An HMA client asked his attorney, Mark Shub, Esquire (Shub & Associates, P.C., 6 Beacon Street, Suite 510, Boston, MA 02108, http://www.shubassociates.com/) some questions related to loan forgiveness available through the CARES ACT PPP Program.  We trust that you find Mark’s answers interesting and helpful.


Please note that: Permission was provided by Shub & Associates to include this email in the HMA Blog; the readers need to be aware that this advice was drafted as of information available on April 20, 2020 and as this is a dynamically changing environment, the information posted in this blog may be dated and updated based upon new guidance and this email and is only posted  as a guidance.


Ah, simple questions should be able to be answered simply. 

So the simple answer is that (A) we do not know what costs are forgiven; (B) we do not know what will determine which costs are allowed (incurred, paid, or both); (C) we do not know the time frames; (D) we do not know if we can deduct the expenses paid with forgiven dollars; (E)  we do not know how to compute the reduction in forgiveness related to lost employees or reduced salaries, or how to restore that reduction if it occurs; and (F) our ignorance may be irrelevant because the banks are going to make the rules, and we have no guidance whatsoever on what the banks are thinking. 

See below for a more detailed answer to your simple question:

The lenders have the final say.  The CARES Act states that a borrower must submit to the lender an application, which includes certifications and documentation verifying payments made. The CARES Act further states that any borrower who fails to provide a complete application is not eligible for forgiveness.  The lender then has 60 days to make a decision on forgiveness. Although the CARES Act also states that if the lender receives the required documentation and certifications from the borrower, the lender will not be subject to SBA enforcement action or penalties if it chooses to forgive the loan, the CARES Act does not mandate loan forgiveness.  In the absence of further SBA guidance, each lender can determine its own interpretation of key terms and computational formulae.

Based upon the CARES Act and the SBA guidance issued to date, it is clear when the 8-week covered period begins, and what the general nature of the expenses during that 8-week period that will be eligible for forgiveness.

What CARES Act and the SBA guidance issued to date do not make clear is the following:

What does the CARES Act mean by the phrase “costs incurred AND payments made” within the 8-week covered period will be forgiven?

There are two possible interpretations of this critical phrase. The first is to focus on the use of the word “and” rather than the use of the word “or”.  In one interpretation, to qualify as forgivable expenses any expense needs to both incurred and paid within the 8-week period. This, means, payroll attributable to the period prior to the date of loan, which are paid during the 8 weeks following the date of the receipt of the proceeds of the loan would not be eligible for forgiveness, because the costs were not “incurred” during the 8-week period beginning with the receipt of the proceeds and similarly the payroll costs “incurred” during the 8-week period but not paid until after the 8-week period would not be eligible for forgiveness.

The other interpretation is that the word “and” does not require an expense to be both paid and incurred during the 8-week period, but rather the use of the word “and” means each of expenses incurred before and after the 8-week period and paid during the 8-week period would be eligible for forgiveness because the amounts were paid within the covered period. This interpretation permits prepayment of expenses, which may appear unintended, but remember the CARES Act only specifically bars prepayment of mortgage interest during the covered period.

Once you determine the amount of a PPP loan that will be eligible for forgiveness, the forgiveness will be reduced if a business either cuts employees or slashes salary during certain time periods.

Employee Reduction. The CARES Act provides that the amount of loan forgiveness is reduced by multiplying the amount eligible for forgiveness by the quotient obtained by dividing:

  • The average number of full-time equivalent employees per month employed by the eligible recipient during the covered period; by
  • At the election of the borrower, either
    • The average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on February 15, 2019 and ending on June 30, 2019; or
    • The average number of full-time equivalent employees per month employed by the eligible recipient during the period beginning on January 1, 2020 and ending on February 29, 2020.

If a business reduces employees from February 15 through April 27, 2020, but eliminates that reduction by June 30, 2020, the reduced forgiveness is restored.  

  • A business must measure its FTEs for each pay period during the 8-week covered period (assume 100).
  • A business must measure its FTEs for the period February 15–June 30, 2019 or January 1–February 29, 2020 (Assume 200 in each case).

At this point, if the business were otherwise eligible for $100,000 of forgiveness, that amount would be reduced to $50,000 ($100,000 * 100/200).

But a business must measure:

  •  Its FTEs from February 15–April 27, 2020. (assume 25), and
  •  Its FTEs on February 15, 2020 (assume 30).

It appears that this 5-person reduction between February 15 and April 27, 2020 will be ignored if no later than June 30, 2020, the business has restored the employee levels to what they were on February 15, 2020 (30).

Next, the formula requires a business to determine its FTEs for each pay period that are part of the formula but provides no guidance on how to quantify FTEs.

Then, the formula requires a business to determine “average” FTE during the following periods:

  1. The 8-week covered period beginning with receipt of the loan proceeds; 

  2. February 15 – June 30, 2019 or January 1 – February 29, 2020; and

  3. February 15 – April 27, 2020; and

  4. February 15, 2020, and

  5. June 30, 2020 

If your FTEs in period 1 is less than in period 2 (whichever is lower), there will be a reduction in forgiveness, unless, if during period 5, you restore any reduction in employees that occurred during period 3 relative to the date in period 4.  

Why is forgiveness reduced if staffing drops during the covered period relative to 2019 or the beginning of 2020, but restored if you replace employees lost during the period February 15 to April 27, 2020?

And what are the terms on restoring FTEs? Can you rehire for a completely different position?  For how long does the restoration “hiree” need to remain employed?  Can you hire a replacement on June 30, 2020 and terminate the replacement on July 1, 2020?  Do the restoration “hires” need eliminate 100% of the reduction, failing which the exception permitting forgiveness does not apply?

Salary Reduction.  The amount of loan forgiveness is also reduced by the amount of any reduction in total salary or wages of any employee during the covered 8-week period who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay of more than $100,000. The reduction in forgiveness amount is required if the reduction in wages over the 8-week period is in excess of 25% of the total salary or wages of the employee during the most recent full quarter during which the employee was employed before the covered period.

A quarter is 12 or 13 weeks. The 8-week period is 8 weeks. This rule appears to be saying that if during the 8-week covered period you get paid less than 75% of what you did during the previous calendar quarter prior to the covered period, your forgiveness amount is reduced. But 8 is only 67% of 12; so, if an employee earned $12,000 for twelve weeks in the previous calendar and $8,000 during the 8-week covered period (i.e., the weekly amount is the same), is the business required to reduce its forgivable amount because of the variance in number of weeks during the two comparison periods?

Based upon the bold words above, if an employee got a bonus during one pay period in 2019 that, when annualized, exceeds $100,000 in total pay, then this calculation does not apply.

So, that said, back to the beginning.  Until there is some SBA guidance, the answers to many questions are unclear. 


Mark Shub, Esq.



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