This article is the marvelous work of our current law clerk Kieran O’Day, who will be finishing his stint with us shortly and heading on to clerk with the Supreme Court for the State of Wisconsin!

Now that many of the initial small businesses who received PPP loans are in full swing on using such funds, many are looking toward the loan forgiveness provided by the CARES Act. Additionally, in anticipation of forgiveness applications, there have been significant updates from the federal government including (1) releasing the forgiveness application and guidance related to it; (2) publishing guidance on the forgiveness process generally; and (3) passing the Paycheck Protection Program Flexibility Act (PPPFA). This post briefly discusses updates (2) and (3), the forgiveness guidance and the PPPFA, respectively. The PPP loan forgiveness application can be found here. 

PPP Forgiveness Guidance

On May 22, 2020, the Department of the Treasury issued guidance to clarify PPP forgiveness under the CARES Act. Certain portions of the guidance are affected by the PPP Flexibility Act discussed below. However, there remain important aspects of the guidance that business owners should keep in mind. Such provisions include clarifications on:

  • Timing of payroll costs and alternative payroll periods. Payroll costs are paid when the employer distributes paychecks or initiates ACH transactions. Such costs are “generally incurred on the day the employee’s pay is earned.” Businesses can select an “alternative payroll period” if a business’s payroll period does not fall perfectly in line with loan disbursement. Ordinarily, the covered period is 8 weeks from loan disbursement, however, the under the alternative payroll period, the 8-week covered period can begin on the first payroll period after disbursement and continue 8 weeks from that date. The alternative payroll period is only permitted for those businesses that use a bi-weekly or shorter payroll cycle.
  • FTE employee calculations. Business should calculate the number of full time equivalent (FTE) employees. According to the guidance, FTE employees are those who work an average of 40 hours per week, and each FTE employee is capped at a quotient of 1.0. Meaning, for example, an employee who works an average of 48 hours per week is 1.0 FTE employee. For calculating part-time employees, employers have the option of either calculating the average number of hours worked divided by 40 (e.g. average 30 hours per week/40=.75, which is .75 FTE employee) or treating each part-time employee as .5 FTE employee. It does not matter which calculation employers use provided they remain consistent for all part time employees.
  • Eligible expenses. Payroll expenses and permissible non-payroll expenses are those that are either paid or incurred during the covered period. This means that even those payments that were incurred before the covered period may be forgiven as long as they were paid for during the covered period. The same principle applies for expenses that are incurred during the covered period but not paid for until after. For the latter category of expenses, they must be paid in the next payroll period after the covered period (in the case of payroll expenses) or the next regular billing date (for non-payroll expenses).
  • Reduction in FTE employees. Under the PPP, the amount of PPP Loan forgiveness is reduced proportionately to the of reduction in FTE employees during the covered period. The guidance clarifies that employers are to choose a reference period and compare the number of FTE employees during the reference period to the number of FTE employees during the covered period. The guidance provides the example that if an employer had 10.0 FTE employees during the reference period and that number was reduced to 8.0 FTE employees during the covered period, then the borrower’s forgiveness amount would be reduced by 20%. [1] The guidance further clarifies that FTE employee reductions are not calculated for employees that are fired for cause, voluntarily resign, or voluntarily request a schedule reduction.
  • Reduction in salary or wages. Similar to reducing the number of FTE employees, the amount of forgiveness is affected by reductions in employees’ salary and wages of more than 25% during the covered period. A reduction in salary or wages “only applies to the portion of the decline in employee salary that is not attributable to the FTE reduction.” This means that borrowers will not be penalized twice for the same employees if the reduction was a reduction in hours that did not change the salary or wage of the employee. The example provided in the guidance and reprinted in the footnote below is informative on this issue.[2]

PPP Flexibility Act

On Friday, June 5, President Trump signed the Paycheck Protection Program Flexibility Act (PPPFA) into law. The PPPFA contains several key provisions that are designed to maximize forgiveness for loan recipients. Some of those key provisions are the following:


  • Extended the original “covered period” under Section 7(a)(36)(A)(iii) of the Small Business Act to February 15, 2020 to December 31, 2020. The original Covered Period was February 15, 2020 to June 30, 2020.
  • Extended the “covered period” under Section 1106(a)(3) of the CARES Act to “the period beginning  on the origination date and ending the earlier of the date that is 24 weeks after said origination date or December 31, 2020.” Additionally, any place where “June 30, 2020” appeared in reference to the PPP was changed to “December 31, 2020.” The original period ended 8 weeks after it began.
  • Added an exemption for the reduction in forgiveness proportionate to the reduction in full time equivalent employees, if the employer is able to document either (a) an inability to rehire individuals who were employees on February 15, 2020 and an inability to hire similarly qualified employees on or before December 31, 2020 or (b) an inability to “return to the same level of business activity as such business was operating at before February 15, 2020” due to complying with safety requirements related to COVID-19.
  • Amended the ratio of loan amount that can be used for payroll expenses vs non-payroll expenses (see SSM’s prior post on the PPP for allowable non-payroll uses) from 75% to 60%.
  • Allows eligible recipients that received their loans prior to the enactment of the PPPFA (June 5, 2020) to elect to use the previous 8-week covered period rather than the 24-week period as amended.
  • Extended the deferral period for loan repayment commencement from “no less than 6 months but no more than 1 year” to “the date that forgiveness is determined under Section 1106 of the CARES Act.”
  • Added a provision that requires payments of principal, interest, and fees to begin if an eligible recipient does not apply for forgiveness within 10 months of the last day of the covered period.

If you have any questions about PPP Loans or such loan forgiveness, please call our business attorneys at Schober Schober & Mitchell, S.C. at (262)785-1820.

[1] Note that FTE reduction is directly affected by the PPFA as discussed below.

[2]Example: An hourly wage employee had been working 40 hours per week during the borrower selected reference period (FTE employee of 1.0) and the borrower reduced the employee’s hours to 30 hours per week during the covered period (FTE employee of 0.5). There was no change to the employee’s hourly wage during the covered period. Because the hourly wage did not change, the reduction in the employee’s total wages is entirely attributable to the FTE employee reduction and the borrower is not required to conduct a salary/wage reduction calculation for that employee.”