duplicate forgiveness application though the SBA Platform. If the borrower is completing the forgiveness application through the SBA Platform, SBA will prepopulate certain data fields on the electronic Form 3508S with the information in SBA’s Electronic Transmission (E-TRAN) system of record. If the borrower is unable to confirm to SBA that the borrower’s records agree with all of the pre-populated data fields, the borrower must apply for forgiveness of the PPP loan through its lender. If the borrower is submitting a forgiveness application through the lender, the borrower must complete all of the data fields on the form. Additionally, if the borrower is completing the forgiveness application through the SBA Platform, the borrower must complete all data fields that are not pre-populated. Borrowers that use Form 3508S are not exempt from reductions for forgiveness amounts based on reductions in FTE employees or in salaries or wages. Only borrowers with loans of $50,000 or less are exempt from any reductions in the borrower’s loan forgiveness amount based on reductions in FTE employees or in salaries or wages subject to the borrower together with its affiliates not receiving First Draw PPP Loans totaling $2 million or more or Second Draw PPP Loans totaling $2 million or more.
          • Form 3508EZ: Borrowers and other interested parties can use the Form 3508EZ to calculate the forgiveness amount, by adding all eligible payroll and nonpayroll costs to calculate the potential forgiveness amount and then adjusting that amount by the payroll cost 60% requirement to arrive at the forgiveness amount.
          • Form 3508:Borrowers and other interested parties may use the Form 3508 to calculate the amount of forgiveness by adding all eligible payroll and nonpayroll costs to calculate the potential forgiveness amount, then adjusting that amount for full-time equivalency (FTE) and salary/hourly wage reductions, and then adjusting that amount by the payroll cost 60% requirement to arrive at the forgiveness amount.

          7. FORGIVENESS REDUCTIONS BASED ON HEAD COUNT, SAFE HARBORS, AND REHIRING FORGIVENESS GUIDANCE:

          Section 7A of the Small Business Act specifically requires certain reductions in a borrower’s loan forgiveness amount based on reductions in full-time equivalent employees. It includes an important statutory exemption for borrowers that have eliminated the reductions on or before December 31, 2020 (or for a PPP loan made on or after December 27, 2020, not later than the last day of the loan’s Covered Period). The Small Business Act also allows exemptions from reductions in loan forgiveness amounts based on employee availability and business activity. In addition, the SBA and Treasury have adopted regulatory exemptions to the reduction rules for borrowers that (1) have offered to restore employee hours at the same salary or wages, even if the employees have not accepted, (2) fired an employee for cause or have an employee who voluntarily resigns or voluntarily requests a schedule reduction; (3) eliminate reductions by December 31, 2020 or, for a PPP loan made after December 27, 2020, the last day of the loan’s Covered Period, or (4) have a PPP loan of $50,000 or less.

          There is some guidance in the 2021 Forgiveness IFR, the loan forgiveness applications, and the Forgiveness FAQs on implementation of statutory exemptions from loan forgiveness reduction based on reductions in full-time equivalent employees, including the calculation of the average full-time equivalency (FTE) (40 hour week), the FTE Reduction Safe Harbors, and the FTE Reduction Exceptions.

          • In General: A reduction in FTE employees during the Covered Period reduces the loan forgiveness amount by the same percentage as the percentage reduction in FTE employees. If the average number of FTE employees during the Covered Period is less than during the reference period (defined below), the total eligible expenses available for forgiveness is reduced proportionally by the percentage reduction in FTE employees. The borrower is exempt from this proportional reduction if the borrower is able to document in good faith the following: (1) an inability to rehire individuals who were employees of the borrower on February 15, 2020; and (2) an inability to hire similarly qualified individuals for unfilled positions on or before December 31, 2020 (or, for a PPP loan made on or after December 27, 2020, not later than the last day of the loan’s Covered Period). See below under “FTE Reduction Exceptions.” Borrowers are also exempted if the borrower is able to document in good faith an inability to return to the same level of business activity as the borrower was operating at before February 15, 2020, due to compliance with certain requirements. See below under “FTE Reduction Safe Harbors.”
          • “Full-Time Equivalent Employee” means an employee who works 40 hours or more, on average, each week. The hours of employees who work less than 40 hours are calculated as proportions of a single full-time equivalent employee and aggregated.
          • Reference Period: The reference period is, at the borrower’s election, either (i) February 15, 2019 through June 30, 2019; (ii) January 1, 2020 through February 29, 2020; or (iii) in the case of seasonal employers, either of the preceding periods or any consecutive 12-week period between February 15, 2019 and February 15, 2020.
          • Calculation of FTE Employees: Borrowers seeking forgiveness must document their average number of FTE employees during the Covered Period and their selected reference period. If applicable, a borrower must perform this calculation for both its First Draw PPP Loan and Second Draw PPP Loan. For purposes of this calculation, borrowers must divide the average number of hours paid for each employee per week by 40, rounding the total to the nearest tenth and capping this quotient at 1.0. For example, an employee who was paid 48 hours per week during the Covered Period would be considered to be an FTE employee of 1.0. For employees who were paid for less than 40 hours per week, borrowers may choose to calculate the full-time equivalency in one of two ways: (1) the borrower may calculate the average number of hours a part-time employee was paid per week during the Covered Period. (For example, if an employee was paid for 30 hours per week on average during the Covered Period, the employee could be considered to be an FTE employee of 0.75; or similarly, if an employee was paid for 10 hours per week on average during the Covered Period, the employee could be considered to be an FTE employee of 0.25); or (2) for administrative convenience, borrowers may elect to use a full-time equivalency of 0.5 for each part-time employee. Borrowers may select only one of these two methods, and must apply that method consistently to all of their part-time employees for the Covered Period and the selected reference period. In either case, the borrower must provide the aggregate total of FTE employees for both the selected reference period and the Covered Period by adding together all of the employee-level FTE employee calculations. The borrower must then divide the average FTE employees during the Covered Period by the average FTE employees during the selected reference period, resulting in the reduction quotient.
          • Restoration: if a borrower eliminates any reductions in FTE employees occurring between February 15, 2020 and April 26, 2020 (the safe harbor period) by December 31, 2020 (or, for a PPP loan made on or after December 27, 2020, by last day of the loan’s Covered Period), the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in FTE employees.
          • FTE Reduction Safe Harbors: There are two separate safe harbors that exempt certain borrowers from any loan forgiveness reduction based on a reduction in FTE employee levels:
            1. Safe Harbor 1: If the borrower, in good faith, is able to document that it was unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 (or, for a PPP loan made on or after December 27, 2020, between March 1, 2020 and the last day of the Covered Period with respect to such loan), by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration (includes both direct and indirect compliance with COVID-19 requirements and guidance, such as state and local government shutdown orders that are based in part on guidance from the three federal agencies [based on the Interim Final Rule posted June 22, 2020]), related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.
            2. Safe Harbor 2: If both of the following conditions are met: (1) the borrower reduced its FTE employee level in the period beginning February 15, 2020, and ending April 26, 2020; and (2) the borrower then restored its FTE employee levels in the borrower’s pay period that included February 15, 2020 by not later than (i) December 31, 2020, for a PPP loan made before December 27, 2020, or (ii) the last day of the Covered Period, for a PPP loan made after December 27, 2020.
          • FTE Reduction Exceptions: Any FTE reductions in the following cases do not reduce the borrower’s loan forgiveness: the FTE of (1) any positions for which the borrower made a good-faith, written offer to rehire an individual who was an employee on February 15, 2020 and the borrower was unable to hire similarly qualified employees for unfilled positions on or before (a) December 31, 2020, for a PPP loan made before December 27, 2020 or (b) the last day of the Covered Period, for a PPP loan made after December 27, 2020; (2) any positions for which the borrower made a good-faith, written offer to restore any reduction in hours, at the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the reduction in hours, during the Covered Period, the employee rejected the offer and the borrower maintained records documenting the offer and rejection, and (3) any employees who during the Covered Period (a) were fired for cause, (b) voluntarily resigned, or (c) voluntarily requested and received a reduction of their hours. In all of these cases, the borrower may count such employee at the same full-time equivalency level before the FTE reduction event when calculating the FTE employee reduction penalty. Borrowers that avail themselves of this de minimis exemption must maintain and provide records upon request. Any FTE reduction in these cases does not reduce the borrower’s loan forgiveness.
            • Employee Declines the Offer to Rehire: The 2021 Forgiveness IFR emphasizes that the borrower is required to inform the applicable state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer. The documents that the borrower should maintain to show compliance with this exemption include the written offer to rehire an individual, a written record of the offer’s rejection, and a written record of efforts to hire a similarly qualified individual.
            • Include Employees Who Made More Than $100,000: According to the Forgiveness FAQs, the FTE reduction exceptions apply to all employees, not just those who would be listed in Table 1 of the Form 3508 or lender equivalent. A borrower must include employees who made more than $100,000 in the Table 1 of the PPP Schedule A Worksheet.
            • A Borrower with a Loan of $50,000 or Less is exempt from any reductions in the borrower’s loan forgiveness amount based on reductions in FTE employees unless the borrower together with its affiliates received First Draw PPP Loans totaling $2 million or more or Second Draw PPP Loans totaling $2 million or more.

            8. FORGIVENESS REDUCTIONS BASED ON SALARY OR WAGES:

            Under Section 7A(d)(3) of the Small Business Act, a reduction in an employee’s salary or wages in excess of 25% will generally result in a reduction in loan forgiveness amount, unless an exception applies. Specifically, for each new employee in 2020 and 2021, as well as 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 forgiveness amount by the total dollar amount of the salary or wage reductions that are in excess of 25% of base salary or wages of the employee during the most recent full quarter during which the employee was employed before the Covered Period (the reference period), subject to exceptions for borrowers who restore reduced wages or salaries. This reduction calculation is performed on a per employee basis, not in the aggregate. Additionally, this reduction is performed based on the Covered Period and reference period applicable to the First Draw Loan or Second Draw Loan.

            • Examples of How to Calculate the Reduction in Loan Forgiveness Amount Arising From Reductions in Employee Salary or Wage: The 2021 Forgiveness IFR contains two examples and the Forgiveness FAQs have three examples; see those for more guidance.
            • Restoration: If certain employee salaries and wages were reduced between February 15, 2020 and April 26, 2020 (the safe harbor period) but the borrower eliminates those reductions by December 31, 2020 (or, for a PPP loan made on or after December 27, 2020, by last day of the loan’s Covered Period), the borrower is exempt from any reduction in loan forgiveness amount that would otherwise be required due to reductions in salaries and wages.
            • No Double Penalty: To ensure that borrowers are not doubly penalized, the salary/wage reduction applies only to the portion of the decline in employee salary and wages that is not attributable to the FTE reduction. There is an example of this in the 2021 Forgiveness IFR.
            • A Borrower with a Loan of $50,000 or Less is exempt from any reductions in the borrower’s loan forgiveness amount based on reductions in employee salary or wages unless the borrower together with its affiliates received First Draw PPP Loans totaling $2 million or more or Second Draw PPP Loans totaling $2 million or more.
            • Only Salaries and Wages: In accordance with Forgiveness FAQS, for purposes of calculating the loan forgiveness reduction required for salary or wage reductions in excess of 25% for certain employees, the borrower should only take into account decreases in salaries or wages.

            9. DOCUMENTS:

            The forgiveness applications issued by the SBA require that they be accompanied with detailed documentation and that additional documents be retained by the borrower. If the lender identifies errors in the borrower’s calculations or material lack of substantiation in the borrower’s supporting documents in the loan forgiveness applications, the lender is to work with the borrower to remedy the issue. Borrowers should take the time to make sure they have both the accompanying documentation and the documents to be maintained available at the time of the submission. A borrower should not put off getting the “retained” documents together. The SBA has a right to request that information as part of its review. If the borrower does not promptly provide documents, this might cause delays and possibly denial of forgiveness. In addition, certain documents are required for appeals of certain SBA decisions. See our articles “Updated Key Considerations for PPP Documentation under the Economic Aid Act (January 27, 2021),” “A Guide to the SBA PPP Loan Forgiveness Review Process,” and “First Draw PPP Loans $2 Million and Up and the PPP Necessity Questionnaires.”

            10. Form 3508D—BORROWER’S DISCLOSURE OF CERTAIN CONTROLLING INTERESTS:

            All borrowers that received First Draw PPP Loans before December 27, 2020 are required to submit the form. The purpose of the form is to require borrowers that received First Draw PPP Loans before December 27, 2020 to disclose whether a “Covered Individual” directly or indirectly held a “Controlling Interest” in the borrower at the time the borrower’s loan application was submitted to the PPP lenders. If the borrower submitted a loan forgiveness application to its PPP lender before December 27, 2020, then the form must be completed and submitted to the PPP lender not later than January 26, 2021. If the PPP lender has already submitted a forgiveness decision to the SBA, the PPP lender must promptly transmit the completed Form to the SBA. Otherwise, PPP lenders must transmit the completed Form 3508D to the SBA when the PPP lenders issues its forgiveness decisions to the SBA. If the borrower submits a loan forgiveness application to its PPP lender on or after December 27, 2020, the form must be completed and submitted to the PPP lender within 30 days after submitting the forgiveness application. In that case, the PPP lender must transmit the completed Form 3508D to the SBA when the PPP lender issues its forgiveness decision to SBA.

            The form requires disclosure, “at the time the borrower’s application for the First Draw PPP Loan was submitted to the PPP lender” of the names of “Covered Individual(s) directly or indirectly” holding “Controlling Interest(s) in the Borrower.” Those facts and a certification is required by the Principal Executive Officer of the borrower, “or an individual performing a similar function.” An entity is prohibited from receiving a PPP loan after December 27, 2020 if a controlling interest is held directly or indirectly by the President of the United States, Vice President of the United States, the head of an Executive department, or a Member of Congress, or the spouse of any of the preceding.

            For purposes of the form, the following definitions apply:

            • A Covered Individual means (a) any one of the following Government Officials: the President, the Vice President, the head of an Executive department as defined in 5 U.S.C. § 101, or a member of Congress, and (b) the Spouse, as determined under applicable common law, of a Government Official described in clause (a), determined as of the time the borrower’s loan application was submitted to the PPP lender.
            • A Controlling Interest means owning, controlling, or holding not less than 20%, by vote or value, of the outstanding amount of any class of equity interest in a borrower. Additionally, for purposes of this form and the certification, the securities owned, controlled or held by an individual and their spouse will be aggregated. The term “equity interest” means (1) a share in a borrower, without regard to whether the share is transferable or classified as stock or anything similar, (2) a capital or profit interest in a limited liability company or partnership, or (3) a warrant or right, other than a right to convert, to purchase, sell, or subscribe to a share of interest described in (1) or (2), respectively.

            This article summarizes aspects of the law. It does not constitute legal advice. For legal advice for your situation, you should contact an attorney.

            [1] The prior interim final rules relating to loan forgiveness and loan reviews that are incorporated in the 2021 Forgiveness IFR are: the first interim final rule on loan forgiveness (85 FR 33004) (June 1, 2020); the first interim final rule on SBA loan review procedures and related borrower and lender responsibilities (85 FR 33010) (June 1, 2020); the interim final rule incorporating Flexibility Act Amendments (85 FR 38304) (June 26, 2020); the interim final rule on Treatment of Owners and Forgiveness of Certain Nonpayroll Costs (85 FR 52881) (August 27, 2020); and the interim final rule on Additional Revisions to Loan Forgiveness and Loan Review Procedures Interim Final Rules (85 FR 66214) (October 19, 2020). The rule also incorporates the forgiveness portions of the interim final rules regarding individuals with self-employment income (85 FR 21747 (April 20, 2020) and 85 FR 36997 (June 19, 2020)) and fishing boat owners (85 FR 39066) (June 30, 2020).

            [2] For First Draw PPP Loans made in 2020, borrowers use 2019. For First Draw PPP Loans made in 2021 and Second Draw PPP Loans, borrowers use the year (2019 or 2020) that was used to calculate the borrower’s loan amount.

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