What Are The Loan Forgiveness Procedures?

Have You Received Your PPP Loan? Here’s What to Do Next.


Organize all documents in a due diligence folder

  • A copy of the application,
  • Copies of any supporting documentation provided to the bank,
  • Copies of the PPP borrowing amount calculation (including all payroll related reports – Forms 940, 941, W3, W2s, etc.),
  • A copy of any correspondence with the bank as to the submission and acceptance of the application,
  • And most importantly a memo discussing your organization’s reasons why it took a PPP loan.


Identify how the money will be used over the eight week period and beyond

Remember that at least 75% of the loan must be spent on payroll and non-payroll related costs cannot exceed 25% of the loan amount.

Open a separate account

Borrowers should segregate PPP Funds into bank accounts separate from their normal operating accounts. The CARES Act’s emphasis on the specific use of PPP Funds for Forgivable Expenses makes separate accounts advisable. Holding PPP Funds in separate accounts also makes collecting the documentation required for the Forgiveness Application more straightforward for both the Borrower and the eventual reviewer.

Keep great records

Although keeping great records seems intuitive in light of the Forgiveness Application requirements, what constitutes “great” records deserves careful attention. Because of the requirement that, to be a Forgivable Expense, a cost must be incurred and payment made during the Covered Period, the dates of payments and the incurrence of the associated obligation to pay will be necessary to document. As such, simple cleared checks may not suffice without the dated versions of the payroll statements, timecards or invoices to which such checks relate – Borrowers should keep these records and organize them in a way that facilitates easy matching. With respect to Forgivable Expenses that may not include payroll statements, timecards or invoices (e.g., mortgages or rent payments), Borrowers should have a redacted copy of their mortgage or lease on file as supporting documentation in case requested.

What costs are eligible for payroll?

  • Compensation (salary, wage, commission, or similar compensation, payment of cash tip or equivalent)
  • Employer’s payment for vacation, parental, family, medical, or sick leave
  • Allowance for dismissal or separation
  • Payment required for the provisions of group health care benefits, including insurance premiums
  • Payment of any retirement benefit
  • Payment of State or Local tax assessed on the compensation of employees


What is most critical is the funds paid out for payroll during the 8 weeks

The Forgiveness Application allows the borrower to choose to use the 56-day period following the receipt of the first loan money, which is referred to as the “Covered Period,” or to select the “Alternative Payroll Covered Period,” to coincide with the payroll schedule of the borrower, if it is bi-weekly or more frequently.

By the language of the CARES Act, and the regulations and FAQs issued by the SBA, only payroll that was actually paid during the eight weeks for services actually rendered by employees, plus applicable PTO used during that eight weeks, were going to be forgiven. This was going to cause a significant hardship, and accounting nightmares for the majority of businesses, which pay their workers in arrears.

The Alternative Payroll Covered Period, if elected, will begin on the first day of the borrower’s first pay period following the date that they receive their first PPP loan dollars, and will end on the 56th day thereafter. This assumes that all borrowers pay their employees in full on the last day of each pay period

A borrower that elects to use the Alternative Payroll Covered Period must also account for employee health insurance, retirement plan contributions, and state and local taxes assessed on employee compensation during the same period of time, but will keep track of rent, interest and utilities for the “Covered Period” (the first 56 days after the receipt of the first PPP loan amount). Interest, rent and “utilities” that are incurred during the eight week repayment measurement period and paid shortly thereafter in the normal course of business will also qualify to be forgiven.

The rule makes it clear that the borrower can first determine its payroll, health insurance and retirement plan expenses (called the “Payroll Amount”) and then, the sum of the other forgivable expenses (“rent, utilities, and interest”) cannot exceed 33 1/3% of the Payroll Amount.

For example, if the loan is $100,000, and only $70,000 is spent on payroll, health insurance and retirement plan expenses, then 33 1/3rd% of $70,000 is $23,333, and the maximum amount forgiven based on interest rent and utilities will be $23,333, so that the total loan forgiveness would be $93,333.

The language in the Instructions that confirms this states that “eligible non-payroll costs cannot exceed 25% of the total forgiveness amount.”(25% of 93,333 is $23,333).

Put another way, in order to maximize debt forgiveness, there needs to be a 3-to-1 ratio between payroll and non-payroll costs, according to Ainsworth.

If you spend $100,000 in eight weeks, for example, $60,000 of that on payroll and $40,000 of that on non-payroll, then the $60,000 is eligible for forgiveness — but only $20,000 of non-payroll is eligible.

“The government really wants everyone to focus on payroll.”

Reduction in Number of Employees Reduction (“RNE Reduction”)

In order to ensure that Borrowers use their funds to retain their current workforce, the Forgivable Amount will be reduced by a percentage based on employee headcount reductions that occurs during the Covered Period. This percentage is calculated by taking the Borrower’s average number of full time equivalent employees (“FTEs”) per month during the  Covered Period and dividing it by, at the Borrower’s option, either (i) its average number of FTEs per month from February 15, 2019 – June 30, 2019 or (ii) its average number of FTEs per month from January 1, 2019 through February 29, 2019. These calculations should be made using the average number of FTEs for each pay period of a given month. For example, consider a Borrower that has an otherwise forgivable PPP Loan of $1,000,000 and had an average of 200 FTEs for the period from January 1, 2019 through February 29, 2019. If the Borrower decides to lay off 75 FTEs such that it has an average of 125 FTEs during the Covered Period, the Forgivable Amount will be reduced from $1,000,000 to $625,000 (which is 125/200, or 62.5%, of the otherwise forgivable $1,000,000 loan).

Salary and Wage Reduction (“SWC Reduction”)

In order to ensure that Borrowers use their funds to maintain their employee compensation at comparable levels, the Forgivable Amount will be reduced by the amount of any reduction in total salary or wages of certain classes of employees that exceed 25% of the total salary or wages of such employee(s) during the most recent full quarter during which the employee was employed before the Covered Period. The employees that are subject to measurement for the SWC Reduction are those who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of $100,000+.

Document reasons why all employees have not returned

Remember, one of the main purposes of taking a PPP loan was to keep workers employed and continue being paid their pre-COVID 19 wages. If a pharmacy did not bring back all its employees, it is suggested that the reasons be documented as to why they are not on the payroll. It’s important to note here that not bringing back employees because there is no work for them to do will most likely not be looked upon favorably by the SBA. The expectation is that the pharmacy may be paying some employees who will not actually be performing any work (or their typical responsibilities) during the next couple of months.

Comply with Loan Documents.

PPP Loans are evidenced by promissory notes issued by lenders. Although the SBA provides a form of a promissory note for

lenders to use, its FAQ guidance confirmed that lenders may use their own form of a promissory note. Though the promissory note should be in simple form, there may be certain restrictions or notice requirements in the promissory note that may

require notice of certain events or, in some cases, repayment in full of the loan to the lender based on actions taken by the Borrower (e.g., the consummation of a change of control transaction). Similarly, Borrowers that have credit from other sources should be sure to discuss their PPP Loan with their current lenders. Although not directly related to forgiveness, Borrowers should avoid or proactively remedy any conflict between their PPP Loans and their incumbent credit facilities. Despite many Borrowers viewing their PPP Loans as grants, PPP Loans are debt instruments until they are forgiven and may cause Borrowers to run afoul of their incumbent credit facilities, creating a cascade of issues that should be the least of Borrowers’ concerns during this crisis.

When in Doubt, be Conservative.

Different Borrowers will have different levels of tolerance for the risk that a portion of their PPP Loans will be unforgivable. Indeed, some Borrowers may have already made plans for their loans that contemplate certain amounts being unforgivable, as even the unforgivable portion of PPP Loans provide Borrower-friendly terms for needed capital.

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COVID-19 Pharmacy Survival Guide