May 19, 2020



On Friday, May 15th, the SBA released the application that borrowers will use to request loan forgiveness from their banks. Here is the link.

THIS BLOG POST IS VERY LONG.  It is intended to be used as a guide for completing the Application and related forms – not merely an update on recent changes.  We strongly recommend printing and stapling all 11 pages.  Then, also print and staple only pages 3, 6, and 9, so you will also have quick access to the actual forms without the instruction pages being intermingled.  We will continually refer to these forms, so having access to them will make this fun adventure much more understandable.



The Application, Schedule A and Worksheet to Schedule A do a decent job distilling the PPP program into a logical format for requesting loan forgiveness – and answering SOME (but, unfortunately, not ALL) of the questions that have been open to interpretation.


To briefly recap, “payroll costs” as well as interest on business debts, rent, and utilities that are incurred during the 8-week “Covered Period” following the loan funding date are eligible for forgiveness.  Forgiveness will be reduced in two potential ways – (1) if wages earned by lower earners during the covered period are far less than they had been, and (2) if the office headcount shrinks.  These can be cured, however.  Also, payroll costs must comprise at least 75% of the forgiven amount, and the other expenses no more than 25%.  Any amount that is not forgiven has to be repaid over two years with interest at 1%.


Before diving into the forms, here are a few general observations, two good and one bad:


The Good

  1. The application addresses a major timing issue.  What happens if the PPP loan funded mid-way through a payroll cycle?  The good news is that we have a choice of starting our 8-week (56-day) period on the day the loan funds OR the first day of the first pay period following the disbursement of the loan.  The latter one is called an “Alternative Payroll Covered Period” (or “ACP”) and it will allow those of us using bi-weekly payroll to neatly align our 8-week period to our normal pay cycle.  So long as employees are paid in the final payroll we can include that compensation, even if it technically falls outside of the actual 56-day period following the date of the loan.  The ACP applies only to “payroll costs” not to rent, interest, and utilities.  The covered period for those remains the 56 days following the loan disbursement.


  1. There is some flexibility to cram expenses into the 8 weeks. Expenses that are “paid OR incurred” during the covered period are eligible for forgiveness.  This is a major positive shift away from the CARES Act, which uses a “paid AND incurred” rule.  Now, wages, health insurance premiums, plan contributions, rent, interest, and utilities that accrued prior to the PPP loan but are paid during the covered period are eligible for forgiveness.  For example, if you delayed paying your March rent until April (after your PPP loan funded) then March rent is now forgivable.  IT IS PAID DURING THE COVERED PERIOD (EVEN THOUGH INCURRED BEFORE).


Also, expenses can be incurred during the 8-week period and paid by the next regular payment date, even if payment is made after the end of the covered period.  THESE ARE INCURRED DURING THE COVERED PERIOD (EVEN THOUGH PAID AFTER).


The change from “Paid AND Incurred” to “Paid OR Incurred” would seem to open the door to cramming FUTURE expenses into the covered period, for example, pre-paying employees NOW against earnings to be earned LATER or pre-paying FUTURE months of rent during the covered period.  (But, keep in mind that there is no loan forgiveness on wages over $15,385 during the covered period (for any employee) and non-payroll costs like rent can’t exceed 25% of the total loan forgiveness.)


The Bad

  1. We are still limited to just 8 weeks (56) days for using the PPP loan proceeds. Congress may extend the duration to 12 or 24 weeks (or allow the 8 weeks to commence when businesses reopen), but that will require an amendment to the CARES Act or future guidance from Treasury.


  1. The 75/25 rule for Payroll costs vs. Non-payroll costs (rent, debt interest, etc.) are still in place. There is blowback against this because many employers don’t have enough payroll costs to allow their non-payroll costs to be fully forgivable, so this rule may yet change.


  1. Forgiveness MAY be disallowed for a shareholder’s or a partner’s share of retirement plan contributions and group health insurance. Earlier SBA guidance discriminated against Schedule C owners by capping their share of forgiveness at $15,385 (which is $100,000 x 8/52) and disallowing loan forgiveness for their plan contributions and health insurance.  Shareholders of corporations and partners of partnerships were exempted from this.  But, as we will see, the Application and related forms seem designed now to exclude these benefits, not just for Schedule C’s BUT ALSO FOR SHAREHOLDERS AND PARTNERS.  However, the instructions to the forms don’t explicitly discriminate against shareholders and partners. This is confusing.  And, until we get better guidance, we recommend INCLUDING shareholders’ and partners’ health insurance and plan contributions in the loan forgiveness computations.



The Application looks fairly simple.  It’s only one page, as are Schedule A and the Worksheet to Schedule A.


The top half of the Application asks for basic information on the borrower and the loan.  You’ll indicate how often you run payroll and if you’ll use the normal Covered Period or the ACP.  If you’re having trouble with THIS part of the Application, then the rest of this process will become a bit daunting . . .


The bottom half of the Application is where the final calculations are made.  A good way to conceptualize this entire process is that we are moving from SMALL TO BIG.  What we mean is, look at LINE 1 of the Application: “Payroll Costs (enter the amount from PPP Schedule A, line 10.”


We don’t know this number yet.  Before we start completing the Application, we have to complete Schedule A.  But, as we’ll see, before we can do Schedule A, we have to do the Worksheet.  Thinking Small to Big:  THE WORKSHEET is where we determine EMPLOYEE COMPENSATION.  SCHEDULE A is then where we determine OVERALL PAYROLL COSTS.  And, the APPLICATION is where we ADD UP ALL OF THE FORGIVABLE CATEGORIES OF EXPENSES.


So, this process really begins with . . .



The Worksheet is where we enter compensation for each employee during our covered period.  Remember that this must be capped at $15,385 per employee.


It is also where we determine the number of FTEs during the covered period AND whether we have to take a reduction in forgiveness because one or more employees making less than $100,000/yr took more than a 25% pay cut which was not cured by June 30, 2020.


Employees who earned at or below $100,000 in 2019 are listed in Table 1, and employees who earned above $100,000 go on Table 2.  The discrepancy has to do with the fact that lower-paid employees can trigger forgiveness reduction if they suffer too big of a pay cut.  Those in Table 2 can’t.  It is, therefore, preferable to list employees in Table 2 if possible.


Associate doctors who earned over $100,000 annualized in 2019 go on Table 2 even if they took severe pay cuts during the shutdowns.  There may also be an opportunity to bump a rank-and-file employee from Table 1 to Table 2.  Technically, Table 1 is for employees with ANNUALIZED COMPENSATION FOR ALL PAY PERIODS IN 2019 OF LESS THAN $100,000.


But, what if during ONE of the 2019 pay periods, the employee received a bonus such that her compensation during that pay period exceeded $100,000 on an annualized basis?  For example, the employee earns $75,000 but received a $5,000 bonus in one two-week pay period taking her total 2019 pay to $80,000.  That’s below $100,000 in the aggregate, but that one large paycheck means that she was earning over $100,000 for a brief part of the year.  Perhaps, this gives us grounds for listing her in Table 2.  We need more guidance first.


Table 1

List your employees who earn less than or equal to $100,000/yr in Table 1.  Include their Name and last four digits of their SSN under the “Employee Identifier” column.


Under “Cash Compensation” put down what each employee earned during the covered period (or ACP) making sure not to go over $15,385.


Under “Average FTE” you must calculate the full-time-equivalence FOR EACH EMPLOYEE OVERALL 8 WEEKS OF THE COVERED PERIOD (OR ACP), BASED ON A 40-HOUR WORK WEEK.  An employee cannot have Average FTE over 1.0, and we are supposed to round to the nearest tenth.


So, if the first employee in Table 1 averaged 40 hours per week during the 8 week period, we enter 1.0 for this employee in the Average FTE column.  If the second averaged 45 hours, we again enter 1.0.  If the third averaged 15 hours during the 8 weeks, then we enter 0.4.


There is a second, simpler, way that we can calculate our FTEs if we don’t want to bother with the math.  For any employee who works 40 or more hours, we give then a “1.0” and for anyone under 40 hours, they automatically get a “0.5.”  In the paragraph above, we would get 2.5 FTEs using this simplified method versus the 2.4 FTEs we get by counting the actual average weekly hours.


So far, so good.  But, now comes something a LITTLE more tricky . . .


Salary/Hourly Wage Reduction

Remember, one of the ways that we may have a forgiveness reduction is if our under-$100,000/yr employees take a greater than 25% pay cut during the covered period.  This is how we determine that.


We compare an employee’s ANNUALIZED salary or hourly wage during the 8-week covered period (or ACP) to his or her ANNUALIZED salary or hourly wage during the first three months of the year (Jan. 1 – Mar. 31, 2020).  If the reduction in annualized salary is 25% OR LESS, then all is fine – no reduction in loan forgiveness.  But, if the reduction is MORE THAN 25%, then the borrower’s loan forgiveness is reduced by 8 weeks’ worth of the excess over 25% -- unless this is cured by the Safe Harbor.  An example will explain this.


Assume the employee earns $6,000 during the covered period.  On an annualized basis, this is $39,000 ($6,000 x 52/8).  However, during the first quarter (Jan. 1 through Mar. 31, 2020), the employee received $16,000, which is $64,000 annualized.  The employee suffers a 39% pay reduction.  A 25% pay reduction would have been $16,000.  Our employee took a $25,000 pay reduction.  So, there is an excess of $9,000.  The borrower’s loan forgiveness will be reduced by  8/52nds worth of this “excessive” annualized pay reduction -- ($9,000 x 8/52) -- or $1,385.  This is the amount to enter for this employee under the “Salary/Hourly Wage Reduction” column.  If, the employee qualifies for the safe harbor (discussed below) then don’t enter $1,385.  Enter $0 instead.


(For employees who are paid by the hour, there is a similar calculation, but it appears to only apply if the employee’s per-hour wage is reduced, not if the number of hours worked are reduced.  By our reading, if an employee earned $40/hr before the lockdown AND during the covered period, there will be no reduction in loan forgiveness even though her actual number of hours worked, and actual compensation were greatly reduced.  Her hourly rate remained fixed. There can still be reduced forgiveness because she may be less of an FTE than she was before, but there won’t be a double reduction for this particular employee.  More guidance will be helpful.)


Safe Harbor for Salary/Hourly Wage Reduction

The reduction won’t be required, however, if we meet the safe harbor.  Here’s how this works.


  1. Determine the employee’s annual salary and hourly wage as of Feb. 15, 2020.


  1. Determine the average annual salary or hourly wage for the period from Feb. 15, 2020 – April 26, 2020.


  1. If the second calculation is GREATER than the first, then there is no safe harbor, and your loan forgiveness will be reduced due to this employee’s pay reduction.


  1. If the second is less than the first, then determine the average annual salary or hourly wage for the employee as of JUNE 30, 2020. IF THAT IS EQUAL TO OR GREATER THAN THE FEBRUARY 15, 2020 SALARY OR HOURLY WAGE, THEN THE SAFE HARBOR APPLIES AND THERE WILL BE NO REDUCTION IN YOUR LOAN FORGIVENESS.


Therefore, even if the employee’s compensation has been going down throughout the first part of this year, so long as by June 30, the salary or wage being earned on Feb. 15 is re-established, then the safe harbor is met and no reduction is required.


Table 2

After completing Table 1 for all employees, who in 2019 earned annualized compensation under $100,000, complete Table 2.  This is for employees who earned more than $100,000 (annualized) in 2019.


HOWEVER, WE ARE NOT TO INCLUDE THE OWNER(S) – SHAREHOLDERS, PARTNERS OR SCHEDULE C SOLE PROPRIETORS.  Don’t include YOUR compensation and don’t include YOUR FTE number in the Average FTE column.  Schedule A has a line to include your compensation, but the cap is $15,385.  And, as for the FTE, it’s a neutral point.  Owners don’t count their FTE number either during the covered period or during one of the earlier measuring periods.


FTE Reduction Safe Harbor

Loan forgiveness can be reduced a SECOND (and much more meaningful) way – if the office headcount is reduced during the covered period and not restored.  A reduction will occur if the AVERAGE NUMBER OF FTEs DURING THE COVERED PERIOD (OR ACP) IS LESS THAN THE AVERAGE NUMBER OF FTEs DURING EITHER OF THE FOLLOWING PERIODS (YOUR CHOICE):


  1. February 15, 2019 – June 30, 2019, or
  2. January 1, 2020 – February 29, 2020


For example, if your FTEs during the covered period (Table 1 employees plus Table 2 employees) are 3.5, but the office averaged 6.0 FTEs from Feb. 15, 2019 – June 30, 2019, and 5.0 from Jan. 1, 2020 – Feb. 29, 2020, then you’re facing a large reduction in your total loan forgiveness.  You’ll take a 42% hit if you elect the first measuring period, and 30% if you elect the second.  If you borrow $100,000, you stand to lose $30,000 or $42,000 of your loan forgiveness.  Obviously, go with the second, but both are quite bad.


How to fix it?  Meet the safe harbor!  To do so, you have to calculate your FTEs for TWO ADDITIONAL periods:


  1. February 15, 2020 – April 26, 2020, and
  2. The pay period that includes February 15, 2020


If the average FTEs for Feb. 15 – April 26 are LOWER than they were on Feb. 15 (i.e., headcount is shrinking with the onset of the virus – which is likely the case), then you will meet the safe harbor IF YOUR FTEs ON JUNE 30, 2020 ARE GREATER THAN OR EQUAL TO YOUR FTEs ON FEBRUARY 15, 2020.  So, even if by June 30, your FTEs aren’t restored to the level they were in 2019 or the first two months of 2020, so long as you can rehire enough people to get to the Feb. 15, 2020 FTE level, you pass.


Some other good news - remember that if you make a good faith written offer of re-employment and the employee turns it down, you will still get credit and can include this person in your June 30 FTE count.  The same applies, if, during the covered period, an employee was fired for cause, voluntarily resigned, or voluntarily requested and received a reduction of their hours.



Working our way up the chain, the purpose of SCHEDULE A is to get a sum total of the borrower’s “Payroll Costs” during its covered period and to document if there is going to be a reduction in loan forgiveness due to a drop in FTEs.


Lines 1 through 5

Lines 1 through 5 of Schedule A are easy to complete.  Just pull the requested information from the Worksheet.  Lines 1, 2, and 3 refer back to Table 1 of the Worksheet.  Lines 4 and 5 refer to Table 2.  Remember, there is no potential for loan forgiveness reduction for a Table 2 employee (which is why these employees are segregated onto Table 2 in the first place).


Lines 6, 7 and 8

Lines 6, 7, and 8 are new.  Line 6 asks for the “Total amount paid by Borrower for employer contributions for employee health insurance.”  Line 7 asks for the total amount for “employer contributions to employee retirement plans.”  Line 8 asks for the total amount paid for “employer state and local taxes assessed on employee compensation” (e.g., unemployment taxes).


These amounts are IN ADDITION to the employees’ annualized compensation up to a $100,000 cap ($15,385 for the covered period).  Table 1 and Table 2 employees (from the Worksheet) get this benefit, but it remains to be seen whether owners will be able to get it as well.  We mentioned that earlier SBA guidance specifically prohibited Schedule C owners from getting loan forgiveness for their own plan contributions and health insurance.  They are hard-capped at $15,385.


Will shareholders and partners be in for the same strict treatment.  We sure hope so.  The Application, Schedule A, and the Worksheet are designed to treat shareholders and partners as non-employees and more like Schedule C sole proprietors.  Perhaps this means not granting them forgiveness for their own plan contributions and health insurance.  However, the instructions to these forms (Lines 6, 7, and 8 of Schedule A) don’t make that explicit.


This is currently ambiguous – and we like to interpret the ambiguities in OUR FAVOR.  So, until we are explicitly told otherwise, we recommend including shareholders’ and partners’ group health insurance premiums and the plan contributions in the forgiveness request.


Line 10

This is where we add up the Payroll Costs, Lines 1, 4, 6, 7, 8, and 9.


Moving to the End of Schedule A

Between Lines 10 and 11, there is a small paragraph that introduces a second simplified FTE safe harbor.  Earlier we discussed the actual FTE safe harbor rule, that if you had an FTE reduction compared to your prior chosen measuring period, but by June 30, you restore your FTEs to the level you had on February 15, then you are home free.  Well, that has been and still is the rule.


Now, we get a second get out of jail free card.  Even if you fail the actual safe harbor test, you still get bailed out if, by the end of your covered period, your FTEs are the same as they were on January 1, 2020.  We don’t know why this provision was added when we already had the June 30 safe harbor, but we’ll take it.


Lines 11, 12, and 13

If you meet the FTE safe harbor test (or this new January 1 safe harbor test), then you skip Lines 11 and 12 and ENTER 1.0 ON LINE 13.  This is your “FTE REDUCTION QUOTIENT” and, you WANT this to be 1.0.


If you don’t meet either safe harbor, then you have to complete Lines 11 and 12 to calculate your FTE Reduction Quotient on Line 13.  Line 11 is your Average FTEs during your chosen reference period (February 15 – June 30, 2019, or January 1 – February 29, 2020).  Line 12 is your Average FTEs during the covered period (all your employees listed on Table 1 PLUS Table 2 from the Worksheet, but not owners).  Line 13 is Line 12 divided by Line 11.


So, if Line 11 is 5.0 and Line 12 is 3.5, then Line 13 will be 0.70, and we’re looking at a big (30%) reduction in the amount of loan forgiveness.



We’re in the home stretch!  The Application is where we:


  1. Sum up our Payroll Costs plus the other forgivable expenses;
  2. Account for reductions due Salary/Hour Wage Reductions and FTEs that weren’t cured by safe harbors; and finally
  3. Determining the Forgiveness Amount


Lines 1 through 4 – Payroll and Non-Payroll Costs

Line 1 asks us for the Payroll Costs.  This is where this whole process started, and the figure we use here comes from Line 10 of Schedule A.


Line 2 is for “Business Mortgage Interest Payments.”  Include in this your business debts generally, not simply “a mortgage.”  And, what’s includible here is INTEREST paid during the covered period on a debt obligation that was incurred before February 15, 2020.


Line 3 is for “Business Rent or Lease Payments.”  Rent or lease payments for the office AND equipment qualify.  The lease has to pre-date February 15, 2020.


Line 4 is for “Business Utility Payments.”  These include electricity, gas, water, transportation, telephone, and internet where service began before February 15, 2020.


BE EXPANSIVE WITH WHAT YOU INCLUDE ON LINES 2-4, AND TAKE ADVANTAGE OF THE “PAID OR INCURRED” RULE.  It looks like mortgage interest, rent, and utilities that are paid in arrears can be included.  For example, if your covered period starts April 15, and you pay your March rent on April 16, then your March rent is forgivable.  Similarly, if a utility expense was incurred during the covered period, but payment isn’t made until it is due (AFTER THE COVERED PERIOD), then it too will be forgivable.


Lines 5 through 7 – Adjustments For FTEs and Salary/Hourly Wage Reductions

It is interesting to see how these two loan forgiveness reductions inter-relate.


Line 5 is where we enter the total amount of Salary/Hourly Wage Reduction for all Table 1 employees who took large pay reductions which weren’t cleared up by the safe harbor.  This figure is pulled from Box 3 of Table 1.


Line 6 is simply our total forgivable expenses (Lines 1-4) minus the Salary/Hourly Wage Reduction (Line 5).


Line 7 is where we bring over the FTE Reduction Quotient from Line 13 of Schedule A.  Hopefully it will be 1.0.  But, if not, then we bring over the smaller decimal.


Lines 8 through 11 – Finalizing the Forgiveness Amount

Our final loan forgiveness amount is going to be THE LESSER of three things:


  1. Line 8 – What we get when we multiply our net forgivable expenses (net of the Salary/Hourly Wage Reduction) by our FTE Reduction Quotient;


  1. Line 9 – the PPP Loan Amount; or


  1. Line 10 – a calculation that guarantees that at least 75% of the forgiven amount is attributable to Payroll Costs and no more than 25% is for mortgage interest, rent, and utilities.


Let’s use one final example to wrap things up.  Assume the following:


The Borrower obtains a $120,000 PPP loan

Payroll Costs during the covered period are $70,000

Mortgage interest, rent, and utilities are $30,000

The Borrower satisfied the Salary/Hourly Wage Reduction Safe Harbor, but not the FTE Safe Harbor, and has an FTE Reduction Quotient of 0.90.


For Line 8 we enter:  $90,000 [($70,000 + $30,000) x 0.90]


For Line 9 we enter:  $120,000


For Line 10 we enter: $93,333 (Payroll Costs of $70,000 / 0.75). This calculation ensures that Payroll Costs won’t be less than 75% of the total forgiven amount.  In this case, our mortgage interest, rent, and utilities are TOO HIGH relative to our Payroll Costs and get scaled back from $30,000 to $23,333.  ($23,333 is 25% of $93,333).


BUT, Line 10 doesn’t give us our lowest number.  Line 8 does.  $90,000 is the lowest of our three alternatives, and we enter it on Line 11, finally reaching the end of our journey.



This is the process for completing the Application, Schedule A, and the Worksheet.  It is logical, but it will be time-consuming, as it will be compiling the necessary payroll records, cancelled rent and utility checks, and all the rest of the documentation that will have to be submitted.  (These are listed on page 10 of the 11-page application package.)


This is also not the last word on PPP forgiveness.  If Congress and the Treasury hold true to form, more guidance is bound to trickle out in the coming days and weeks.  We’ll be watching and reporting on the latest developments, but this should be a good start for now.


Finally, in the near future, we will do a webinar working through a real-world example, using real numbers, showing how a hypothetical employer would complete each of these forms and calculate its loan forgiveness amount.  The webinar will be on our website and available to C&A Newsletter subscribers.

Collier & Associates, Inc. will update our blog as the CARES Act progresses. We take pride in continuing to keep our subscribers and website visitors updated on current events during this extraordinary time.

We will work diligently to answer general inquiries via our website if time permits and in a little more detail within our Newsletters. However, if your questions are detailed in nature, please request to set up a conference call for a formal legal consultation. Thank you.


Collier & Associates, Inc. provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act on this information without seeking advice from professional advisors.

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  1. David D'Apolito, DMD on at 3:57 pm

    What if as in real life a hygienist does not come back for 4-5 weeks into the time frame after the loan was received as she had no child care and stayed home and she stated that to us. What if on 2/12/20 you terminated a PT employee due to complaints from patients but replaced her hrs with somebody else’s who only worked 4 to 5 hrs a week the year before for you? What does it mean on top paragraph of page three about …” took more than 25% pay raise which was not cured by 6/30/2020″?

    • C&A on at 10:37 am

      I do apologize, Dr. Apolito. The “pay raise” has been corrected to “pay cut.” As for your FTE and salary issues, if you’d like more guidance on strategy, you’re welcomed to set up a consultation, or you can work through it with your CPA as well if they are knowledgeable within the known PPP loan rules. Best of Luck to You!


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