Calculating PPP Loan Forgiveness

Written by Jeremy E. Warring
Posted Apr 17, 2020

If you have received, or anticipate receiving a Paycheck Protection Program Loan (PPP), you have done so with the expectation that all or a portion of the loan will be forgiven. The following is an outline describing what expenses are covered, how forgiveness is calculated, and applications process.

  1. Covered Expenses. Recipients shall be eligible for forgiveness on covered loans in an amount equal to the sum of costs incurred and payments made during the Covered Period for Payroll Costs, payment of interest on covered mortgage obligations, Covered Rent Obligations, and Covered Utility Payments.

    • The “Covered Period” begins on the date the loan is first funded, and continues for eight weeks.

    • “Covered Rent Obligations” are rents obligated to be paid during the Covered Period under a lease agreement in force prior to February 15, 2020.

    • “Covered Utility Payments” are payments for electricity, gas, water, transportation, telephone, or internet access during the Covered Period for services which commenced prior to February 15, 2020.

    • “Payroll Costs” means the sum of payment of any compensation to (or income for sole proprietors and independent contractors), that is a wage, commission, income, net earnings from self-employment, or similar compensation, paid during the Covered Period, in an amount which does not exceed $100,000 per person on an annual basis, prorated over the Covered Period. At least 75% of the forgiven amount must fall into this category.

  2. Calculating Forgiveness and Reductions. The amount of forgiveness will be based on how much of the loan was used for covered expenses, and can be reduced if FTE levels during the Covered Period are lower than Historic FTE (the average monthly FTE level for either February 15 through June 30, 2019; or January 1 through February 29, 2020). If during the Covered Period, FTE headcount declines, or salaries and wages decrease by more than 25%, from the Historic Period, the amount forgiven will be reduced.

    • Reduction Based on FTE Headcount. The amount of the reduction based on FTE headcount is equal to the percent reduction in FTE headcount, as follows:

      • Assume a $400,000 loan is received; $300,000 used for Payroll Costs (75% of loan) and $100,000 used for a combination of other Covered Expenses.

      • 100% of the loan is used for Covered Expenses, and should be forgivable.

      • FTE Headcount during January 1 through February 29, 2020 = 100 FTE.

      • FTE Headcount during Covered Period = 95 FTE.

      • Ratio of Covered Period FTE to Historic FTE = 95/100 (95%).

      • Forgiveness Calculation: $400,000 Loan, multiplied by 95% = $380,000 (a 5% reduction in forgiveness).

    • Reduction Based on Wage/Salary Decline. The forgiveness based on the amount of wages actually paid is more nuanced, and after receiving several questions, we have revised this paragraph to provide additional clarity on the requirements under the Act.

Under the Act, the reduction shall be equal to the amount of the reduction in total salary or wages of any employee during the Covered Period, to the extent such reduction exceeds 25% of the total salary or wages of the employee during the most recent full quarter prior to the Covered Period, during which such employee was employed (employees making $100,000 or more on an annualized basis are excluded from this calculation).

This is not to be confused with a 25% reduction in the average paycheck received during the Covered Period as compared to the previous quarter, which is how many have interpreted this provision. The language of the Act, instead, states that wages paid during Covered Period cannot be decreased by more than 25% of the total salary or wages of the employees during the most recent full quarter, even thought the quarter is 13 weeks, compared to an 8 week Covered Period. By way of example:

      • Assume a $400,000 loan is received; $300,000 used for Payroll Costs (75% of loan) and $100,000 for other Covered Expenses.

      • Again, 100% of the loan is used for Covered Expenses, and should be forgivable.

      • FTE Headcount during January 1 through February 29, 2020 = 40 FTE, each paid $20,000 during the most recent full quarter prior to the Covered Period ($800,000 total salary and wages for the quarter). This averages out to $1,538.46/week per employee ($20,000/13=$1,536.46). There is no reduction headcount.

      • This means total payments owed to each employee (based on their $20,000 received during the immediately preceding quarter) during the Covered period equals $12,307.68 ($1,536.46 x 8 weeks=$12,307.68).
      • However, 25% of the total salary and wages received by each employee during the most recent full quarter is $5,000 ($20,000 x 0.25=$5,000).
      • Under the Act, an employer can reduce the total $12,307.68 by up to $5,000 and not receive a reduction in their PPP Loan Forgiveness related to decreased salary and wages even though this would be a reduction of a little more than 40%.

Whether this was the drafters’ intent is unclear, but applying the plain language of the Act simply yields no other result. The practical application of this leads to may potential issues. For example, employees who were only partially employed during the preceding quarter, while making the same annually as those fully employed, may have a lower threshold before the non-forgiveness kicks in.

Take an employee making $20,000 annually, but who was only employed for one-half of the immediately preceding quarter. That employee would have earned $10,000 during the immediately preceding quarter. Can that employee only have their wages decreased by $2,500 during the Covered Period before the employer starts having PPP forgiveness reduced? It would seem so under the Act, as the total salary and wages of that employee during the preceding quarter is only $10,000.

This could also likely lead to reductions far in excess of what statute ostensibly intends. If the intent was to prevent the employee from seeing their average check decrease by more than 25%, the drafters would have tied this limit to the employee’s average paycheck received over the previous quarter. Or prorated the previous quarter’s salary/wages over an 8 week period. Instead, the Act simply says it cannot be decreased by more than 25% of the employee’s total salary and wages during the preceding quarter.

It’s unclear whether this is the drafter’s intent, but until an amendment, or alternative guidance is provided by the SBA/Treasury, this is how the Act should be applied. For safety’s sake, and because we’ve already seen the rules change on employer’s once, it may very well be safer to limit wage and salary decreases to 25% per pay period, and not by 25% of the previous quarter’s total salary.

And, for purposes of calculating forgiveness, both Full-Time Employees and Full-Equivalent Employees are used for these calculations. A Full-Time Employee must be employed on average at least thirty hours per week. A FTE Employee is a combination of employees, each of whom is not individually a Full-Time Employee, but who, when combined with other non-Full-Time Employees, are counted as the equivalent of a Full-Time Employee. As used through this post, FTE refers to Full-Time Employees and Full-Time Equivalent Employees.

  1. Eliminating a Reduction. If your FTE headcount or wages decreased during the period between February 15, 2020 through April 26, 2020, resulting in a reduction to your loan forgiveness, you do have the opportunity to “fix” the event causing the reduction and potentially get the full forgiveness (assuming all other use requirements are met).

    • Eliminating Reduction for FTE Headcount. If, by June 30, 2020, you increase your FTE headcount to pre February 15, 2020 levels, the reduction in forgiveness attributable to the decrease in FTE headcount during the period between February 15, 2020 through April 26, 2020, will be excused. According to the CARES Act, you will have “eliminated” the reduction of FTE headcount.

    • Eliminating Reduction for Wage/Salary Decline. If, again by June 30, 2020, you have restored salary and wage levels for those who suffered a more than 25% decrease during the period between February 15, 2020 through April 26, 2020 to at least the level existing on February 15, 2020, the reduction in forgiveness attributable to the wage/salary decline will be excused. The CARES Act again refers to having “eliminated” the decline.

Without further guidance, under the language of the CARES Act, any reduction attributable to decreased FTE headcount or salary/wages which occurs outside the period between February 15, 2020 through April 26, 2020, cannot be eliminated, and will operate to reduce forgiveness. This means if your Covered Period does not overlap at least partially with this period, this provision will not apply to you.

  1. Applying for Forgiveness. Applications for forgiveness must be submitted to your lender, and will need to include documentation verifying your FTE headcount and pay rates during the Covered Period, as well as all other payments on Covered Expenses (ie. payments on eligible mortgage interest, leases, and utility obligations). Documentation you should provide includes:

    • payroll tax filings reported to the IRS;

    • state income, payroll, and unemployment insurance filings;

    • cancelled checks, payment receipts, transcripts of accounts; and

    • any other documentation verifying payments towards Covered Expenses.

You must also provide certification that the documents and evidence provided true and correct, and that the amount for which forgiveness is required was used for these Covered Expenses. The administrator may request additional information, so keep thorough records of FTE headcount, and how all funds are used. Your lender is required to provide a determination on your request for forgiveness within 60 days of receiving your application.


If you have applied for and obtained a PPP, make sure you take steps necessary to get the full benefits of the program – forgiveness. If you have questions or concerns about your loan, calculating your anticipated forgiveness, or navigating the business decisions you are facing while balancing the forgiveness requirements, please contact one of our attorneys today.

Learn More about Messerli Kramer’s Attorneys Jeremy E. Warring
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