SBA Issues Loan Forgiveness Application

by | May 18, 2020

May 18, 2020

June 18, 2020 – Additional updates have been made to this program. Please click here for additional information. 

On Friday, May 15, 2020, the Small Business Administration (SBA) published the loan forgiveness application, SBA Form 3508, to be completed by borrowers who have obtained a Paycheck Protection Program (PPP) Loan. This new form gives borrowers added clarity around how the SBA considers loan forgiveness to be calculated. A link to the application may be found here.

Key Elements

Many features of the application are as expected. Several updated or new items are highlighted below. This commentary is not considered to be an all-inclusive list but provides what we consider to be the most impactful or further clarified information provided by this application.

Payroll Schedule

There has been much confusion and lack of clarity around which payroll schedule will qualify for loan forgiveness. The application allows the borrower to describe the payroll frequency (weekly, biweekly, twice a month, monthly and other).

Covered Period

Consistent with other guidance, the covered period remains as the eight-week period, or 56-day period that starts with the day that the PPP Loan is disbursed to the borrower.

Alternative Payroll Covered Period

The alternative payroll covered period is introduced in this application. This new measurement period will grant flexibility in how a borrower calculates the payroll portion of the loan forgiveness request. There have been many questions around payroll periods and payroll dates and how to determine which payrolls qualify.

The alternative payroll covered period can be utilized by borrowers who pay biweekly or more frequently. It considers payroll periods, rather than pay dates. The payroll covered period starts with the first payroll period beginning immediately after the loan funding date. In other words, if a borrower receives funds in the middle of a payroll period, the payroll cost calculation doesn’t start until the beginning of the next payroll period. The covered period then continues for an eight-week period, or 56-day period, consistent with prior guidance. Finally, the payroll cost for that ending payroll period can be counted as a payroll cost for the forgiveness calculation as long as the cost is paid to employees on or before the next payroll date, which can be after the eight-week period. This alternative payroll covered period calculation is only available for payroll related costs. Non-payroll related costs will follow the covered period as defined previously.

Average Full Time Equivalent (FTE) Clarification

The application clarifies many questions around how to calculate an FTE for purposes of loan forgiveness. There had been many authorities who have defined FTE in various ways, including the SBA itself in its business calculations here, that defined FTE as 30 weekly hours.

For purposes of the loan forgiveness calculation, An FTE is defined as any employee who works 40 hours or more per week. For any employee who works less than 40 hours per week, the borrower may divide the average hours paid per week by 40, and either round to the nearest 10th or count the employee as a 0.5 FTE.

In general, no consideration in reduction of forgiveness is calculated if 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. Otherwise, the borrower is required to provide a detailed calculation of FTE counts to determine the percentage reduction in loan forgiveness.

FTE Reduction Safe Harbor

More clarification is given with a very precise definition of the FTE Safe Harbor. This safe harbor takes count of the borrower’s employee FTE levels no later than June 30, 2020 and compares it to employee FTE levels during the pay period that included February 15, 2020. It also specifies that the borrower must have also reduced its FTE levels in the period beginning February 15, 2020 and ending April 26, 2020. Both conditions must be present in order to qualify for this safe harbor.

FTE Reduction Exceptions

The SBA provides an exception in the calculation of FTE for borrowers who have attempted to rehire employees, have employees who voluntarily requested and received reduced hours or who have been required to terminate employees for cause. This only applies to employees who are compensated at a rate that is less than or equal to the annual equivalent of $100,000 for any pay period in 2019. The SBA allows the employer to count these employees in the FTE count.

Salary/Hourly Wage Reduction

Many of our questions have now been answered as it relates to the salary/hourly wage reduction. For simplicity purposes, let’s refer to average annual salary or average hourly wage as “wages” in our discussions below. It’s important to note that this calculation applies only to employees who are compensated at a rate that is less than or equal to the annual equivalent of $100,000 for any pay period in 2019.

We now know that we are not comparing the total compensation of the covered period to the total compensation of the first quarter of 2020, but rather we are comparing the average annual salary or the average hourly wage, which makes the comparison more balanced. Additionally, the determination of a potential salary/hourly wage reduction is calculated on an employee by employee basis.

The first calculation to determine a reduction of more than 25% compares the covered period average annual wages with average annual wages that occurred during the period from January 1, 2020 to March 31, 2020. If it is determined based on this assessment that the wages were in fact reduced by 25%, then the borrower has a few safe harbor options to “cure” by analyzing wages in this order:

  1. Comparing the average wages as of February 15, 2020 to the average wages between February 15, 2020 and April 26, 2020, and/or
  2. Comparing the average wages as of February 15, 2020 with the average wages as of June 30, 2020.

If the borrower does in fact require a reduction in the forgiveness, there is a calculation to assist the borrower in the reduction for hourly workers.

The remaining unanswered questions here include:

  1. Borrowers who have attempted to rehire employees, have employees who voluntarily requested and received reduced hours or who have been required to terminate employees for cause. There was an exception provided for the FTE calculation as discussed above that does not seem to have been clearly applied to the wage reduction rule.
  2. Whether an exemption can be obtained on a macro basis for employers who had laid off larger groups of employees and have subsequently replaced them with new hires. Currently the rules seem to dictate that each of those employees would be considered for reduction.

Employee Count

An interesting observation found in the application is that it requests the total number of employees at the time the borrower applied for the loan and also the total number of employees at the time the borrower is applying for loan forgiveness. This does not have any bearing on the calculation of forgiveness. Schedule A of the loan application is where FTE calculations occur. Perhaps this is the SBA’s way of screening that the borrower had less than 500 employees at the time of the application and at the time of the loan forgiveness.  

Check Box for Loans in Excess of $2 Million

Consistent with other guidance given by the SBA, it appears that there will be closer scrutiny on loans in excess of $2 Million.

Business Mortgage Interest

This application makes it clear that prepayments of mortgage interest are not allowed for consideration in forgiveness. Also, the mortgage must have been incurred prior to February 15, 2020.

Business Rent or Lease Payments and Business Utility Payments

The business rent or lease payments and utility payments eligible for forgiveness must be for obligations incurred prior to February 15, 2020. The application provides a few methods to document this and must be included with the application upon submission.

EIDL Loans

There is no reference to the timing of the EIDL Loans. In prior guidance borrowers were required to add back EIDL Loans if they were borrowed prior to the PPP Loan. It appears based on this application, that any EIDL Loan incurred after the borrowing date of the PPP Loan and prior to loan forgiveness, are to be considered part of the loan forgiveness calculation and will reduce the amount of forgiveness available to the borrower.

Nonpayroll costs

This application makes it clear that the borrower is not required to include all eligible nonpayroll costs in the calculation of forgiveness if the borrower so chooses.

Other considerations

There is a line for compensation to owners. It was expected that general partners and self-employed individuals would be considered here. This form introduces a new term labeled, “owner-employees”. The definition of owner-employees is unclear. Is this any employee of a C or S Corporation that owns any percentage of stock in the borrower? Until we have further guidance, we have to assume that the answer to this question is ‘yes’.

A remaining question regarding cash compensation for employees relates to whether pay raises and bonuses during the 8-week covered period are allowed. These items appear to be allowed within the loan application, however, there is the limit for each individual up to $15,385. Further guidance may clarify this item.

Health insurance expense and retirement plan expense was not further defined, although it is made clear that the owner’s health insurance and retirement expense will not be considered an eligible payroll cost. What is still not clarified is the appropriateness of retirement plan expenses, such as profit-sharing contributions or defined benefit payments that might be paid during the covered period but are for payroll that was incurred in a different time period.

Page 10 of SBA Form 3508 gives detailed information on appropriate documentation that must be submitted or maintained with the loan forgiveness application. The borrower is required to retain the documentation for six years after the date that the loan is forgiven or repaid in full.

The borrower is required to make certain certifications as to the accuracy of the application and both the PPP Loan Forgiveness Calculation Form and PPP Schedule A are required for submission. All of the borrower application for forgiveness information will be submitted to the lender servicing the loan and will be subject to audit by the SBA. Additionally, the application lists fines of up to $1,000,000 or imprisonment of up to thirty years.

Our Management Consulting team is willing and eager to assist you by advising on documentation best practices, modifying your chart of accounts and calculating initial projections.  We can be reached at:

As your trusted advisors, we are committed to keeping you well-informed with any new legislation passed by Congress or other authorities as well as any new pronouncements by the Department of Treasury that may affect you. Please do not hesitate to reach out to KHA with any additional questions you may have.  

These sources are simply included for informational purposes. KHA Accountants, PLLC, its partners and others do not provide any assurance as to the accuracy of these items or the information included therein. As such, KHA Accountants, PLLC cannot be held liable for any information derived from referenced sources. This by no means is a recommendation to obtain a loan or attempt to apply for a loan. There are many unknowns at this time regarding what other stimulus (grants or other loan options) that may become available with pending and future bills, executive orders, or emergency declarations to follow, that may become laws. Consult your legal and business advisors prior to making financing decisions. This is intended for illustrative and discussion purposes only.

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