Top 10 PPP Loan Forgiveness Updates FAQs

November 20, 2020

It is no surprise there are continued changes from the SBA and Treasury on the Paycheck Protection Program “PPP” which have both lenders and borrowers on edge and uncertain about what will happen next. Many businesses are at the end of their 24-week covered period and are seeking guidance on when and how to apply for forgiveness. Plenty has occurred over the last several months and we’re going to simplify it for you. Below are our top 10 most frequently asked questions from our Where’s the Money? Part 10 Loan Forgiveness Updates webinar.

1. Is the compensation cap for owners of S-Corps only applied to those whose ownership exceeds 5%?

The employee cash compensation of an S-corporation owner-employee, which is an owner who is also an employee, is eligible for loan forgiveness up to the amount of 2.5/12 of their 2019 employee cash compensation, with cash compensation defined as it is for all other employees. Owner employees with less than 5% in a C-Corp or S-Corp are not subject to the owner compensation rule, but would be still subject to the employee cash compensation rules.  Note: Employer contributions for health insurance are not eligible for additional forgiveness for S-corporation employees with at least a 2% ownership in the business.

2. What form should you use to apply for loan forgiveness?

SBA Form 3508

  • Should be used if you do not meet the criteria for the 3508EZ and/or 3508S

SBA Form 3508EZ

This form can be used if one the following is true:

  • Sole proprietor or independent contractor with no employees
  • No wage reductions in excess of 25% and no headcount reductions
  • No wage reductions in excess of 25% and meet the FTE safe harbor

SBA Form 3508S

  • Should be used for loans less than $50,000.

i. If borrower is part of affiliated group which has PPP loans that exceeds $2,000,000 in total loans this form cannot be used.

3. What are the exceptions to the FTE reduction?

a. 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 December 31, 2020

b. Any positions for which the Borrower made a good-faith, written offer to restore any reduction in hours, at the same salary or wages, during the Covered Period or the Alternative Covered Period and the employee rejected the offer

c. Any employees who during the Covered Period or the Alternative Payroll Covered Period were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction of their hours.

4. How does the “safe harbor” affect the FTE and wage reduction?

Two separate safe harbors exempt certain borrowers from any loan forgiveness reduction based on a reduction in FTE employee levels:

1. Borrowers that can certify that they have documented in good faith that their reduction in business activity during the covered period stems directly or indirectly from compliance with        such COVID Requirements or Guidance are exempt from any reduction in their forgiveness amount stemming from a reduction in FTE employees during the covered period.

2.The Borrower is exempt from the reduction in loan forgiveness for wage reductions as well as any reduction in FTE if the Borrower reduced its wage and FTE employee levels in the              period beginning February 15, 2020, and ending April 26, 2020 and later restored its wage and FTE employee levels by not later than December 31, 2020.

5. Can we achieve full forgiveness even if we have a headcount or wage reduction?

Yes. This is dependent on total payroll costs and non-payroll costs over the elected covered period.  For example, if you elect the 24-week covered period and your loan proceeds were based on 2.5 months of average monthly payroll costs, then your eligible expenses over the covered period may exceed your loan proceed amount even if you have a proportional reduction to forgiveness for FTE reductions and wage reductions.

6. Does Good Faith Certification apply to all borrowers, or only for loans <$2m?

a. For loans under $2M individually or in the aggregate with a company’s affiliated entities, are deemed to have met the Good Faith Certification.

b. Loans in excess of $2M individually or in the aggregate with a company’s affiliated entities, need to make the Good Faith Certification will be subject to review by SBA for compliance. If SBA determines that a borrower lacked adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness.

7. If you use up your funds in 12 weeks, for FTE calculations, do you calculate headcount for the 12 weeks or the full 24?

If you use the funds of the loan prior to the end of the 24 week period you can apply for forgiveness however if a borrower applies for loan forgiveness before the end of the covered period and has reduced any employees’ salaries or wages by more than the 25% allowed for full forgiveness, the borrower must account for the excess salary reduction for the full eight-week or 24-week covered period, whichever one applies to its loan.

In the example above if you applied at week 13 or later you would include the FTE through the date of the application of forgiveness.

8. Are there any requirement to not have to file for forgiveness on Loans less than $50,000?

Currently, there are no provisions allowing for the forgiveness of the PPP loan without submitting an application to the lender and SBA.  The SBA has provided a simplified loan forgiveness application, Form 3508S, for borrowers with PPP loans of less than $50,000, provided they are not part of an affiliated group which collective PPP loan amount exceeds $2M.

9. What are defined as affiliates under the SBA?

For purposes of the PPP loan, the SBA provides a broad definition of affiliates, which include foreign entities.  Per the SBA guidance:

  • Concerns and entities are affiliates of each other when one controls or has power to control the other, or a third party or parties control or has the power to control both.  It does not matter whether control is exercised, so long as the power to control exists.

The control or power to control can be associated with ownership, stock options, convertible securities, merger agreements, management, and identity of interest.  See the link here for the SBA’s guidance on affiliation.

10. If you apply for loan forgiveness on before year end and you don’t expect to receive a response from letter and SBA until 2021, are you not eligible to deduct the PPP eligible expenses?

On November 18th, the IRS released Revenue Ruling 2020-27 which provided guidance to the timing of the disallowance of the expenses related to the PPP loan forgiveness.  Per the guidance, a taxpayer, which reasonably expects to meet the PPP loan forgiveness criteria as of the end of the tax year in which the expenses were paid, would not be eligible to include the deduction in that tax year. This disallowance of deduction was not based on the timing of submission of the PPP forgiveness application nor receiving a formal forgiveness notification from the lender or SBA.

Additionally, the IRS released Revenue Procedure 2020-51 which provides for a safe harbor to allow a taxpayer to deduct the costs related to a portion or all of the amount expenses denied for loan forgiveness or if the taxpayer does pursue loan forgiveness.


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