The Impact of Applying Early for PPP Loan Forgiveness

July 7, 2020 | Article

Paycheck Protection Program (PPP) loan borrowers using the 24-week covered period may pay and/or incur enough eligible expenditures to qualify for full forgiveness of their PPP loan before the end of their covered period.

The actual PPP loan amount is generally equivalent to 2.5 months of a borrower’s 2019 payroll (subject to certain limitations), meaning that a borrower who did not reduce employee headcount or wages could pay and/or incur enough eligible payroll expenses by week 11 or 12 of their covered period (roughly 2.5 months of time) to tentatively qualify for full forgiveness. Consequently, many borrowers have asked whether they must wait until the end of their 24-week covered period to apply for forgiveness.

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Am I allowed to apply for PPP loan forgiveness early?
The government says a borrower can apply early, but they must be aware of certain limiting factors.

In recent guidance, the government states that a borrower can apply for forgiveness before the end of their covered period. The guidance further states a borrower using either the 8-week or 24-week covered period can apply early; however, in practice, borrowers using the extra time provided in the 24-week period may be the only ones who apply early. 

How do headcount and salary cuts affect my PPP loan forgiveness?
It appears that a borrower accounts for certain employee salary and headcount reductions at the time of the filing of the application. As a reminder, both salary and headcount cuts can reduce a borrower’s forgiveness amount. 

In the recent guidance, the government says that if “a borrower applies for forgiveness before the end of the covered period and has reduced any employee’s salaries or wages in excess of 25%, the borrower must account for the excess salary reduction” for the full covered period. In an accompanying example, the government states that a borrower cutting an employee’s weekly salary from $1,000 to $700 during the covered period must take into account the cut in excess of 25% ($50) and prorate that amount over the full 24-week covered period, resulting in a $1,200 reduction to forgiveness, even though the borrower applied before the end of their covered period.

The government does not discuss how a borrower accounts for any reductions to headcount when applying early, but it appears those reductions are accounted for at the time an application is submitted. One unknown question is whether an employer must maintain its full headcount even after it applies for forgiveness. As presently structured, the forgiveness application does not require a borrower to update the government on employee salary and headcount information after the forgiveness application is submitted.

Even if a borrower is subject to forgiveness reductions due to cuts to employee salaries or headcount, the construction of the current forgiveness application may render those reductions moot. The application currently asks a borrower to sum all eligible expenditures and then apply any reductions.

Borrowers using the 24-week covered period can tally an amount of eligible expenditures in excess of their PPP loan amount, meaning a reduction to forgiveness may still produce a final forgiveness amount in excess of the PPP loan balance, apparently resulting in full forgiveness. It is unclear whether the government intended for this result and they could clarify in further guidance that total eligible expenditures cannot exceed the total PPP loan amount.

How to Begin Planning for an Early PPP Loan Forgiveness Application
Allowing borrowers to apply early for PPP loan forgiveness will permit many borrowers to begin the forgiveness process as soon as they have paid and/or incurred enough eligible expenditures. Borrowers choosing between an 8-week and 24-week covered period may favor a 24-week period knowing that they can apply for forgiveness at any point during their covered period. However, it’s important to note that borrowers applying early still must account for employee salary or headcount reductions.

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